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	England and Wales High Court (Chancery Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> The Trustee of the Singer & Friedlander Ltd Pension and Assurance Scheme v Corbett [2014] EWHC 3038 (Ch) (16 October 2014) URL: http://www.bailii.org/ew/cases/EWHC/Ch/2014/3038.html Cite as: [2015] 1 Ch 571, [2015] Pens LR 31, [2015] 1 CH 571, [2014] EWHC 3038 (Ch), [2015] 3 WLR 787, [2015] CH 571, [2015] WLR(D) 242

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IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice, Rolls Building Fetter Lane, London, EC4A 1NL
		16/10/2014

Mr Justice Birss :

1. This matter raises a short point on the interpretation of s75 of the Pensions Act 1995. The question is whether the trustee of a pension scheme is able to assign the debt owed to the pension scheme which is created by s75. In this case the trustee wishes to assign the s75 debt and seeks a declaration from the court that the debt created by the section is assignable. If it is assignable the trustee would seek to sell the debt by way of assignment at the best possible price in order to obtain the maximum benefit for the pension scheme. The trustee also asks the court to direct that the proposed assignment is one which in the circumstances a reasonable and properly advised trustee could enter into in the exercise of its powers.
2. The application is supported by witness statements from Bruce John McNess an associate of BESTrustees Plc, the sole trustee of the scheme.
3. Kaupthing, Singer & Friedlander (KSF) was a bank. The scheme's members were certain employees of KSF. KSF is the sponsoring employer of the scheme. The scheme is a defined benefit scheme established to provide benefits to or in respect of members in circumstances such as retirement, serious ill health and death. KSF entered into administration on 8 October 2008.
4. In accordance with section 75, once an insolvency event occurred (s75(6A)) and the relevant insolvency practitioner has served a notice pursuant to s75(4C) in compliance with s122 of the Pensions Act 2004 declaring that the scheme has failed, then an amount equal to the difference between the assets and liabilities of the scheme as calculated and certified by the scheme actuary shall be treated as a debt due from the employer to the trustee or managers of the scheme.
5. The scheme failure notice in this case was served and, on 8 January 2009, the Pension Protection Fund (PPF) confirmed it had received the notice. On 28^th May 2009 the scheme submitted a claim in the KSF administration for the s75 debt. At that stage the sum claimed was an estimate. By a report and certificate dated 3 April 2012 the Scheme Actuary certified the s75 debt at £74,652,000. The administrators accepted the s75 debt subject to two potential set offs. One was in relation to sums (£713,079) paid out for the purposes of pension payments made during the period prior to the administration. In effect the scheme had been using KSF as its bank in order to pay benefits to members. This set off was agreed between the trustee and the administrators. The second set off was disputed, with that dispute being resolved in the trustee's favour by the High Court in BESTrustees v Kaupthing Singer & Friedlander [2013] 081 PBLR (010).
6. Thus today the s75 debt is admitted by the administrators for the purpose of payments of dividends from the administration (subject to the agreed set off). To date the trustees have received £60.26m in dividend payments. That is 81.5p in the £ on the reduced sum of £73.94m.
7. The trustee wishes to be able to wind up the scheme. The only reason why the scheme cannot commence winding up is because there remains the possibility of further distributions by way of dividends from the KSF estate. The scheme is forced to incur expense whilst waiting for the administration of KSF to come to an end and enable further dividends to be paid. The administrators have stated that the end date for the administration will not be before 2017. The administrators have also indicated what their estimate of the final dividend would be. The figure is set out in Annex A to this judgment. The trustee has spoken to brokers interested in acquiring the debt owed by KSF to the scheme. Brokers have told Mr McNess that they could find buyers for the debt at the rate also set out in Annex A to this judgment.
8. The trustee obtained a report from KPMG on the valuation of the claim in the KSF administration and calculations from Barnett Waddingham (the scheme actuary) on the costs of running the scheme for another 3-4 years to allow the KSF administration to come to an end as opposed to winding up the scheme once the trustee had assigned the s75 debt. Both the report and the calculations are exhibited by Mr McNess. The relevant figures are set out in Annex A to this judgment. The KPMG report highlights three potential benefits of selling the debt (1) saving scheme running costs, (2) an increased payment potentially achieving more than the administrators' current estimate and (3) certainty of being able to recover the sums now rather than the uncertainties and potential for lower recovery than the administrators' estimates.
9. Thus the trustee seeks the guidance of the court by bringing this Part 8 claim. The claim was issued on 30^th July 2014. The matter is urgent because the trustee wishes to take advantage of the current market position relating to KSF debt, if it is properly entitled to. The claim was served on the defendant Mr Richard Corbett as a representative defendant and was served on the Pensions Regulator. On 11^th September 2014 Deputy Master Nurse gave directions, including an order confirming that Mr Corbett be appointed to represent all members of the scheme and all those persons (including the unborn and the estates of deceased persons) claiming under and through them.
10. On 16^th September a short third witness statement of Mr McNess was served which dealt only with recent variations in the price on offer and underlined the urgency of the application. Annex A summarises the reasons for urgency.
11. Mr Corbett's position is explained in a witness statement of Claire Elizabeth Carroll dated 17^th September 2014. Ms Carroll is a partner in the solicitors firm Eversheds who act for him. Mr Corbett is a member of the scheme, was an employee of Singer & Friedlander for many years and became an executive and later a non-executive director of the bank. He was a trustee of the scheme for five years in the 1990s and has served on an ad hoc consultative committee set up after KSF failed.
12. Ms Carroll's witness statement addresses the defendant's stance on this application. It deals with the question of the assignability of the s75 debt, draws the court's attention to the key arguments on both sides. Ms Carroll explains that Eversheds have advised Mr Corbett that the arguments presented by the trustee are "comprehensive and coherent" and that the arguments against assignability are not so overwhelming that the application should not be made at all. Ms Carroll concludes on this point by explaining that Mr Corbett supports the trustee's application for a declaration that the debt is assignable.
13. On the second issue, of whether the court should direct that the proposed assignment is one which in the circumstances a reasonable and properly advised trustee could enter into in the exercise of its powers, Mr Corbett's position is that since neither he nor Eversheds know what the price would be, they cannot comment on a putative assignment. That will be a commercial matter for the trustee to decide upon if it obtains directions from the court. Mr Corbett takes comfort from the trustee's explanation that if the court gives the direction sought, the trustee would review the market carefully and obtain advice from KPMG, Pinsent Masons and leading counsel on whether any offers at that time were reasonable and take into account any change in the likely dividend from the administration in deciding whether accepting an offer to buy the debt was in the members' best interests. Mr Corbett makes no other comment on the second direction sought.
14. The claim form and the supporting evidence were served on the Pensions Regulator (save for the recent third statement of Mr McNess). It was asked to consider whether it would seek to be joined to the claim and make representations. In an email exchange the solicitors for the trustee drew the Pension Regulator's attention to the principal arguments both ways in relation to the interpretation of s75. In particular the solicitors drew the Pension Regulator's attention to the key issue about the moral hazard provisions in the Pension Act 2004 (see below) which appear to run counter to the trustee's position. The Pension Regulator reviewed the documents provided and decided it did not need to be joined on the application and did not intend to make representations to the court.
15. Neither Mr Corbett nor his representatives nor any representatives from the Pension Regulator attended the hearing. Ms Agnello invited me to consider whether to require representatives either of Mr Corbett's and/or the Pension Regulator to attend in any event and assist the court by arguing the case against the trustee. I have given this anxious consideration since a decision on any point of this nature is always improved by hearing adversarial argument from both sides of the matter. However in the end I decided not to require such representation from either party, for the following three reasons.
16. First, in a related case which I deal with below, Bradstock Group Pensions Scheme Trustee Ltd v Bradstock Group Plc and others [2002] ICR 1427 (Charles Aldous QC sitting as a deputy judge of the Chancery Division), none of the parties before the court in that case dissented from the argument about section 75 which was advanced by the trustee there but counsel for the representative beneficiary drew the court's attention to possible contrary arguments. Before me Ms Agnello on the trustee's behalf had already raised the arguments adverse to her submission and was able to develop them at the hearing.
17. Second, it is clear that those advising Mr Corbett have applied their minds specifically to the legal question at issue. Not only do they support the trustee's position but they did not identify any other factor or argument which might be advanced against the trustee's position which the trustee had not already identified. A representative of Mr Corbett would have been in the same position as the trustee's representatives, supporting the application but arguing the contrary to help the court.
18. Third, the Pensions Regulator has had full and proper notice of this application and the letter and emails from the trustee explained the important points in issue. The moral hazard argument is one which relates directly to the powers of the Pensions Regulator. Nevertheless Pensions Regulator has explained in clear terms that it does need to be joined and does not intend to make representations. The response from the Pensions Regulator shows that it had specifically in mind the moral hazard provisions and the balancing of any potential prejudice against any benefit to members' interests.

