In its judgment in the Element Six pensions case, the Commercial Court provided valuable judicial guidance on the duties of trustees. In this e-zine, we review six lessons learned from the case.
6 Lessons from the Element Six Pensions Case
We recently reported on the Element Six case, which is probably the most significant pensions case to come before the Irish courts in recent years. In 2012, 128 members of the Element Six pension scheme issued proceedings against the trustees of the scheme claiming breach of trust for accepting a final contribution offer of €23.1m (plus €14m to a defined contribution scheme) from the sponsor of the scheme, Element Six Limited, to terminate its liability to contribute. The members argued that the trustees should have made a contribution demand of €129.2m to make up the funding deficit and that their failure to do so was a wilful default. The members also submitted that the trustees’ decision was tainted by certain conflicts of interest and that they took irrelevant matters into account while ignoring relevant issues. You can read our full article on the background to the case here.
In a judgment delivered on 4 February 2013, Mr Justice Peter Charleton of the Commercial Court dismissed the claim against the trustees. In the concluding paragraph of a very detailed and thorough judgment, Charleton J summed up his findings as follows:
“The… trustees did their best. They were not overwhelmed or crippled or influenced to any degree by any conflict of duty or 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… They did not take any irrelevant factor into account and nor did they ignore any relevant factor. Nor does the weighting which the… trustees gave to particular factors emerge as unreasonable…”
In this update, we consider the main lessons to be learned and the principles which have emerged from the Court’s judgment
1. Failure to make a contribution demand
The members argued that the trustees’ failure to make a contribution demand was a wilful default on the basis that they decided consciously not to make such a demand.
Charleton J rejected this argument, holding that to prove a wilful default, the members had to show not only that the decision was made consciously, but also that it was a reckless breach of duty. The judge went on to state that even if this analysis was wrong, and wilful default simply means consciously failing to do something, then, for liability to be established, the default must infringe the core duty of trustees to manage the trust honestly and in good faith for the benefit of the members. The Court noted that no allegation had been made by the members that the trustees had acted dishonestly or otherwise than in good faith. Indeed, the evidence showed that the trustees were conscious of their duties to the members and did their very best to exercise those duties honestly and in good faith.
Trustees should seek expert advice on the implications of making or failing to make a contribution demand and should take this advice into consideration.
2. Review of trustees’ decision making
Charleton J stated that when reviewing a decision made by trustees, a Court must place itself in the “hot seat” of the trustees and approach the matter on the basis of what the trustees knew or ought to have known at the relevant time. He added that a Court will not lightly interfere with a decision of trustees: the only decisions which should be condemned by a Court are those which can properly be characterised as decisions which no reasonable body of trustees would have made.
The Courts will only review those decisions which no reasonable body of trustees could have made.
3. Conflicts of interest
The members submitted that four of the trustees had a conflict of interest as they stood to gain from accepting the company’s offer to provide enhanced employer contributions to a separate defined contribution scheme in respect of certain categories of members (one category of which included those four trustees).
The Court noted that the trust deed contained a clause designed to deal with the strictures of the normal conflict of interest rule. Charleton J accepted that it is possible for a trust deed to exempt trustees from both minor and major conflicts of interest and from conflicts of duty. However, he held that a trust deed cannot provide an exemption from the trustees’ core obligation to exercise fidelity to the objects of the trust for the ultimate good of the beneficiaries through acting honestly and objectively and in good faith. The judge stated that, notwithstanding an exemption in the trust deed, the decision of a trustee cannot stand if a conflict of interest is such as to overcome or disable a trustee’s ability to act in good faith independently for the good of the beneficiaries.
The Court found, as a matter of fact, that no conflict of interest or duty had influenced the decision of any of the trustees or undermined or overwhelmed their ability to act honestly and objectively in the interests of the members and in good faith.
While trust documentation may (and usually does) contain exoneration clauses, trustees must still be aware that conflicts of interest can potentially affect their ability to act in the best interests of members and in good faith.
4. Court directions
The members submitted that, prior to accepting the company’s offer, the trustees should have made an application to the High Court for directions as to what action to take. It was argued that this was the proper course of action in circumstances where there were conflicts of interest and the trustees were deadlocked, three having voted in favour of accepting the company’s offer and three having voted against it.
The Court accepted that it was certainly open to the trustees to make an application for directions, but it did not accept that this was something which they were obliged to do. Charleton J noted that the trustees, although faced with a difficult decision, retained the ability to act honestly and in good faith. He held that the trustees’ failure to apply to the Court could not undermine their decision unless that failure was a decision which no reasonable body of trustees could have made.
Trustees are not obliged to apply to Court for directions unless it is unreasonable for them not to do so.
5. Weight given to relevant factors
The members submitted that the trustees took various irrelevant factors into account in making their decision. The first “irrelevant” factor was the threat made by the company to shut down the plant, which, if acted on, would have resulted in some 359 employees being made redundant. The second was that the trustees had regard to a proposed contribution of €14m to a defined contribution scheme, which only stood to benefit a limited number of the members.
However, Charleton J was satisfied that these were issues to which the trustees could properly have regard. He noted that it would be wrong for the trustees to take a narrow view of only the financial considerations under the trust deed and not the financial benefits from an offer that would go to those same members.
As regards the weight to be given to a relevant factor, Charleton J was satisfied that this is a matter for the trustees in the exercise of their discretion. The trustees can give a relevant factor as much weight or as little import as they see fit in light of the information and advice available to them. Again, the judgment makes it clear that the Court should only interfere where it is satisfied that the decision is one which no reasonable body of trustees would have made.
Trustees should consider all relevant factors (including those outside the trust deed) and ignore all irrelevant factors when making decisions. Once a relevant factor is considered, unless the weight attached to that factor is unreasonable, the decision must stand as the Court will not reassess it.
6. Funding proposal – contractual obligation and preferential debt on insolvency
It was clear on the evidence that the trustees had considered serving a contribution demand on the company and suing for the amount which it had committed to pay under a funding proposal. In assessing their options, the trustees instructed insolvency specialists to prepare a report on the likely return on a liquidation of the company, which was estimated as being in the region of €18.2m to €42.5m.
The Court accepted there was a real risk that making a contribution demand would have left the members considerably worse off than accepting the company’s offer. Furthermore, the sums potentially available on an insolvent liquidation were closer to the offer of the company, particularly if the extra €14m was taken into account.
Charleton J also expressed the view that a breach of contract occurred when the company announced that it was not going to pay the next contribution of €10.75m due under the funding proposal. He suggested that the capitalised value of that commitment was a ground upon which the trustees could have sued. The judge further commented that since this would have been a “sum due” in respect of the company’s contributions to the scheme, it would have had priority on an insolvent liquidation of the company.
The Court’s comments on the contractual nature of funding proposals and the preferential status of a pension deficit on a company insolvency, while obiter, will need to be considered going forward.
This judgment is important as it underlines and reinforces some of the core legal principles to be followed by pension scheme trustees. For the first time it also gives some judicial guidance on contribution demands and funding proposals as well as on some other relevant questions that crop up in practice from time to time. Trustees, employers and advisers can learn from the lessons in the case when making decisions – particularly when making difficult, and possibly controversial, decisions such as whether or not to serve a contribution demand.