The Dosco Overseas Engineering Limited (1973) Pension and Assurance Scheme - Determination notice

The Determinations Panel (the Panel) on behalf of the Pensions Regulator (TPR) met on 23 February 2021 to decide whether to exercise a reserved regulatory function in relation to the issues raised in a warning notice dated 29 March 2019 (the Warning Notice) served by TPR’s case team (the Case Team) in respect of SMT Scharf AG (Scharf). By way of the Warning Notice, TPR also initiated separate regulatory action against Mr Martin Cain (Mr Cain).
Prior to the Panel’s meeting, the Case Team and Mr Cain reached agreement (the substance of which is not known to the Panel) on the regulatory action against him referred to in the Warning Notice. That regulatory action was consequently withdrawn. As such, the Panel is only required to make a determination in respect of, and this Determination only concerns, Scharf.
The Panel was asked to determine whether to issue a contribution notice (CN) under section 38 of the Pensions Act 2004 (PA04) against Scharf. At the hearing, the Case Team sought a sum of £2,317,278.70.
The Case Team identified the following persons as being persons directly affected by this determination, and the Panel agrees:
1. SMT Scharf AG;
2. The Scheme Trustee, PAN Trustees UK LLP (references to the Trustee or Trustees in this Determination Notice are to the Scheme Trustee or Trustees from time to time); and
3. The liquidator(s) of Dosco Overseas Engineering Limited (Overseas) and Hollybank Engineering Co Limited (Hollybank together with Overseas, the Employers), the Employers of the Scheme, being Edward Terence Kerr and Ian James Gould of BDO LLP at the time of the Warning Notice and Francis Graham Newton of BDO LLP as at the time of this determination.
This Determination Notice is structured as follows:

Introduction

The Warning Notice arises out of the sale of the Dosco group of companies (the Dosco Group) owned by Scharf between 2010 and 2013. The Dosco Group’s business was in producing mining and tunnel support equipment. Scharf is a German company, listed on the Frankfurt stock exchange, also involved in the mining equipment industry. Two companies in the Dosco Group, Overseas and Hollybank, were the participating employers in the Dosco Overseas Engineering Limited (1973) Pension & Assurance Scheme (the Scheme).
The Dosco Group was sold by Scharf, pursuant to an agreement for the sale and purchase of shares of Dosco Holdings Limited (Holdings), to a special purpose vehicle incorporated on behalf of and owned by (amongst others) Mr Cain (the Share Sale). The first instalment of the price for the Share Sale, paid to Scharf, was funded by moneys lent from the Employers (the Employer Loans) with no funding external to the Dosco Group being used for the Share Sale. The Panel will refer (as have the parties) to the Share Sale and the Employer Loans as the management buyout (MBO), it being a management buy-out of the ownership of the Dosco Group. Shortly after the MBO, the Dosco Group business failed, and administrators were appointed. The Employers were subsequently put into liquidation.
The Scheme is an occupational defined benefit scheme with 584 members, of which 204 are deferred and 380 pensioner members. The fund size is £53 million, with a deficit (calculated on the basis required by section 75 of the Pensions Act 1995 (section 75)) of £38.8 million at the date of the MBO. An independent trustee was appointed on 17 April 2013 prior to the MBO.
The Case Team’s case, in summary, is that Scharf showed complete disregard for the Scheme in selling the Dosco Group through the MBO. As a result, the Employers no longer benefitted from being part of a group with parental support, and over £1.4 million of cash had been taken out of the Employer businesses by the Employer Loans. The nature of the Employers’ business meant their cash flow was highly intermittent, as it was dependent on a relatively small number of substantial sales. Had there been parental support or the cash in the Employers, they would have been better placed to survive or, were they to have failed, the Employers’ cash would have been available to the Scheme as the principal creditor on an insolvency. On either basis, it is said, the Scheme suffered a material detriment as a result of the MBO.
Scharf denies knowledge of the Employer Loans, but accepts it was a party to the Share Sale. Otherwise, Scharf also avers that it was not obliged to provide parental support and that its actions were not in breach of any duty and, as a matter of German company law, it was required to act in its own best interests in order to maximise Scharf’s success.

Representations and submissions

In response to the Warning Notice, the following representations were made by the parties:
1. Initial representations from Scharf dated 28 May 2019;
2. Short email representations from the Employers’ liquidators dated 11 July 2019;
3. Substantial representations from Scharf dated 27 September 2019;
4. Representations from Mr Cain dated 30 September 2019;
5. A letter from the Trustee dated 30 October 2019 supporting the regulatory action;
6. Response to representations from the Case Team dated 20 March 2020; and
7. Reply to Response from Scharf dated 2 June 2020.
Scharf’s substantive representations throughout were made through its German lawyers, Rödl & Partner. Its submissions expressly challenged jurisdiction and sought to make submissions whilst “not indicating any submission to the jurisdiction” (eg in its 27 September 2019 submissions). Scharf confirmed in correspondence with the Panel that its challenge to “jurisdiction” meant both jurisdiction in the technical sense (ie that TPR has no power to issue a CN against it because it was located in Germany) and enforcement (ie that any CN would not be enforceable against it in Germany).
Shortly before the oral hearing, Scharf indicated, via a letter from English lawyers dated 10 February 2021, that Scharf would not attend the oral hearing or “engage any further in the Determinations Panel’s process”. Consequently Scharf did not serve a position statement as provided for in the Panel’s directions. The Panel has, however, had the benefit of, and has carefully considered, Scharf’s written representations.
As a result of the decision of Scharf not to attend or make representations at the oral hearing, and the fact that the Trustee and Employers’ liquidators indicated they intended to attend as observers only and not to make submissions, the Panel decided that the oral hearing would be most effective if it were used for the Panel to ask questions of the Case Team (and there were no further submissions at that stage). Mr Sebastian Allen of Counsel represented the Case Team at the oral hearing, and the Panel was assisted by the answers to its queries.