Section 75 of the Pensions Act 1995

19. Section 75 was a re-enactment, with minor variations, of the previous provision originally in s58B of the Social Security Pensions Act 1975 which was inserted by the Social Security Act 1990 which came into force on 29^th June 1992 (SI 1992/1532). Section 58B was consolidated into s144 of the Pensions Scheme Act 1993. Section 75 came into force on 6 April 1997.
20. Section 75 is a key piece of the statutory funding regime for occupational pensions. It imposes a debt obligation upon the employer relating to the scheme if a relevant trigger event occurs. Its purpose is to ensure that in specified circumstances the employer who participates in a defined pension scheme can become liable for some or all of the shortfall in the scheme's funding. Unlike the employer's obligation to fund an ongoing scheme, section 75 creates an obligation for the payment of a lump sum. There are provisions which specify in detail how the sum is arrived at but they are not material to this application.
21. The Pensions Act 1995 was amended by the Pensions Act 2004. The amendments altered section 75 in various ways. The 2004 Act also contained provisions which provide a new mechanism whereby persons may be required to make payments into the scheme in certain circumstances. These are Contribution Notices under s38 of the 2004 Act and Financial Support Directions under s43 of the 2004 Act. Ms Agnello referred to these provisions as the "moral hazard" provisions. They interact with and refer to s75 of the 1995 Act (as amended) and play an important part in the issues I have to decide.
22. The legislation is complex and wordy. However the critical element of section 75 for the purpose of this application is s75(4) and the provisions relating to that subsection. In its current form these provisions are as follows:

75 Deficiencies in the assets

(1) This section applies in relation to an occupational pension scheme other than a scheme which is – (a) a money purchase scheme, or (b) a prescribed scheme or scheme of a prescribed description

(2) – (3) [similar provisions to subsection (4) but not applicable in this case ]

(4) Where-

(a) immediately before a relevant event ("the current event") occurs in relation to the employer the value of the asserts of the scheme is less than the amount at that time of the liabilities of the scheme,

(b) [the current event happened after the appointed day and not in certain circumstances]

(c) [applicable if the scheme was being wound up before the event, but it was not]

(d) [if certain other criteria are satisfied which are satisfied in this case] and

(e) no relevant event within subsection (6A)(c) has occurred in relation to the employer during the period mentioned in paragraph d(i)

an amount equal to the difference shall be treated as a debt due from the employer to the trustees or managers of the scheme.

(4A) where the current event is within subsection (6A)(a) or (b), the debt under subsection (4) is to be taken, for the purposes of the law relating to insolvency as it applies to the employer, to arise immediately before the occurrence of the current event.

(4B) Subsection (4C) applies if, in a case within subsection (4)-

(a) the current event is within subsection (6A)(a) or (b), and

(b) the scheme was not being wound up immediately before that event.

(4C) where this subsection applies, the debt due from the employer under subsection (4) is contingent upon-

(a) a scheme failure notice being issued in relation the scheme after the current event and the following conditions being satisfied – (i), (ii) and (iii) [ certain conditions the details of which are irrelevant ]

(b) the commencement of the winding up of the scheme before–

(i) any scheme failure notice or cessation notice issued in relation to the scheme becomes binding, or

(ii) any relevant event within subsection (6A)(c) occurs in relation to the employer.

(5) For the purposes of subsections (2) and (4), the liabilities and assets to be taken into account, and their amount or value, must be determined, calculated and verified by a prescribed person and in the prescribed manner.

(6) [irrelevant]

(6A) For the purposes of this section, a relevant event occurs in relation to an employer in relation to an occupational pension scheme if and when-

(a) an insolvency event occurs in relation to the employer,

(b) [irrelevant],

(c) a resolution is passed for a voluntary winding up of the employer in a case where a declaration of solvency has been made under s89 of the Insolvency Act 1986 (members voluntary winding up).

(6B) – (6D) [contain definitions and other provisions of marginal relevance]

(7) This section does not prejudice any other right or remedy which the trustees or managers may have in respect of a deficiency in the scheme's assets.

(8) A debt due by virtue only of this section shall not be regarded (a) as a preferential debt for the purposes of the Insolvency Act 1986, or (b) as a preferred debt for the purposes of the Bankruptcy (Scotland) Act 1985

(10) Regulations may modify this section as it applies in prescribed circumstances.

