Pensions experts at Macfarlanes have commented on the recent judgment of the Upper Tribunal on the financial support direction issued to ITV by The Pensions Regulator in relation to Box Clever, the first one of substance in this area, here.  Their note contains an insight into important questions such as whether there is a requirement for wrongdoing in order to be liable (spoiler: the court said that there is not) and whether events which occurred prior to the Pensions Act 2004 can be relied upon in determining liability (they can).

There is another interesting angle to this case from a restructuring lawyer's perspective: the court had to consider whether the acceleration and enforcement by WestLB as secured lender, including the appointment of administrative receivers over a holding company in the structure (sitting between ITV and the employers of Box Clever's defined benefit schemes), caused there to be a lack of "association" between them for the purposes of the Pensions Act. A key requirement for "association" is the ability to exercise voting powers over shares. There are a couple of key items of interest for us arising from the judgment:

  • Under the security agreement which created a mortgage over shares in favour of WestLB, and which contains the sort of language which many of us will be familiar with, the chargor retained the ability to exercise voting rights in respect of shares absent a Declared Default. On the court's interpretation of that document, even after a Declared Default had occurred and demand under a guarantee had been made on the chargor by WestLB as facility agent, that wasn't sufficient to cause the chargor's voting rights to be lost and ITV's "association" therefore to cease. In their view, there had to be a further notice from WestLB as security agent claiming those voting rights for there to no longer be an association. Consequently, for new deals where there is a pensions risk inherent in a borrower structure, prospective lenders might wish to consider more explicitly building in the requirement for a further notice as described here, in order to make clear to the debtor side that an enforcement should not enable them to reduce their potential liability for a financial support direction under the Pensions Act. That would reduce the risk, in the event of restructuring negotiations, of creating a somewhat perverse outcome under which debtors might actually favour lender enforcement.
  • It was argued by ITV that the appointment of administrative receivers over the assets of the chargor, which as a matter of law caused the management powers of its ITV-nominated directors to cease, meant that an "association" no longer existed because it was the administrative receivers and not ITV-nominated directors who controlled the ability to exercise share voting rights held by it. The court rejected that argument on the basis that administrative receivers were simply acting as agents of the chargor and that there was no change in beneficial ownership of the shares simply because of their appointment. In the judge's view, all that changed was that the people who had the power to decide how voting rights should be exercised on behalf of the stakeholders of the chargor had moved from its board to the administrative receivers, and there is no basis for treating ITV differently with respect to its liability under the financial support direction as a consequence. Another way to look at this is: although a company is treated under the law as being a "person" which is owned by its shareholders, its "brain" is normally operated by its directors -- in this case the court held that a "brain transplant" from the directors to the administrative receivers didn't affect the link between its continued ultimate shareholder ITV and the pension schemes within its group.

If you would like to read the full judgment, it can be found here.