Jurisdiction

The Panel is satisfied that TPR has jurisdiction to issue a CN against Scharf, notwithstanding Scharf’s incorporation in Germany.
It is not easy to identify Scharf’s arguments as to why TPR has no jurisdiction; Scharf’s submissions appeared to the Panel more to address potential enforcement issues. The Panel is satisfied that questions of enforcement are not relevant to its decision whether or not to issue a CN.
The Panel considers there are two fundamental reasons why the power to issue a CN (and the wider moral hazard regime of PA04) is not limited in jurisdiction to people or entities incorporated or resident inside the jurisdiction:
1. First, the statutory language expressly envisages a target being outside the United Kingdom (the full relevant statutory materials are set out in Appendix 2 at the end of this determination):
  1. One of the statutory criteria for issuing a CN is that the target is the employer or “connected or associated” with the employer (section 38(3)(b)(ii) PA04). By section 38(10) PA04, the test for whether a party is “connected or associated” is that in section 435 of the Insolvency Act 1986. Section 435(11) of the Insolvency Act expressly states that a “company” for the purpose of section 435(10) includes “any body corporate (whether incorporated in Great Britain or elsewhere)” (emphasis added).
  2. Similarly, the provisions for service of documents in section 303 PA04 envisage service on a body corporate (i) at the address of the registered or principal office (section 303(6)(a)), with (ii) where the company is registered outside the United Kingdom service at “its principal office within the United Kingdom if any”. Provision is therefore made for service outside the United Kingdom, at a principal office where there is no such office in the United Kingdom.
  3. By using the language “Great Britain or elsewhere”, Parliament expressly intends for the CN regime to apply to companies wherever they are incorporated. The service provisions are also only consistent with that.
2. Secondly, the statutory purpose. The moral hazard regime, including the CN regime, is designed to provide regulatory protection for relevant pension schemes in the United Kingdom. The protection would be rendered nugatory if the moral hazard regime could not be used against foreign corporations. All it would be necessary to do to evade the regulatory regime would be to use a foreign company. This would have significant adverse consequences, not only for pension scheme members whose statutory protection would be eroded, but also for other businesses who are responsible for qualifying pension schemes, as the inevitable cost of the ineffective moral hazard regime would be passed on to them through the higher cost of levies payable in respect of the Pension Protection Fund.
The Panel reached this view on the point of construction of the relevant Act of Parliament, PA04, alone. Both its terms and its purpose are in favour of jurisdiction.
While not strictly relevant or binding, the Panel noted that moral hazard powers have been exercised against foreign targets in many substantial disputed regulatory actions, including Nortel, Lehman Brothers, and the Bonas cases. Lehman Brothers was considered in the Supreme Court (reported at [2013] 3 WLR 504) and Bonas in the Upper Tribunal, by an experienced High Court pensions judge, Warren J (reported at [2011] Pens LR 109), with no suggestion that there was a territorial limit on the jurisdiction. It seems to the Panel that were there to have been an arguable point on jurisdiction, given the specialist judge and large specialist legal teams involved in these prior disputes, it is likely that the point would have been taken and considered.
For the reasons given above, it is the Panel’s clear view that it has jurisdiction.

Background and facts

The facts can be usefully divided into the following three periods:
1. The period prior to 18 September 2012 when Scharf decided to sell the Dosco Group;
2. The period between 18 September 2012 and 8 May 2013, when Scharf sought to sell the Dosco Group culminating in the MBO; and
3. Events following the MBO.
The Panel has found the facts in the following section based principally on the contemporaneous documents, and in addition where necessary making inferences from the terms of those documents and the inherent probabilities, in line with the modern approach to fact finding (summarised in Gestmin v Credit Suisse [2013] EWHC 3560 (Comm) at [15]-[22]). Three specific points arose on the Panel’s fact-finding exercise:
1. The Case Team invited the Panel to draw adverse inferences from Scharf’s failure to provide witnesses, particularly Mr Dreyer. However, in response to questions from the Panel it was not suggested that specific facts ought to be inferred as a result of that absence and it was submitted that the Panel did not need to draw such inferences to reach its conclusions. The Panel has not found it necessary to draw inferences from the absence of witnesses, instead relying on the documentation and proved factual circumstances.
2. Scharf referred in its submissions to extracts from a statement said to have been made by lawyers on behalf of Mr Dreyer. The Panel considered those as part of the submissions made by Scharf but did not feel able to put any real weight on the facts alleged in those extracts, given (a) they were from lawyers for Mr Dreyer and not Mr Dreyer himself and not certified with a statement of truth, (b) they were extracts, and (c) the Panel had no knowledge or information of the circumstances in which the extracts were produced. The Panel has preferred in any event the contemporaneous documents.
3. Given Mr Cain’s involvement in the MBO, the Panel’s analysis of the facts will inevitably involve him. Having reached agreement with the Case Team, Mr Cain was not part of the hearing before the Panel and is not the subject of, or a party directly affected by, this Determination Notice. In those circumstances, the Panel’s findings in the next section are not findings of fact as against Mr Cain. The Panel noted that Mr Cain, in general terms, agreed with the Case Team’s analysis of the facts in any event.