23. The starting point for the creation of the debt created by s75(4) is a "current event" such as an insolvency event (s75(6A)(a)). The administration of KSF in this case is such an event. The debt is created if the deficiency exists immediately before the current event (s75(4)(a)). Further conditions are applicable in s75(4)(b) to (d) but they all apply in this case. On that basis s75(4) provides that an amount equal to the difference "shall be treated as a debt due from the employer to the trustees or managers of the scheme". This is the language which creates the s75 debt in the appropriate circumstances. The language is unchanged from the terms used in the 1992 amendments to the Social Security Pensions Act 1975 which created s58A.
24. Under s75(4A) the debt is taken to arise immediately before the insolvency so that it counts as a debt owed by the employer when the insolvency event occurred. The debt is contingent on certain further events (s75(4C)(a) and (b)). These are essentially the issuance of a scheme failure notice under s122(2)(a) or s130(2) of the Pensions Act 2004 and the commencement of winding up the scheme. There are more detailed criteria but the details do not matter.
25. The determination and verification of the amount of the debt is conducted in a prescribed manner (s75(5)).
26. The characteristics of the s75 debt fell to be considered by the High Court in Bradstock (above). The problem which arose in that case was whether it was possible for the trustees of a pension scheme to which s75 applied to reach a binding compromise of the s75 debt with the employer. On the facts of that case the compromise would give the scheme significantly more than it would recover in the liquidation of the employer but still considerably less than the full amount of the minimum funding requirement of the scheme. The learned deputy judge held that a section 75 debt could be compromised (see paragraphs 10 to 13). He pointed out that many of the provisions are mandatory and that the underlying purpose of the provisions is the need not only to protect members and pensioners but to maintain public confidence in occupational pension schemes generally. While a scheme is ongoing the trustees cannot waive the need for compliance with the provisions or negotiate a more lenient schedule of contributions than the regulations prescribe. The judge pointed out that provisions cannot be contracted out of in advance of the s75 debt coming into force but held that there was a clear distinction between that sort of attempt to avoid the effect of the provisions and trustees compromising or settling a s75 debt in the best way they reasonably can for the benefit of scheme members. The judge could not see any reason as a matter of construction or public policy why trustees should not be able to compromise a s75 debt in the exercise of their relevant powers. That would not involve contracting out of the provisions but enforcing it by means which the trustees honestly and reasonably believe secures the largest amount towards the shortfall. To compromise the debt in such circumstances gives effect to the legislation in the best practical way consistent with the exercise of the trustees powers.
27. Ms Agnello submitted that if a s75 debt can be compromised (Bradstock) then it is very hard to see why it should not be assignable in the present circumstances in which the debt has been triggered, certified and admitted to proof. It is akin to the trustees of a scheme selling any other asset, which they are able to do.
28. I accept Ms Agnello's submission (subject to the 2004 Act which I will come to). An assignment of a section 75 debt is an event of lesser significance in the context of the legislation as a whole than a compromise of the debt for the following reasons. In both a compromise and an assignment the trustee has bound the scheme to accept less than the nominal value of the debt. However in a compromise the employer has also purported to discharge its ongoing liability for the s75 debt. That is why the argument that the parties were contracting out of the scheme was a significant one in Bradstock. However in an assignment case, the employer remains liable for the whole debt (subject to any payments already made) just as they were before the assignment. The assignment does not let the employer avoid its obligations. In my judgment Bradstock is a strong point in favour of the trustee's case before me.
29. Ms Agnello also submitted that debts, like other intangibles, are generally capable of assignment. There are exceptions, such as social security benefits and armed forces pay, but they are provided for by statute (s187(1) of the Social Security Administration Act 1992 and s356 of the Armed Forces Act 2006). There are other exceptions which have been identified by the courts on public policy grounds. An example arose in Sears Tooth v Payne Hicks Beach [1997] 2 FLR 116 in the context of a spouse's rights following divorce whereby certain periodical payments are capable of being varied by the court and therefore cannot be assigned. There is no express prohibition on the assignment of the s75 debt and she submitted it was difficult to imagine what public policy grounds might exist for holding that a s75 debt was not assignable.
30. Again subject to the 2004 Act, I accept Ms Agnello's submissions. There is no express prohibition on the assignment of the section 75 debt and no apparent public policy reasons why it should not be possible. Moreover, just as the judge found in Bradstock, in this case if to deal in the debt by assignment secures the largest amount which the trustees reasonably and honestly believe can be secured towards the shortfall, then such a transaction would be furthering the purposes of section 75 and the legislation as a whole.
31. If this case had arisen before the passing of the 2004 Act, then the answer would have been a simple one. A consequence or natural extension of the High Court's finding in Bradstock about what can be done with a section 75 debt is that the debt is assignable by the trustee.
32. The 2004 Act provided for a series of further measures to provide protection to occupational pension schemes. It created the Pension Protection Fund and the Pensions Regulator. The main function of the Pensions Regulator is to protect occupational pension schemes and the benefits under them and reduce the risk of situations which may lead to compensation being payable from the Pension Protection Fund. Note that in the present case the scheme is sufficiently well funded that it will not require the support of the PPF.
33. The 2004 Act had two relevant effects for present purposes. The terms of section 75 of the 1995 Act were recast and sections 38 – 51 were enacted which provide the so called "moral hazard" provisions.
34. The amendments to s75 itself change the way in which the triggering conditions operate and allow for the s75 debt to arise in further circumstances than before. For example administration was included as a relevant insolvency event. However these changes did not alter the language used in the section which creates the debt itself. On the face of it Parliament did not intend to alter the nature and characteristics of the section 75 debt which by that time had been dealt with in Bradstock.
35. The operation both of section 75 itself and the FSD element of the moral hazard provisions was addressed in the Supreme Court in In re Nortel GmbH and re Lehman Brothers International [2014] AC 209. Section 75 is addressed by Lord Neuberger at paragraphs 6-7, the Pensions Regulator and PPF at paragraphs 8-10 and the FSD at paragraphs 11-24. In paragraphs 11 and 12 Lord Neuberger said this:

"11. It was perceived that the creation of the PPF might encourage some employers to arrange their affairs so as to throw the burden of pension scheme deficiencies upon the PPF, which would unfairly burden other schemes by increasing the amount of the levies. An example of such an arrangement is where a group of companies uses a single company (a "service company") to employ people who then work for other group companies. In such a case, the employees' pension rights could be regarded as unfairly prejudiced if, by comparison with the resources of other group companies, the service company had very limited resources to meet a section 75 debt.

12. The FSD regime was designed to mitigate such problems. In a nutshell, it enables the Regulator in specified circumstances (i) to impose, by the issue of a FSD to some or all of the other group companies (known as "targets"), an obligation to provide reasonable financial support to the under-funded scheme of the service company or insufficiently resourced employer, and (ii) to deal with non-compliance with that obligation by imposing, through a Contribution Notice (a "CN"), a specific monetary liability payable by a target to the trustees."

