The High Court has ruled that a pensions top-up arrangement set up to provide security for unfunded pensions promises for four ex-directors at Granada Group did not require shareholder approval to be considered viable.
The case, Granada Group v Law Debenture Pension Trust Corporation, concerned a secured unfunded unapproved retirement benefit scheme (SUURBS), which was created in 2000 for the benefit of its directors.
The organisation, which merged with Carlton Communications in 2004 to form ITV (pictured in 2011), set up the scheme under trust as a pension scheme with Law Debenture as trustee, with a charge over securities which could be enforced if Granada failed to pay the promised pensions top up.
Top-up arrangements take a number of forms, one of which is an UURBS.
An UURBS could be a simple contractual promise. However, an unfunded promise also exposes the individual to the long-term credit worthiness of the organisation.
To mitigate this risk, a common sub-set of an UURBS, was one under which the employer provided security for this pension promise (a secured UURBS, or SUURBS).
Granada sought a declaration that the SUURBS was voidable because shareholder approval had not been obtained under the Companies Act 1985, which states that where directors of a company or a person connected with the directors acquire a non-cash asse” above a prescribed value, shareholder approval must be obtained in a general meeting. If not, the arrangement is voidable at the instance of the company.
However, the Act contains an exemption for trustees of ‘pension schemes’ or employees’ share schemes.
Granada’s primary argument was that this pension scheme exemption applied only to the acquisition of the non-cash asset, the benefit of the charge over securities, by Law Debenture and not to the acquisition of beneficial interests under the SUURBS by the directors themselves.
If it was wrong about that, it argued that the SUURBS was not a ‘pension scheme’ and so this exemption did not apply.
High Court decision
The judge found in favour of Law Debenture and the arguments made on its behalf.
It was held that the directors did not themselves acquire a non-cash asset by virtue of the security arrangement. The directors had no rights over the securities or the charge and this was not a bare trust.
A right of the directors as members to compel the trustee to administer the scheme properly, was not a right over property and far too nebulous. It was also not capable of being valued in monetary terms.
It was also further decided that, although Law Debenture acquired a non-cash asset in the form of the charge over the securities and was a ’connected person’, it did so in the capacity of trustee of a pension scheme and therefore fell into that exemption.
Granada argued that the pension scheme was the contractual promise to pay and did not include the charge and securities, but the judge held that it was clear that the security element was an integral part of the arrangement and the SUURBS as a whole was a pension scheme.
The judge considered that if Granada was right in its arguments, there would be significant implications for the pensions industry.
Although it was acknowledged that the legal argument was either right or wrong, the impact on other pension schemes of a finding that Granada was right, was a reason to “scrutinise the rival arguments with particular care”.
The judge was also of the view that it was unlikely that Parliament really intended that section 320 of the Companies Act should apply in the way suggested by Granada.
The inference was that it was not intended that pension fund arrangements should be caught at all, consistent with the policy underlying section 320 of the Act.
The judge concluded that Law Debenture had acted entirely reasonably in defending the proceedings in the interest of all the beneficiaries.
It was also ordered that Granada pay Law Debenture’s costs on an indemnity basis.
Mark Blyth, pensions dispute resolution partner at Linklaters, said: “This judgment is a welcome confirmation of the law in this area and upholds the validity of these types of arrangements.”