Events up to 18 September 2012

Hollybank was incorporated in 1953 and Overseas in 1956. The Scheme (as its name suggests) was established in 1973. Holdings was incorporated in 1995 and was, at the times material to this Determination Notice, the immediate parent company of the Employers.
Scharf was incorporated in 2000 and became a public company in 2007.
The Dosco Group had historically always had parental support. By 2009, the Dosco Group’s ultimate parent was Billington Holdings PLC (Billington). Over 2009 and 2010, Billington negotiated with Scharf for the sale of Holdings (and so the Employers) (the Billington Sale). The Billington Sale took place on 4 May 2010. Importantly for the purposes of this Determination Notice, there was significant consideration by Scharf of the impact on the Scheme of the Billington Sale:
1. On 10 December 2009, Scharf wrote to the Scheme Trustees stating it “does not consider the transaction to be materially detrimental to the position of the Scheme”. That same letter stated “Scharf is well aware of the long term nature of sponsoring employer obligations to defined benefit pension schemes”. This letter shows Scharf was aware of (a) the need to engage with the Scheme Trustees in relation to any proposed transaction, (b) the concept of “material detriment” as a relevant factor in that engagement, and (c) the “long-term nature of sponsoring employer obligations”.
2. In reply to a letter in response from the Trustees dated 17 December 2009, Scharf wrote on 15 January 2010 proposing “an enforceable guarantee for the…Employers’ contributions under the recovery plan” to be given by Scharf to the Trustees as mitigation.
3. Following further discussion with the Trustees, Scharf applied to TPR for clearance of the Billington Sale on 12 March 2010 (the Clearance Application made in accordance with the voluntary regime under PA04). In response to the question “what effect does this have on the pension scheme?” the Clearance Application stated “the change of ultimate parent company may affect the Participating Employers’ covenant”. The Clearance Application proceeded to set out not only the “Mitigation” that would be provided to the Scheme but also that the Employers would be in a better position because (a) there would be a better “business fit” with Scharf’s group; (b) the net assets of Scharf’s group were stronger than Billington’s; and (c) the cash position of the Scharf group post-transaction would be stronger than the pre-transaction group (the Scharf Group Advantages).
4. The mitigation for the Scheme promised by Scharf consisted of (a) the transfer of Scharf treasury shares worth £1.6 million into the Scheme; (b) an agreement by Scharf for Overseas and Hollybank to pay into the Scheme 33% of any dividend declared by either and not owed to the other until July 2014; (c) a warranty from Scharf that all intra-group arrangements and transactions affecting its group of companies were on arm’s-length terms.
5. A warning notice in respect of the Clearance Application was served on 28 April 2010. That warning notice referred to the mitigation provided and to the Scharf Group Advantages as set out in the Clearance Application.
6. A determination notice granting clearance was issued on 29 April 2010. The background to the application referred to the mitigation provided and the Scharf Group Advantages. The facts and matters relied on in granting clearance included the mitigation agreed for the Scheme and “the financial circumstances of the Applicants and the strength of the Employers’ covenant post transaction”. The Panel interprets this as a reference to the Scharf Group Advantages put forward by Scharf in the Clearance Application and set out in the clearance warning and determination notices.
7. The Clearance Application process shows Scharf was aware of (a) the opportunity to seek clearance from TPR to avoid the risk of the exercise of moral hazard powers; (b) by setting out the Scharf Group Advantages, the relevance and importance of the Scharf Group to the Scheme; (c) the need for mitigation to be provided in certain circumstances on the sale of assets including a scheme sponsoring employer; and (d) the existence of a regulatory structure in the United Kingdom which could impose liability in respect of the Scheme more widely than simply on the Employers (otherwise Scharf would not have needed to make the Clearance Application at all).
8. On 4 May 2010, the Billington Sale occurred through a share purchase agreement for the Holdings shares. XXXXX of Scharf was appointed as a director of each Dosco Group company, and Scharf and the Scheme Trustees executed a deed to give effect to the agreed mitigation.
On 3 February 2011, XXXXX was appointed as a trustee of the Scheme. XXXXX resigned as a director of the Employers with effect from 31 March 2012, and as a trustee on 7 August 2012. On 12 April 2012, Mr Dreyer of Scharf was appointed as a director of the Employers.
During this period, it appears to have been relatively common for there to be inter-company intra-group loans and for other support to have been provided, for example:
1. An inter-company loan between Hollybank and Overseas dated 7 September 2011 for £600,000;
2. An inter-company loan between Hollybank and Overseas dated 30 March 2012 for £700,000;
3. A Scharf provision of a bank guarantee to Deutsche Bank in favour of Overseas in the sum of £900,000 which appears to have been approved on 10 May 2012. The Scharf Supervisory Board minute approving this states “Due to high order volumes…Dosco has a liquidity shortage for approx. 6 weeks” reflecting the uneven nature of Dosco’s cash position.
4. A loan agreement between Overseas and Scharf for €500,000 dated 28 May 2012;
5. Scharf providing a guarantee for banking facilities of the Dosco Group at NatWest dated 4 July 2012.
Following his appointment, Mr Dreyer was informed of and took some interest in the Scheme’s position:
1. Mr Cain emailed Mr Dreyer on 25 July 2012 stating “I had a long discussion with the lawyers [Squire Sanders] today in regard to the pension issues and they will now send me their formal advice before the 14th August, I believe there are a number of scenarios to look at some of which are much easier than others!”. While the Panel has not seen that advice, it is apparent from this email that Mr Dreyer and Mr Cain were considering the impact of the Scheme on the Dosco Group business by this date, and that this consideration was relatively serious given external pensions legal advice was being obtained.
2. Mr Dreyer declined to become a trustee of the Scheme.
3. Mr Cain sent Mr Dreyer an email on 21 August 2012 asking for confirmation that Mr Dreyer “received a private email form [sic: from] me last week in relation to the pension scheme?” Mr Dreyer confirmed from a private email address “Yes thank you!”. The Panel infers from the timing that this related to questions arising from the advice provided by Squire Sanders.
4. Squire Sanders emailed Mr Cain on 30 August 2012 asking “I don’t know whether Christian [Mr Dreyer] has yet had chance to consider our report. If he or you have any further comments/queries please do let us know”.
5. There is a document dated 7 September 2012 headed “Answers to the pension questions raised by C Dreyer”. It sets out the Scheme’s deficit (which by the end of April 2013 could be in excess of £10 million), contributions of c£525,000 from the Employers, Employer contributions of 8.9% of salary, and the “insurance premium p.a.” which is understood to be the PPF levy of c£250,000.