36. The relevant point before me is that in certain circumstances as part of the contribution notice and FSD arrangements, the Pensions Regulator can issue a direction to the trustees not to take any or any further steps to recover the section 75 debt pending recovery of all or part of what is due under a contribution notice. The power to issue this direction is provided for by sections 41(4) and 50(4) of the 2004 Act. Before such a direction can be issued a contribution notice either has to have been issued under s38 (in the case of section 41(4)) or a contribution notice has to have followed from an FSD under s43 (in the case of s50(4)). In either case a trustee or manager failing to comply with such a direction may be liable for a civil penalty (s41(5), s50(5)) under s10 of the 1995 Act (civil penalties).
37. The existence of a power to direct the trustees not to take steps to enforce the s75 debt is inconsistent with the concept that the section 75 debt could be assigned away by the trustees. Obvious difficulties would arise if the trustees assigned the section 75 debt but then after that the Regulator wished to make a direction under s41(4) or s50(4) of the 2004 Act. If a direction was issued after a trustee had assigned the debt then the trustee would be unable to comply with it because the debt no longer vested in the trustee.
38. Ms Agnello submitted that despite these provisions, the debt created by section 75 of the 1995 Act, in its form as amended by the 2004 Act, was nevertheless assignable. However she properly drew my attention to this point as a possible contrary argument.

What is the correct interpretation of section 75 today?

39. In order to properly interpret section 75 of the 1995 Act in its amended form, it is obviously necessary to carry out that exercise in the overall context of the terms of the 2004 Act. Thus the existence of the moral hazard provisions in the 2004 Act and their impact are plainly relevant. Ms Agnello submitted that prior to amendment by the 2004 Act, the true interpretation of section 75 of the 1995 Act was that the debt was assignable and that a key issue in favour of the trustee's submission before me was that one could not find any indication in the amending act which showed that parliament intended to alter the nature of the section 75 debt.
40. I agree that it is appropriate to consider the intention behind the amending Act. This is supported by Hobhouse LJ in Inco Europe Ltd v First Choice Distribution (a firm) and others [1999] 1 All ER 820 at 823 in which he addressed the principles applicable to the interpretation of amendments to statutes. Hobhouse LJ said this:

"In general terms, it is undoubtedly correct that the effect of an amendment to a statute should be ascertained by construing the amended statute. Thus, what is to be looked at is the amended statute itself as if it were a free standing piece of legislation and its meaning and effect ascertained by an examination of the language of that statute. However in certain circumstances it may be necessary to look at the amending statute as well… The expression of the relevant parliamentary intention is the amending Act. It is the amending Act which is the operative provision and which alters the law from what it had been before."

41. Although the 2004 Act did enact changes to the words of section 75 of the 1995 Act and did alter the way it worked in various ways, there is nothing in those changes which could support the idea that Parliament intended to alter the nature of the section 75 debt itself. Importantly, the operative words of section 75 remained the same as before. It is a well known principle of construction that one should not change the form of words used unless one intends to change the meaning (Ms Agnello referred to Blackburn J in Hadley v Perks (1886) LR 1 QB 444 at 457). It is also well established that no change in meaning is to be taken as effected unless it was intended (see Bennion on Statutory Interpretation Code on s234).
42. Ms Agnello drew my attention to an oddity in the drafting of s41(4). In some circumstances the section 75 debt may be due not to the trustees but to the Pension Protection Fund because the PPF has assumed responsibility for the scheme. That is catered for by s41(2) but the power to give a direction suspending recover of the debt under s41(4) only refers to a direction to the trustees and not to the PPF. It may be that the draftsman assumed that the relationship between the Pensions Regulator and the PFF meant the Regulator would not need to issue directions of that kind to the PPF in the relevant circumstances. In any event however this oddity (if that is what it is) does not have a bearing on the issue I have to decide.
43. Another element in the provisions which Ms Agnello drew to my attention which might have a bearing on the answer to the problem is s75(6D). This provides that in some circumstances a section 75 debt which arose under the section is treated as if it had never arisen. However the circumstances relate to the staying of a members voluntary winding up of the employer and do not shed light on the issue I have to decide.
44. When I reserved judgment at the conclusion of Ms Agnello's oral submissions I did not find this an easy question to decide. Ms Agnello had made a compelling case that the court should declare that the trustees have the power to assign the debt. Why should the inconsistency between the element of the moral hazard provisions in the 2004 Act discussed above and the assignability of the section 75 debt prevent the trustees from obtaining what would otherwise be the best result of the members of this scheme by assignment of the debt now? After all the moral hazard provisions have not been engaged in the present case. However the fact it might be desirable in this case does not mean that the Act must be interpreted in such a way as to permit the assignment. The fact remains that sections s41(4) and 50(4) are inconsistent with the idea that the trustees can assign the debt. In the end however I concluded that Ms Agnello was correct and prepared a draft judgment on that basis. My reasons for accepting the submission that the debt is assignable were the following.
45. First the language used to create the debt in the first place gives no indication that it is anything other than a debt with the same characteristics as any other. Normally debts are assignable. There is no express prohibition on assignment in the legislation.
46. Second, the wider considerations which led to the judgment of the High Court in Bradstock apply today as much as they applied then. Being able to deal in the debt allows the trustees to further the interests of members by securing the largest amount available for the scheme.
47. Third, the inconsistency between the debt and the moral hazard provisions is only a potential one which only arises in particular circumstances. It will not arise in all circumstances and does not prevent the moral hazard regime as a whole from operating.
48. The draft judgment was sent to counsel as a draft subject to typographic errors, to be handed down in court a week later. But I then had second thoughts. A point occurred to me which had not been discussed before and had not been raised either by the Pensions Regulator or the representative defendant. A note was sent to counsel explaining the issue. Ms Agnello responded in a further note fully addressing the issue. I am grateful to her for those submissions. This judgment takes them into account.
49. The note sent to counsel was in the following terms:

