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High Court rules in favours of trustees in Element 6 case

  • Ireland
  • General

11-02-2014

The judgement of Mr Justice Charleton in Greene and Others v Coady and Others
delivered on 4 February 2013 may be the most significant ruling ever given by an
Irish court in a pension case.

It will at a minimum set a benchmark against which Trustee decision making
procedures in their interactions with sponsoring employers will in the future be
judged. There are a number of practical issues raised by the judgement which we
will be exploring in more detail at our “Doing Your Duty” trustee briefing on 6
March 2014.

However, we outline some of the key points in the judgment in this briefing.

Basis of Claim

Element 6 Limited was the principal employer of the Element 6 pension scheme.
The scheme had a funding deficit of over €100 million in 2008, and the employer
had agreed in 2009 to enter into a funding proposal to restore the scheme to
solvency.

In 2011 the proposal went off track. The employer refused to continue the scheme
in its current form, and claimed that the scheme was threatening the employer’s
continuing existence. This led to correspondence and discussion with the trustees,
which ultimately led to the employer making an offer to pay €35.4 million into a
combination of the scheme and a separate DC scheme, on the basis that this would
be a final payment prior to the scheme being wound up. The deficit was estimated
at €129.2 million at this point. The employer then issued a notice to terminate its
contributions to the scheme.

After taking advice, the trustees decided to accept the offer, which was increased
to €37.1 million in total, rather than issuing a contribution demand against the
company for the full deficit.

The plaintiff beneficiaries claimed for damages for breach of trust against the
defendant trustees. The breach of trust alleged was the failure of the trustees to
make a contribution demand of €129.2 million (the MFS deficit) or more from the
sponsoring principal employer Element 6 Limited, in the context of that employer
having terminated its liability to contribute to the scheme. It was alleged that
failing to do so was a wilful default by the trustees.

The plaintiffs also claimed that the trustees’ decision to instead accept the
employer offer was vitiated by a conflict of interest, that it took into account
irrelevant matters and ignored relevant issues and that it was a decision that no
reasonable body of properly informed trustees could have taken.

Basis for review of a trustee decision

The court reaffirmed the position that the test to be applied as to whether a trustee
decision should be overturned by a court is whether it is a decision which no
reasonable body of trustees could have made.

Once the trustees are shown to have acted honestly and in good faith after having
taken account of all relevant considerations and excluded all irrelevant
considerations, only decisions which are property characterised as being ones that
no reasonable body of trustees could have made should be condemned.

Relevance and Weight

The court also declined to second guess or disagree with the weight which the
trustees choose to give to a particular factor, so long as it is a relevant factor. This
endorses English authorities such as Edge v Pension Ombudsman.

Conflict of Interest

The issue of conflict of interest was a major element of the plaintiffs’ claim. The
six defendant trustees had split down the middle on the question of whether to
accept the employer’s contribution offer, with the three company nominees voting
in favour, and the three worker nominees voting against, the company nominated
chairman exercising his casting vote in favour.

The court considered the various potential sources of conflict for the company
nominated and/or employed trustees, including their interest in their jobs and in
the €14 million element of the employer offer which was to benefit active members
rather than other categories of members.

The court affirmed that, without a valid exception applying, a trustee cannot put
himself in a position where he has a conflict of interest, even if he does not actually
act improperly.

The court accepted three exceptions to this rule:

  • Informed consent
  • A conflict inherent in the operation of the scheme itself, which cannot be
    avoided in order to operate the trust
  • An express exemption under the trust deed

Here, the Trust Deed had a fairly common form of exemption clause, which
protected trustee decisions made despite a trustee having a direct or personal
interest in the outcome. The plaintiffs argued that this could not exempt major
conflicts such as the personal interests of the trustees in this case, and did not
cover the conflict of duty which certain trustees had, in terms of their competing
duty to the employer.

The court strongly rejected this, and reaffirmed that a properly drafted conflicts
exemption clause in a trust deed allows trustees to be in a position where they
have conflicting interests or conflicting duties to their role as trustees. However,
the court also affirmed that the particular decision of the trustees must not then be
overborne by those conflicts.

What was important in this case was that the judge was satisfied on the evidence
that, as a matter of fact, no conflict of interest or duty “influenced the decision of
any of the Trustees much less undermined or overwhelmed their ability to act
honestly and objectively in the interests of the beneficiaries and in good faith”.

Wilful default

The plaintiffs argued that the failure to serve a contribution demand was a wilful
default by the trustees. The significance of this is that the trust deed, like the
majority of Irish pension deeds, exonerated the trustees from liability for their
actions as trustees except in the case of “wilful default”.