18 September 2012 to 8 May 2013

Accordingly, between his appointment in April and the end of summer 2012, Mr Dreyer on behalf of Scharf was giving serious consideration as to how to proceed with the Dosco Group given the Scheme. This culminated in a “special report” (the Report) to Scharf’s supervisory board on 18 September 2012.
The Report was 18 pages long and, in summary:
1. The “Top Line Message” was “Develop Dosco’s Repair Business while Tryin[g] to Sell It”.
2. As an executive summary explaining the reason for that “Top Line Message”, the Report set out (emphases added):
  1. Dosco is unlikely ever to deliver any cash or other value to Scharf AG because:
    1. Doscos [sic] core business is not reliably profitable, and even if it were:
    2. Dosco’s pension scheme would absorb all, being in deficit by up to 30 mill.
    3. Dosco does not deliver any other benefit (eg synergies) to Scharf.
  2. Presently, Scharf’s options for Dosco are:
    1. to sell Dosco: highly unlikely that a buyer can be found
    2. to close Dosco – not advisable as up to 2.5 mill. Guarantees would be drawn
    3. to continue as is – unattractive as attention is drawn with no benefit
  3. Therefore, we propose to
    - try to search for a buyer for Dosco, and
    - at the same time, build a service and repair business with the goal to:
    - a) stabilize and grow Doscos revenues
    - b) develop a forward perspective for management and staff”.
3. The Report had four substantive sections, of which the third was “Pension Fund Related Risks”.
4. The analysis of the business found some “Surprising Findings” that “Contrary to first assumptions, Dosco has some strengths”. However, it was said there were only few opportunities, and the “pension fund” was identified as a weakness and threat.
5. In the section on “Pension Fund Related Risks” the information provided to Mr Dreyer on 7 September was set out. Scharf’s liability was described as follows:
  
  “SMT Scharf AG is (most probably) only liable for whatever has been taken out of Dosco by Scharf, even in case of a Dosco insolvency”.
6. The source of this analysis is not stated. However, the Panel infers this was the result of the legal advice taken from Squire Sanders.
7. Four options for the future were identified, with “continue as in the past” not recommended for two reasons, one of which was “any profits will be taken by the pension fund”; the other being that profitability was very doubtful.
The Supervisory Board considered the Report at a meeting on 18 September 2012, which meeting took place at the Dosco Group’s site in Tuxford. Mr Dreyer and another member of the Scharf Executive Board were physically present, as were two of the three members of the Supervisory Board (the third attending via telephone). Mr Cain attended initially, to present the Dosco Group position as at September 2012. The minutes of the meeting record that:

“Regarding the Hollybank participation, M. Cain reported that this business does not have a future…Legally closing Hollybank would impact balancing of the fund deficit and is therefore postponed”.
The Panel concludes from that minute that the decision not to put Hollybank into winding up was taken to avoid the effect of an employer insolvency on Overseas as the remaining Scheme employer (ie the triggering of a section 75 debt).
Mr Cain was dismissed from the meeting, which then “extensively discussed" the Report. The minutes record that the:

“Supervisory Board supported the strategy suggested by the Executive Board [to establish a services business and to try to sell] and amended it by making the following suggestions:
- The negotiations with the pension fund or the pension regulator should be tougher: it is unacceptable that Scharf is supporting Dosco (financially, operatively), but the underfunded pension fund is skimming off all profit
- Outstanding guaranties [sic] of the PLC should be reduced to zero, if possible”
Not only is this minute a clear record of the decision to sell and the attitude of the Supervisory Board of Scharf to the Scheme, it also recognises that Scharf was providing the Dosco Group with significant support “financially, operatively” by the Dosco Group being part of the wider Scharf group.
Following this meeting in autumn 2012, steps were taken in accordance with the strategy adopted:
1. On 19 September, Mr Dreyer instructed Mr Cain to close the Scheme to future accrual;
2. On 9 October, Mr Cain and Mr Player (the Dosco Group CFO) received some advice from an advisory firm on “ideas that might assist the company to reduce its pension risk”;
3. On 24 October, Mr Dreyer had a meeting with Squire Sanders which had “several findings”. They included that it was necessary to appoint an independent trustee, because Mr Cain was too conflicted, and that “the closure of Hollybank might trigger an insolvency if the deficit had to be plugged immediately”;
4. A “Scharf 2017” strategy paper “excluding Dosco” was prepared in late October. This assumed no proceeds for the assumed disposal of the Dosco Group;
5. Mr Dreyer and Mr Cain had email discussions on 29 October in relation to a services and sales “Newco”, including that there would be a shortfall in the Dosco budget for next year from that previously discussed because “certain spare part sales will be recognised in “New Co” due to the clients need and insistence that sales and service centres are located closer to their operations”. Mr Cain further stated that Dosco “can’t afford to” provide sales and service centres in those locations;
6. On 12 November, a German company GCI Management Consulting GmbH (GCI) was appointed to proceed with the sale of the Dosco Group;
7. By 22 November, Mr Player confirmed that £1 million of Scharf-backed guarantees had been removed (because of the Dosco Group’s then-strong cash position) and that by April 2013 the Dosco Group would have the benefit of only one guarantee of £500,000. As a result, the Dosco Group discussed potential funding alternatives with its UK bankers.
In December 2012:
1. Mr Cain confirmed via an email from his private address that “New Co” had been set up and that he would need a trip to China for its operations there; and
2. Mr Cain in his personal capacity and Scharf agreed a consulting agreement whereby Mr Cain would receive from Scharf 10% of any sales proceeds on a disposal of Holdings achieved in 2013 (the Consultancy Agreement).
A first potential buyer, Famur SA (Famur), was identified and entered into a non-disclosure agreement on 18 December 2012, to enable it to carry out due diligence on the Dosco Group.
In early 2013, there were steps taken by Scharf to treat the pension deficit in different ways in the Holdings accounts and in the Scharf accounts. In an email of 24 January 2013, recording a meeting with Mr Dreyer on 23 January 2013, Mr Player reported Mr Dreyer as saying:

“we are looking to sell Dosco as soon as we can so we need the pension deficit to be as small as possible in their [the Employers’] accounts but as large as possible in SMT [Scharf’s accounts] so we [Scharf] can some profit on sale but it looks attractive to any investors who look at the accounts”.
While two potential Chinese purchasers of the Dosco Group had been identified, they made no firm offers. In addition to Famur, the other potential external purchaser (who did go on to make an offer) was Quantum Kapital AG (Quantum). By early March 2013, Quantum was the only external bidder and it was apparent that Scharf, by Mr Dreyer, wished to sell:
1. On 21 January 2013, Mr Cain emailed Mr Player stating:
  
  “My view is increasingly that Christian [Mr Dreyer] just wants rid of Dosco and would consider anything but what he really wants is rid of the pension liability and that would give me concerns”, to which Mr Player agreed.
2. On 21 February 2013, GCI produced an Investment Memorandum in respect of the Dosco Group. While the Case Team challenge the accuracy of that memorandum, in the Panel’s view, the accuracy or otherwise of that memorandum and other statements made as to the financial position of the Dosco Group to purchasers are not relevant to its decision in this Determination Notice.
3. On 26 February 2013, Famur emailed querying Scharf’s pension deficit figures, explaining that on an insurance buyout basis, the value of the liabilities would increase by as much as 50-100% compared with the levels stated by Scharf. Mr Dreyer replied defending Scharf’s figures but also stating that (emphasis in the original):
  
  “It is important to understand that a buyer (like Famur, just as SMT Scharf) is not liable for the pension scheme. If Dosco failed today…SMT Scharf would not have to pay a single Euro for the pension scheme… It is only under this precondition that Scharf entered into th[e] acquisition in 2010, and this would also hold true for any subsequent owner.”
  