"Why cannot the following be said:

The introduction of the moral hazard provisions by the 2004 Act represents a fundamental change to the nature of the section 75 debt because under the moral hazard provisions other entities may become liable to finance the deficiency in a pension scheme rather than the employer company itself. Before the 2004 Act only the employer was liable to make up the deficit and the only mechanism was by the s75 debt.

Consider a case in which the moral hazard provisions are engaged, the Pensions Regulator issues a Contribution Notice requiring a third party to make a contribution to the scheme and that contribution entirely makes up any deficit which had previously existed in the scheme. In those circumstances why should the employer company remain liable for the section 75 debt? The provisions in s41(4) and s50(4) are the mechanism by which the Pensions Regulator can ensure that the other creditors of the employer do not suffer in those circumstances and the scheme is not over compensated. To allow the debt to be assignable creates the possibility of double recovery by the scheme and unnecessary loss to other creditors.

The party who might suffer would be the other creditor(s) of the employer. Since the section 75 debt was only a deemed debt in the first place, why should the employer's other creditors receive a lower dividend in such a case when the deficit in the scheme has been met by third parties?

Consideration of this example may be said to show that the 2004 Act was drafted on the assumption that the s75 debt was personal to the trustee. For the trustee to assign such a debt undermines a safeguard built into the fairness of the moral hazard provisions. Compromising the debt maybe different since at least in that case the employer will also have obtained a release of the balance of the s75 debt."

50. Counsel considered this submissions and prepared written submissions in reply. These submissions referred to the judgment of David Richards J in Storm Funding Limited (in administration) [2014] Bus LR 454. Although the case had been mentioned in argument in passing before, it had not been cited or addressed in detail.
51. Storm Funding was concerned with the question whether, when two or more contribution notices (pursuant to section 47 of the Pensions Act 2004) are issued, the aggregate maximum amount which may be either specified in the contribution notice or recovered pursuant to them is limited to the shortfall sum determined in accordance with section 75 (see paragraphs 3 and 5). In addressing this question the learned judge considered the various provisions in great detail.
52. The question I have to decide is different from the one which arose in Storm Funding but the approach of David Richards J's to the provisions of the Pensions Act 2004 is applicable and his consideration of the different characteristics of section 75 debt and a contribution notice are directly relevant to the issue I have to decide.
53. One of the arguments put to the court was that the maximum aggregate sum which may be recovered under contribution notices issued to multiple targets should be limited to the shortfall sum. This was based on the general principle that a creditor is not permitted to recover more than 100% of what is in substance the same debt (judgment paragraph 73). This submission in Storm Funding is very similar to the point I raised with Ms Agnello.
54. David Richards J dealt with the submission at length and rejected it. In doing so he drew the following key conclusions which are relevant to the question I have to decide (see paragraph 80 et seq). He held that whereas section 75 imposes an ascertainable debt in certain specified circumstances, the 2004 Act creates a scheme whereby obligations are imposed by the exercise of discretionary powers by a statutory body, or on a reference, by a judicial body. The scheme is an elaborate one designed to achieve fair and proportionate results in the particular circumstances of a case. The definition of "financial support" is not co-extensive with the actual or estimated s75 debt. It may go beyond it. If contribution notices are issued against multiple persons following non compliance with an FSD, the Regulator may but may not provide that they will be jointly and severally liable. Thus the purpose of the scheme created by the 2004 Act is to secure financial support for the scheme which may be different from and larger than any section 75 debt. Therefore there is little logic in linking the aggregate amounts stated in contribution notices to the section 75 debt (see paragraph 92). The additional obligations created by the 2004 Act do not create the same debt as the debt owed pursuant to section 75. There are two separate obligations. Both rank as unsecured debts but they remain separate liabilities.
55. The applicants in Storm Funding relied heavily on section 50(6). That section, along with s50(4) which I need to consider, forms part of the section dealing with the relationship between the employer debt under section 75 and a contribution notice under s47. Section 50(6) provides that any sum paid in respect of a debt due under a contribution notice is to be treated as reducing the amount of debt due under section 75. The Judge held, (in paragraph 100):

