Restructuring

Contributed by Joanne Etherton and Sally Willcock
The Determinations Panel of the UK Pension Regulator (“TPR“) has recently issued financial support directions (“FSDs“) to five companies in the ITV group in relation to the Box Clever Group pension scheme, which has a reported deficit of approximately £62 million. The action has been seen as a bold move by TPR and represents only the fourth known exercise of its FSD powers since TPR was established in 2004.  FSDs have been previously issued in relation to pension schemes in deficit operated by the Sea Containers, Lehman and Nortel.  As is the case for the Lehman and Nortel FSDs, the issuing of the FSD to ITV is currently subject to appeal.
Background – Legislative Framework
TPR’s powers arise under UK pensions legislation introduced in 2004 with the aim of protecting defined benefit pension schemes following several high profile corporate collapses featuring pension funds in deficit.  The legislation established the Pension Protection Fund (“PPF“) (modelled, broadly, on the U.S. Pension Benefit Guaranty Corporation) and a statutory mechanism providing a capped rescue fund for members of defined benefit pension schemes in deficit.  TPR was set up as part of this framework and was empowered to issue FSDs to an employer or any person connected or associated with the sponsoring employer where the sponsoring employer is a service company or insufficiently resourced.  The FSD is an obligation to put financial support (such as a guarantee or a lien over assets) in place for the pension plan, potentially for an amount up to the deficit level.  TPR can only issue an FSD, however, if it is reasonable to do so.  This is different from the other so-called “moral hazard power” of TPR, which is to issue “contribution notices” against persons connected to or associated with a sponsoring employer. Contribution notices require them to make good some or part of a pensions shortfall where, broadly, they have been party to an act or omission that has had the effect of impeding the recovery of the pension shortfall.
Background – Facts
Box Clever Technology Limited was a joint venture company that was set up in 2000 as part of a merger of the Granada and Thorn TV rental companies, both of which transferred their businesses to the company.  The acquisition of the businesses was financed by £860m in debt, none of which was secured by the assets of Granada or Thorn.  Both Granada and Thorn held a stake in the newly created company and two directors were nominated by Granada and two by Thorn to sit on the 10 person board. As part of the merger arrangements, Granada (which in 2004 was to merge with Carlton Communications to form ITV) received £500m in dividends from Box Clever.  Box Clever had put in place a defined benefit pension scheme for former employees of Granada and Thorn who had transferred to Box Clever.  Although accrued service benefits were left behind in the legacy Granada and Thorn pension schemes, the Box Clever Scheme provided top ups to those benefits by paying for linkage to final salaries in Box Clever.  Box Clever was unable to service its debt burden and was put into administrative receivership (similar to administration) by its lenders in 2003.  As at December 2009, the Box Clever pension scheme had a deficit of £62m, approximately two-thirds of which related to the former Granada employees.
TPR had to determine, among other things, whether it was reasonable to issue an FSD (i) in relation to events which happened before the “moral hazard” regime came into existence and (ii) against the five target ITV companies which only came into existence in 2004, were not involved in the events being considered by the Regulator and which derived no direct benefit from Box Clever.
The Decision
Following a hearing the Determinations Panel of TPR ruled that it was reasonable to impose an FSD against the five target ITV companies, concluding its fairly lengthy written reasons as follows:

Overall it seems to us that this is a case where the Scheme’s principal employer, [Box Clever], was set up by the Granada and Thorn groups as part of a transaction that aimed to extract value from the consumer rentals businesses of those groups, but leave them able to share in any future profit. A requirement of that transaction was that a pension scheme be set up for transferring employees; no value could have been extracted without this. Valuable financial benefits were received by the Targets, while the structure used to obtain them required [Box Clever] to borrow £860m from West LB, left all of [Box Clever’s] assets charged to secure that borrowing, and left the Scheme with a weak employer as a result. It is also relevant that this borrowing was not secured on any assets of Granada or Thorn group companies, insulating them from financial difficulties of [Box Clever]. We do not find misconduct on the part of the Targets, but consider the issue of FSDs to be an appropriate and reasonable response to the events of 1999 to 2003 in relation to [Box Clever] and the Scheme.

Although ITV did not come into existence until 2004, was not directly involved in the events that came under scrutiny, and also did not benefit directly from Box Clever, the panel considered it was reasonable to issue an FSD against it as “it stands in the shoes of Granada Limited as the ultimate parent company of the group which benefited from the formation of the JV.”
Comment
The circumstances surrounding the Box Clever FSD are unusual, not least because the actions upon which the Determinations Panel focused took place not only several years before the determination, but also before TPR and the Pensions Act framework, including the moral hazard provisions, came into existence.  It is anticipated that the question of whether there is a temporal limit to the operation of the Pensions Act 2004 is among the issues that will be considered in detail on the appeal.  Other issues likely to be closely considered on appeal include issues as to the fairness of the proceedings in certain procedural respects and the question of whether Granada had sufficient control over Box Clever to make it reasonable to issue an FSD against the ITV entities as the ultimate parent companies of Granada.  We await with interest round two of this dispute due to be heard in 2013 in which the Upper Tribunal will determine the issue afresh in a re-hearing of the dispute.  Interestingly, ITV has just tried to fight off an application by the Box Clever trustee to have legal representation alongside TPR at the Upper Tribunal hearing but on 29 March 2012 a UK High Court judge ruled that the trustee could be added as an interested party and therefore make submissions at the Upper Tribunal hearing.
The written reasons of the Determinations Panel can be accessed here.
In the meantime, TPR appears to have been dealt a blow itself in the form of the December 29, 2011 decision of the United States Court of Appeals for the Third Circuit in In re Nortel Networks, Inc. In Nortel, the Third Circuit affirmed the decision of  the Delaware Bankruptcy Court to enforce the automatic stay against the trustee of the Nortel Networks UK Pension Plan (“NNUK Pension Plan“) and the PPF with regard to their participation in UK pensions proceedings, which are on-going and which are the subject of an earlier blog entry  In brief, in September 2009 the Trustee and the PPF filed contingent and unliquidated proofs of claims against the U.S. Nortel debtors alleging that the NNUK pension plan was underfunded by an estimated US $3.1 billion and that TPR might seek to require certain US debtors to provide financial support for the scheme under the Pensions Act 2004.  TPR also continues in the UK to pursue certain entities within the Nortel group, including the U.S. chapter 11 debtors, in respect of potential FSD claims.  The U.S. courts have now ruled, in relation to the proceedings against the Nortel chapter 11 debtors, that continuing the UK action is a breach of the automatic stay imposed by section 362(a) of the Bankruptcy Code because, “[o]nce the Appellants subjected themselves to the jurisdiction of the Bankruptcy Courts by filing their claims, they became subject to the provisions of the automatic stay.’
Across the pond, the appeal to the Supreme Court in respect of the UK pensions proceedings has been listed to be heard in May 2013.