  This misstates the pensions regulatory structure in the UK and the Clearance Application, to which Scharf was a party.
4. On 27 February 2013, Quantum made an indicative offer of £500,000 for the acquisition of the Dosco Group. This was calculated by taking an enterprise value of £3.5 million and deducting the Scheme deficit of £3 million.
5. On 1 March 2013, Famur decided not to continue with the potential purchase. Four reasons were given, of which the first was “High risk is connected to the valuation of pension fund liabilities. In our opinion liabilities are underestimated and the problem will grow in the future, as interest rates in Europe remain low… Future financial results would be heavily influenced by pension fund valuation. Should interest rates remain low, pension fund might lead to Dosco going bust.” Mr Dreyer replied that the “concise information” provided by Famur was “well explained and understandable”.
6. Mr Dreyer forwarded Famur’s withdrawal to Mr Cain, asking what the Chinese options were. Between 1 and 3 March 2013, Messrs Cain and Dreyer exchanged emails discussing whether there were any other potential purchasers available.
It was at this time that the MBO idea was formulated between Mr Player and Mr Cain (referred to as the MBO Buyers when acting in that context rather than as Dosco Group management), first being raised in emails of 2 and 4 March 2013, in the course of which they recognised it was necessary to “convince” the Trustees, and that TPR and the PPF would also have an input. This shows that directors of the Dosco Group companies could be expected to, and did, have an understanding of the pensions regulatory landscape.
RSM Tenon was instructed by the MBO Buyers to advise them on the MBO on around 7 March 2013. There is no direct evidence before the Panel that Scharf or Mr Dreyer knew of the MBO proposal at this time.
On 13 March 2013, Quantum made an improved offer of £800,000 which led to a negotiation:
1. This was calculated by taking an enterprise value of £3 million, deducting the pension scheme liability of £3 million, and adding back in “excess cash” of £800,000. It was predicated on the Dosco Group meeting its 2013 targets.
2. On 14 March 2013, a Memorandum of Understanding (the March MoU) was signed between Scharf and Quantum envisaging closing on 10 April 2013 with Scharf proposing that a 20% shareholding go to management. Scharf were to give no warranties, with instead due diligence to be carried out by Quantum.
3. The March MoU had a purchase price stated to be €2 million. This euro price was based on calculation in pounds for “cash consideration” of £1.75 million, calculated by taking an enterprise value of £3.5 million, deducting the pension deficit of £3 million and adding in “excess cash” of £1.75 million. From that £2.25 million equity value a £500,000 deduction for “legal costs and speed” was made.
4. On 15 March 2013, Mr Dreyer sent the March MoU to Mr Cain (the latter being responsible for engaging with Quantum on due diligence). In the cover email, Mr Dreyer estimated a 30% prospect of success on the deal. Mr Dreyer noted that a price of €2 million would mean “10% for you… ie 200k EUR”, being the sum under Mr Cain’s commission agreement, as well as the proposed 20% management shareholding. Mr Dreyer confirmed that Quantum had been informed about the Scheme.
On around 15 March 2013, Mr Dreyer informed Messrs Cain and Player that Scharf wanted to cancel the remaining £500,000 guarantee providing Overseas with letter of credit banking facilities. Mr Player was “grumpy” about “the increased cash flow pressures we have now got” as a result of that.
It appears the March MoU prompted Mr Cain to raise the prospect of the MBO with Mr Dreyer, which he did by email of 17 March 2013. On 19 March, he indicated to Mr Player that he was going to “tentatively raise the issue of a potential MBO with Christian [Dreyer] to gauge his reaction”. That same day RSM Tenon emailed Mr Player indicating the advantages of an MBO to Scharf, saying that “there are a good number of investors out there” (being potential investors into the MBO). Quantum, meanwhile, were raising questions over the Dosco Group’s 2013 performance.
While Mr Cain told the Trustees after the MBO that the “management team” made a proposal on 27 March 2013, there appears (from the documentary record available) to have been a short period of limited activity until around 3 April 2013 when Quantum made a further offer (the April Offer):
1. The terms of the April Offer were £150,000 upfront cash and a share of future proceeds up to a purchase price of £2 million. Mr Dreyer authorised Mr Cain, by email in the afternoon of 3 April 2013 to provide Quantum with further information to continue the dialogue (indicating that the April Offer was not one that Mr Dreyer or Scharf rejected immediately).
2. By that same email Mr Dreyer told Mr Cain “I am awaiting your offer, we can talk about it if you like”.
3. Mr Cain replied the same evening to Mr Dreyer:
  1. Stating “I have prepared some investment information which I have sent to [RSM] Tenon who are in turn talking to prospective investors. The plan is for me to meet with these potential investors…” The Panel has been provided with an RSM Tenon presentation dated April 2013. The Panel interpret this email as Mr Cain stating that he intended, at this stage, to find external investment for the MBO and that Mr Dreyer would have reasonably interpreted it as such.
  2. Telling Mr Dreyer that he had told the investors the price was €3 million, but that he might need to talk to Mr Dreyer “depending upon the response I get especially in relation to the pension scheme”. He was “hopeful” of a deal of at least €2.5 million.
  3. Requesting that Mr Dreyer not do a deal with a Quantum until at least the end of next week (being 12 April 2013). Mr Dreyer confirmed that by return.
4. It appears from emails of 4 April 2013 that the MBO Buyers were meeting in relation to potential investors. On 7 April 2013, Mr Cain told Mr Player that Mr Dreyer had not told him the details of the “new offer”, ie the April Offer, but that Mr Dreyer was giving the management “a little time to see what we can come up with”. By this stage, therefore, Messrs Cain and Player as Dosco Group management were clearly being treated as potential purchasers on the other side of the transaction to Scharf and Mr Dreyer.
5. The MBO Buyers continued to try to find investors. On 10 April 2013, they discussed potential investors with RMS Tenon. Eversheds, who were instructed to provide pensions law advice, were said to be “aware of 3 – 4 specialist investors who are in to DB schemes”. On around 12 April 2013 Mr Cain was in China. While not the principal purpose of the visit, he also sought investment in the MBO. By 15 April 2013 there was significant optimism internally that the MBO Buyers would be able to obtain external investment for the MBO.
Contrary to that optimism, no external MBO investor was found. The effect of the Scheme on any transaction came into sharp focus in the second half of April 2013:
1. Scharf announced that the Dosco Group was for sale on 16 April. This led to concern from Mr Mockridge (an employee and Scheme trustee).
2. On 17 April, one potential MBO investor dropped out because of the Scheme, and another was taking legal advice on the Scheme.
3. The same day, Mr Cain resigned as a trustee of the Scheme because of the developing conflict of interest and an independent trustee was appointed.
4. Also on 17 April, Mr Dreyer sent Mr Cain a Memorandum of Understanding reflecting the current status of the Quantum April Offer (the April MoU). The April MoU was now framed as an upfront payment of €500,000 with up to €1.5 million in deferred consideration dependent on Quantum receiving proceeds in respect of the Dosco Group.
5. On 18 April, Mr Cain and Scharf (by Mr Dreyer) amended the Consultancy Agreement to provide for a minimum fee to Mr Cain of €250,000 (which minimum was in excess of 10% of the maximum payable by Quantum under the April Offer of €200,000).
6. It was becoming apparent to the MBO Buyers that the Scheme was an insurmountable obstacle to external MBO investment, as can be seen by a series of email exchanges of 19 to 20 April:
  1. Mr Cain emailed RSM Tenon stating that “I firmly believe that the answer to our current dilemma is to talk to the trustees and get them on board” (email of 19 April 08:13). In that same email, Mr Cain expressly raised going for clearance with TPR.
  2. Mr Player emailed Mr Cain later that day raising concern that there were no further potential investors that RSM Tenon were looking into (email of 13:30).
  3. By the evening, Mr Player told Mr Cain that “It is looking like we may have to consider the purchase partly funded by Dosco so we will need to…agree what funds we both feel happy with to fund this (from Doscos [sic] pocket not ours), for example we may mortgage the property, and use some of the spare cash, and then also the family investor at a lower value” (email of 17:38). Mr Player further explained that “all the commercial investors are out due to the pension deficit issue and they [RSM Tenon] feel it might be easier to get the family investor in at a lower value” (email of 23:23). Mr Cain was then concerned “as we will need the pension trustees on board and in not sure how we do that if we take the money we were going to put in?”.
7. On 23 April, Mr Dreyer asked Mr Cain how he was getting along with an offer. He continued “With Quantum, it is not easy… I would not mind selling to you, speed is the issue of course…” Mr Dreyer plainly wanted a quick sale, in the context of the Dosco Group having a strong cash position and good 2012 results at that time. Mr Cain’s response, in contrast to his statements to Mr Player referred to in the previous paragraph, was that “I would gladly buy it from you but we are still lining up investors a lot of which are nervous of the pension scheme” and asking what the price would be for an MBO.
Events then moved swiftly from the agreement of a memorandum of understanding between Scharf and Mr Cain on 25 April 2013 (the Cain MoU), to preparation for the MBO in the week of 29 April to 3 May, with the MBO being executed on 7 May (being the Tuesday after the early May bank holiday on 6 May). Those preparatory steps were:
1. The Cain MoU executed by Mr Dreyer and Mr Cain was for a purchase price of €2 million, with €1.5 million payable immediately and the remaining €500,000 to be a “seller’s loan” carrying interest at 6% per annum payable quarterly, repayable within 5 years. The purchaser was envisaged as either Mr Cain or a special purpose vehicle incorporated to act as purchaser.
2. On 26 April 2013, Mr Player arranged for the necessary Dosco Group cash to be used as a substitution for the Scharf guarantee of £500,000, which Scharf had required to be released. The MBO Buyers were also considering the cash flow position, recognising that Dosco is “going to get close in December” to running out of cash (on certain assumptions as to sales).
3. On 30 April 2013, Dosco Mining Ltd (DML) was incorporated as the special purpose vehicle for the purchase. The MBO Buyers (and a third person) were the directors.
4. That same day, Mr Cain met with Eversheds and received pensions advice, which Mr Cain described as a “pragmatic view of how we can manage our pension issue”.
5. Finally, on 30 April 2013 Capita provided their actuarial review for the year to the Trustees copying in Mr Player. This report did “not paint a pretty picture, with a significantly increased deficit”.
6. It appears by 1 May 2013 that the decision had been made by the MBO Buyers to use cash internal to the company to pay the purchase price; on that date Mr Cain was emailing RMS Tenon in order to understand the mechanics for the cash transfer to Germany in order to make payment. The approach was, according to RSM Tenon, that “newco on acquiring the business will be pulling the cash together immediately and transferring to Germany to conclude the deal”.
7. That same day, Mr Cain asked Mr Dreyer whether the Scharf Supervisory Board had approved the deal and when the ad hoc announcement to the market would be made. Mr Dreyer assumed this could be delayed until Tuesday 7 May 2013. Mr Cain’s query was because he wanted to advise the Trustee chairman under a confidentiality agreement. Mr Dreyer did not respond to this aspect of Mr Cain’s email.
8. Eversheds produced legal advice for DML dated 2 May 2013 (the Eversheds Advice). The Eversheds Advice:
  1. stated that the MBO “may be deemed to have a materially detrimental impact upon the Scheme and therefore mitigation should be considered to negate that impact”. Clearance was not being sought “Due to the proposed short timetable to completion”;
  2. recorded that the consideration for the MBO “will be the utilisation of free cash currently held within the Group”;
  3. advised that the “impact of the [MBO] on the financial covenant of the Group, which in turn will impact on the Scheme” had to be considered;
  4. provided Eversheds’ opinion that there would likely be material detriment, both from the use of free cash and from the weakening of the financial covenant “as a result of [Holdings] becoming separated from the support offered by the Seller”.
  5. accordingly stated that “without some form of mitigation the Transaction is likely to be materially detrimental to the Scheme”. While it appears mitigation was intended to be provided, no mitigation ever was so provided to the Scheme.
9. Scharf instructed Squire Sanders and German lawyers on the MBO. Eversheds acted for DML. By a short Eversheds email of Friday 3 May 2013 to Squire Sanders, Eversheds attached “an initial draft of the Documents List” for the MBO, and then raised in terms in the cover email the following:
  
