124 members of the Element Six pension scheme are suing the trustees of the scheme in the Commercial Court for alleged breach of duty arising out of the decision to close the scheme with a significant deficit.  The members claim that the trustees breached their duty to the members by failing to demand that the employer fully fund the deficit in the scheme before wind up.  A number of general issues relating to the obligations of trustees were raised during the 3-week hearing of the case.

Background

In October 2011, Element Six Limited (formerly De Beers Industrial Diamond Division (Ireland) Limited) proposed that its defined benefit (DB) scheme be wound up subject to certain conditions, including a final employer contribution of €23m.  In a vote on the company’s proposal, the six trustees of the scheme were evenly split and the proposal was passed on the casting vote of the chairman, a company designated trustee.  The scheme was wound up in December 2011 with a deficit of €129m, which increased to €184m when account was taken of the amount required to provide fully for the scheme’s liabilities.

In July 2012, the members instituted legal proceedings against the trustees, alleging breach of duty arising from their decision to back the company proposal to wind up the scheme and specifically their failure to demand that the company fund the total deficit under the scheme.  The trustees claimed that they were at all times aware of their duties as trustees and that they were solely motivated by what they believed to be the members’ best interests.

Arguments by members

Much of the case centred around the trustees’ failure to make a contribution demand.  The members argued that the trustees did not make a demand because they were conflicted.  Three of the six trustees, including the chairman, were company appointees and consequently owed duties to both the scheme and the company.

The members also claimed that the company threatened and bullied the trustees into winding up the scheme.  It was said that the company warned the trustees that making a contribution demand would force the company into liquidation and that the trustees would be at risk of losing their jobs.

Further, the members argued that the scheme would have been in a better position if the company had been put into liquidation.  Reports prepared by experts for the members estimated that the scheme could have received €14 – €18m more than the company’s €23m offer.  It was also submitted that if the company had been put into liquidation, €165m in transfers made from the company to its parent company in Luxembourg between 2009 and 2011 could have been challenged and potentially set aside.

Responses of the trustees

In response to the claim, the trustees accepted that a certain amount of conflict is inevitable in circumstances where trustees are appointed by a company or from within the workforce, but they argued that such appointments were not unusual and that the important point was how they managed the situation.  They said that all the trustees, including the company-appointed trustees, had acted honestly at all times and in the best interests of the scheme and all of its members.

The trustees claimed that they believed the company would have been liquidated if they had made a contribution demand for the entire deficit and that the variables involved in a liquidation meant that it was not in the members’ best interests to go down this route.  They submitted that it boiled down to whether the scheme would have ranked as a preferential creditor, entitling it to be paid ahead of unsecured creditors, if the company had been liquidated.  The trustees further submitted that if the deficit did not qualify as a preferential claim, the scheme, as an unsecured creditor, would have received just €9.35m from a liquidated company which was far less than the offer that the trustees accepted.  The trustees therefore chose to take the firm offer on the table from the company, rather than gambling on an outcome that was uncertain.

An expert witness for the trustees told the Court that it was his opinion that the trustees secured the best deal that they could reasonably have obtained in the circumstances and that he would have reached the same decision as they did.

Comment

The arguments in the Element Six case appear to be finely balanced and the judgment, which is expected in February or some time thereafter, will be watched very closely by all in the pensions industry.  The case illustrates how important it is for trustees to seek legal and professional advice at an early stage and to be able to stand over their decisions after the event.

Greene & Ors v Coady & Ors 2012/7254P