The difficulty for the administrators is that section 50(6), even taken with the other features of the legislation on which the administrators rely, is a slender basis on which to argue for a significant limitation, which is nowhere expressed in the legislation and which is in many respects contrary to both the express terms of the legislation and its purpose and structure. What then is the purpose of section 50(6)? The trustees and the Regulator submit that its purpose is to reduce the burden on the employer in circumstances where sums due under contribution notices are paid. They note correctly that these provisions apply not only where the employer is insolvent and in an insolvency process. The employer may still be carrying on business and the scheme may still be active. It is the circumstances which can give rise to the issue of FSDs and hence to contribution notices that provide the answer. As previously discussed, the circumstances are limited to cases where either the employer is a service company or the employer is under-resourced and connected or associated persons are over-resourced. In the first case, the employer is subject to financial strains in circumstances where it has been incurring pension liabilities in respect of persons employed effectively for the benefit of its associated or connected persons. In the second case it does not have the necessary financial resources but as at the relevant time associated or connected persons did. As it seems to me, this provides the likely explanation for the inclusion of section 50(6).

56. This conclusion supports the position of the trustees before me. The explanation for the inclusion of s50(6) applies also to s50(4) and undermines the idea that the existence of sections 50(4) (and therefore s41(4)) could be taken to have altered the nature of the section 75 debt itself. It also shows that moral hazard provisions in the 2004 Act are not designed to provide overall protection of the employer and its creditors in relation to the section 75 debt and the liability which may arise under a potential contribution notice.
57. The protection provided by sections 41 and 50 is limited. It is only available in cases when the contribution notice has been issued. In cases where the section 75 debt has been triggered prior to the issue of the contribution notice and there has been no payment, compromise or assignment, then the provisions of section 41 and 50 will apply. However, these provisions do not provide protection in cases where payment of the section 75 debt has been made or compromised. Sections 41 and 50 do not enable any sums already paid to the trustee to be paid back to the insolvent employer's estate so as to be distributed to the other creditors. The creditors of an insolvent employer will still have to shoulder the burden of the section 75 debt alongside their own unsecured debts.
58. Thus, as Ms Agnello submitted, these arrangements are capable of creating anomalies whether or not the section 75 debt can be assigned. That is because the FSD and contribution notices may be issued after the insolvent estate of the employer has already paid a dividend towards the scheme in respect of the s75 debt. The sums paid by way of dividend are not recoverable from any recipient of a subsequent contribution notice and the pension fund is under no obligation to repay the sums it has received by way of dividend. This shows that the mischief which I raised in the note (to the extent it is one) arises regardless of the assignability of the section 75 debt. It is not a reason to conclude that the 2004 Act changed the nature of the debt.
59. Ms Agnello also pointed out that the set off provided for in s50(6) (and its parallel provision in s41(6)) only apply when the debt is still in existence. In other words if the debt has been discharged it will not apply, nor does it apply in relation to any part payments already made. The provisions do permit the recipient of a contribution notice to apply to the Regulator and seek that an amount already paid in respect of the s75 debt be applied to reduce the amount payable under the contribution notice (s50(7)-(12) and also s41(7)-(12)). The Regulator has a discretionary power whether to do so. The contrast between this discretionary power and the automatic provisions of s75 is the same contrast as was drawn generally in Storm Funding. It shows that the obligations under the moral hazard provisions and the s75 debt obligation are distinct from one another.
60. Ms Agnello submitted that the way section 50 (and s41) operate is in many respects rather crude and unsatisfactory and that the system is certainly susceptible to what could be viewed as double recovery. I agree that the operation of all these provisions is capable of creating a situation which could be viewed as double recovery. That was what was at the heart of the point raised in my note to counsel.
61. Ms Agnello also submitted that it is surprising that this legislation has created a system whereby creditors of an insolvent employer have more protection in cases where the Regulator acts quickly to issue its moral hazard proceedings and obtain a contribution notice. Whether surprising or not, in my judgment Ms Agnello is right that the legislation does indeed work in such a way that creditors of an insolvent employer have more protection when the Regulator acts quickly. That is because the Regulator can take a number of years before issuing any moral hazard proceedings but in the meantime the creditors of the employer will be required to shoulder the burden of the section 75 debt. The Regulator has a period of six years from the act it seeks to rely upon to issue the warning notice which commences the moral hazard procedure in relation to section 38 contribution notices and a period of two years (or more depending upon when the connection and association has been broken) to issue the requisite warning notice pursuant to section 43 of the Pensions Act 2004. During this period the obligation upon the employer to pay a section 75 debt which has fallen due is not stayed.
62. In her note Ms Agnello mentioned three further points. First she addressed the Pension Protection Fund (Entry Rules) Regulations 2005. These regulations deal with whether a scheme is eligible for entry into the Pension Protection Fund under s126 of the Pensions Act 2004. Regulation 2(2) provides that a scheme will be ineligible if the trustees entered into a legally enforceable agreement which reduced the amount of debt due under s75 of the 1995 Act. That would be a compromise of the kind sanctioned in Bradstock. In other words this shows that the drafters of the regulations implementing the 2004 Act were alive to Bradstock and assumed compromises of the debt would remain possible in future.
63. Second she referred to section 49(1) of the Pensions Act 2004. This provides that a debt due by virtue of a contribution notice is not taken into account for the purposes of s75(2) and (4) when ascertaining the value of assets or liabilities. Therefore this provision lends further support to the submission that the section 75 debt and the contribution notice obligations are separate.
64. Third Ms Agnello made a new further or alternative submission about the effect of any assignment on s41(4) or s50(4), to the effect that the assignee cannot be in a better position than the assignee and takes the debt subject to equities. The starting point is that the assignee of a debt takes the assignment subject to equities. That is correct. It is expressly provided for by s136 of the Law of Property Act 1925 and in E Pfeiffer Weinkellerei-Weineinkauf GmbH v. Arbuthnot Factors Ltd [1988] 1 WLR 150, Philips J held that the effect of s136 was to give the assignee the procedural advantages of legal title but it did not put the assignee in a better position as far as priorities were concerned. They are determined as if the assignment had been effected in equity, not law (see p162-163).
65. Ms Agnello submitted that the provisions of s41(4) and s50(4) will apply equally to an assignee of the s75 debt as they do to the trustee or manager, being the assignor, because the power given to the Regulator by those sections is capable of acting as an equity which all assignments (legal and equitable) take effect subject to. Thus the debtor is protected because if circumstances arose in which the Regulator would have directed the trustee not to collect the outstanding balance of a section 75 debt pending recovery under a contribution notice, the debtor can rely on that as a defence against the assignee of the debt. Accordingly the employer is no worse off.
66. While I can see the sense in this new submission, I will not decide it on this application, not least because in this case no moral hazard proceedings have been issued and the Regulator does not appear to be investigating any potential moral hazard action in this case. I have approached this matter taking sections 41(4) and 50(4) at face value. They do not mention the possibility of a direction being addressed to anyone other than the trustees or managers of the scheme. If their effect can be regarded as an equity which runs with the debt on assignment, that can only support the trustees position before me.