  “Please note that we are liaising with [RSM] Tenon to agree the mechanics for the extraction of the purchase price from the Target at Completion. We will let you know more about this [once] we have had a chance to discuss the detail with [RSM] Tenon”, (emphasis added).
10. Squire Sanders promptly replied including Scharf’s German lawyers and sending the Document List. The German lawyers were to be “leading on this transaction” on the Scharf side and “reading this email in copy”. Mr Dreyer was also included in copy.
11. The Document List included, with square brackets in the original, “Board minutes of Buyer approving Completion [and dividend of purchase price to shareholder for payment to Seller]”. It therefore appears that (as recorded in the Eversheds Advice) while the principle to use the free cash in the Dosco Group was fixed by this date, it was not clear how the cash was to be “extracted”. The Documents List suggests dividends were to be used; in the event the Employer Loans were used.
12. On Saturday 4 May 2013, Eversheds provided an updated Documents List and ancillary documents. Item 3 was stated to be “Board minute of the Target [Holdings] approving Completion and ancillary matters”. This version of the Documents List was not before the Panel.
As to the MBO on 7 May 2013 itself, it is not clear precisely when (or in what order) the documentation was signed, however the share purchase agreement (the SPA) was exchanged at 18:24:
1. Two Employer Loan agreements were executed, by Mr Cain for DML and by Mr Player for the relevant Employer in both cases. Hollybank lent DML £750,000 and Overseas lent £670,253.34.
2. Otherwise, the Employer Loans were on identical terms. Particularly, the loans were (a) interest free and (b) repayable only after €500,000 plus interest had been repaid to “a 3rd party”, which is the commitment to pay deferred consideration to Scharf by way of the seller’s loan.
3. Board minutes were produced of DML and Holdings approving completion. There have been no minutes produced of Hollybank or Overseas approving the Employer Loans. Holdings approved the Acquisition Agreement, Mr Dreyer having declared an interest as seller and not participating in the decisions to be taken in the remainder of the meeting. Before the Board gave approval, it was “noted that the Company was a party to the Acquisition Agreement as a guarantor of the Buyer’s obligations under it”. Holdings’ approval of the Acquisition Agreement included a resolution to approve “any documents ancillary to [the SPA] which were required to be entered into by the Company be entered into in good faith. Mr Dreyer resigned as a director of Holdings at the end of the meeting and is recorded as present at the meeting. Since Mr Dreyer was not in the United Kingdom at the time of the meeting, the Panel infers he attended by telephone, but that was not stated in the minute.
4. The Scharf Supervisory Board approved the sale. In the English translation provided, the approval was of the MBO described as follows:
  