What constitutes wilful default and how narrowly or widely it should be interpreted
in a pension scheme context has been a source of debate. The court outlined a
couple of alternative definitions of wilful default. Firstly, that the failure to do
something (in this case, make a contribution demand) must be a conscious or
reckless breach of duty by the trustees. This was the court’s preferred definition.
However, in the alternative the court ruled that wilful default must be a failure by
the trustees to act where either they do so with a lack of good faith or honesty, or
where the default is one which no body of trustees, with the knowledge which they
had at the time of their decision, could have made.

In our view, the first definition is to be preferred. It underlines the importance of
trustees not shirking from a difficult decision, but confirms that if the trustees
make that decision in good faith and to the best of their ability, they will be
strongly protected from challenge in doing so.

Importance of advice and evidence of process

The court went through a detailed inventory of the interaction between the trustees
and the employer. The court paid particular attention to the level of advice which
the trustees received, the level of detailed consideration of the issues by the
trustees and the correspondence between the trustees and the employer. The
extent to which the trustees had analysed their different options was clear from
this chronology, and the detailed advice which they had taken. The trustees took
legal and actuarial advice, but very significantly they also took advice from a firm
of accountants on the financial position of the sponsoring employer, and of the
potential level of recovery from that employer if the trustees made a contribution
demand for the full deficit against the employer, and this caused the employer to
go into liquidation.

Underpinning the court’s judgment that the trustees were neither in wilful default
in failing to make a contribution demand nor did they act with a conflict of interest
was the strong evidence put before the court of the efforts by the trustees to make
the best decision in the interests of the beneficiaries of the scheme. If the trustees
were not able to advance such a clear audit trail of their correspondence with the
sponsoring employer, their consideration of the issues and the level of advice which
they had taken, the outcome of the case might have been more uncertain. This is
a clear lesson about the importance of proper process and documentation to
trustees before making a difficult or controversial decision.

Matters to be taken into account

The plaintiffs argued that the potential threat that a contribution demand might
pose to the future of the employer’s operations was an irrelevant factor, and that
the part of the offer which related to contributions to the DC scheme to benefit
certain categories of members of the scheme (a total amount of €14 million) was
also an irrelevant factor.

The court however did not agree, and endorsed a wider view of what trustees are
entitled to take into account in making their decisions. The court said that the
trustees were entitled to take account of issues beyond the scheme itself. The
court noted that the needs of the beneficiaries included work and stability, and
therefore the threat to the employment of the active beneficiaries was a relevant
consideration the trustees could take into account. The court also ruled the
trustees were entitled to take into account the €14 million extra to the DC scheme.
The court also noted that the trustees were entitled to take account of their own
knowledge of certain matters, such as their own assessment of the value which the
company’s assets might realise in a liquidation.

Funding proposal

While not strictly necessary to its decision, the court made comments on the
funding proposal involved in the case which will be of great interest to
practitioners.

The funding proposal had been agreed between the employer and the trustees
after the trustees had made a contribution demand in 2008. The court stated that
where a funding proposal is made which involves a definite offer by the employer
to the trustees and a definite acceptance by them and if the sum to be paid is fixed
over a period of years, then the ordinary rules of contract suggest that this is a
contractual agreement. The court rejected the view that funding proposals are not
contractually binding in these circumstances.

Where the company simply announced that it was not going to pay the next
tranche due under the funding proposal, in the court’s eyes this constituted a
breach of contract. The court also considered that the capitalised value of the
remaining annual tranches could have been sued upon by the trustees, and would
have had priority in an insolvent liquidation of the employer.

This view, while it may not be binding on a future court, is a new perspective on
funding proposals, and its practical implications will need to be assessed further.

Conclusion

The court’s conclusions on how the trustees conducted themselves are now the
definitive summary of how Irish pension trustees should conduct themselves in
taking discretionary decisions affecting the interests of their beneficiaries:

“The defendant trustees did their best. They were not overwhelmed or crippled or
influenced to any degree by an conflict of interest. As a matter of fact, their
decision was solely made in the interests of the beneficiaries. That decision was
arrived at on a fair appraisal of the situation as they saw it and after all reasonable
enquiries. It was made honestly and in good faith. Their actions can only be
judged according to the knowledge which they had at the time of their decision.
They might be criticised had they not obtained the best possible advice; but, they
did this and from reliable and expert sources. They took all of that advice into
consideration and, with prudence and fortitude, made the decision which they
thought was in the best overall interests of the beneficiaries under the defined
benefit scheme. They did not take any irrelevant factor into account and nor did
they ignore any relevant factor. Nor does the weighting which the defendant
trustee gave to particular factors emerge as unreasonable. Ultimately, in the
entirety of the circumstances the decision which the trustees made to decline to
serve a contribution demand and to accept the company’s offer of €37.1 million in
winding up the pension scheme was not one with which any court could take
issue.”

Disclaimer

This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full terms and conditions on our website.

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