Conclusions on the first direction

67. Ms Agnello's submissions addressed the points raised in my note comprehensively and in detail. I have summarised the issues arising above. Looking overall, I find that the position is this.
68. Considered prior to the 2004 Act, the debt created by section 75 of the 1995 Act was assignable. The conclusion follows from the language used in the 1995 Act itself and from a natural extension of the judgment of the High Court in Bradstock.
69. The 2004 Pensions Act did bring in a fundamental change by allowing others to be made liable for the pension deficiency rather than just the employer. Storm Funding shows that the new protection for pension schemes created by the 2004 Act is not merely an addition to the existing section 75 debt. It is an entirely distinct scheme.
70. The relationship between the new provisions and the existing section 75 debt system is complex. There are no express provisions which answer the question arising in this case. The arrangements governing the relationship between the provisions of the 2004 Act and the section 75 debt give rise to potential anomalies whichever way they are looked at. That is important because it undermines any attempt to construe the legislation in such a way as to avoid an anomalous result.
71. It is unreal to find in sections 41(4) and 50(4) of the 2004 Act any manifestation of an intention by Parliament to alter the debt created by section 75 of the 1995 Act.
72. Accordingly the debt created by section 75 of the 1995 Act may be assigned by the trustees or managers of the scheme. I will make a direction to that effect.

The second direction

73. The second direction sought is appropriate. The trustee is not asking the court to ratify sale of the debt at any particular price or in any particular circumstances. The trustee seeks a declaration that assignment is something which a reasonable and properly advised trustee could enter into in the exercise of its powers. I am satisfied that such a direction should be given in this case.

Overall

74. I will make the declarations sought. When this judgment is made public, Annex A will remain confidential until further order in order to permit the trustee (if advised) to deal in the debt without making the commercially sensitive figures public, thereby affecting the selling price of the debt obtainable by the trustee.

Annex A

A1. The administrators estimate of the final dividend is 85-86.5p in the £.

A2. The buyers referred to by the brokers referred to by Mr McNess in his second witness statement are apparently willing to buy the debt at about 90p in the £.

A3. The estimated extra cost of running until the end of the KSF administration as opposed windup up after selling the debt now are an additional £305,000.

A4. The KPMG report describes a recovery of 90p in the £ in the administration as very challenging. Although there is a possibility that recoveries from the KSF administration exceed the current estimates, the recoveries are unlikely to exceed sale in the region of 90p in the £. If the debt ultimately earns 86.5p in the £ the scheme will receive a further £3.7m. If the debt can be sold for 90p in the £ the scheme will receive £6.3m.

A5. The KPMG report mentions taking into account the costs of an aborted sale. Pinsent Masons confirmed that their costs of completing the sale process which would be payable; in the event of an aborted sale would be about £25,000 plus VAT.

A6. The third witness statement of Mr McNess explains that the application is urgent because in the week commencing 8 September he was informed that the potential offer price has reduced to 88 or 89 pence in the £. This was because another large claim is due to come to the market within two weeks.