  “The management (Martin Cain) has contacted a financier who provides the following conditions to him and an SPV:
  - EUR 1.5m at once
  - EUR 0.5m as vendor loan, with 6% interest, secured with the purchase object Dosco
    
    It is supposed to be a share deal. Therefore, all pension fund related duties are transferred to the purchaser.”
5. By the SPA, DML purchased the shares in Holdings (and in substance so the Dosco Group business) for €2 million, with a first instalment of €1.5 million due on completion and €500,000 payable at any time before the fifth anniversary of completion. The SPA also expressly provided (at clause 4.2) for the release of Scharf from the outstanding Dosco Group guarantee of £500,000. By clause 8, Holdings guaranteed DML’s obligations.
6. Mr Cain was appointed as a director of Holdings, and Mr Player appointed as a director of Holdings and Hollybank.
7. Mr Cain invoiced Scharf for €250,000 under the amended Commission Agreement.
8. At 18:51 (it is not clear whether this time is UK time, or German and so an hour earlier), Mr Dreyer circulated the ad hoc disclosure of the sale to the Frankfurt exchange. The announcement set out the sale price and seller’s loan structure, before adding “Besides this, the Scharf Group will incur no secondary liabilities for Dosco’s liabilities, especially not in connection with the Dosco pension fund.”
9. Eversheds sent an email “just to confirm completion” at 19:29 UK time, and stated “we will transfer the Completion Monies first thing tomorrow morning”.
The cash consideration for the MBO was, as stated by Eversheds, received by Scharf on 8 May 2013.

Events following the MBO

On 8 May 2013, Scharf paid Mr Cain his €250,000 commission.
The Trustees (and actuary) were told about the MBO after it happened, on 8 May 2013, and had not been told in advance. The Scheme trustees and actuaries were surprised they had not been told in advance and asked questions about the funding of the purchase.
Mr Cain, in an email of 9 May 2013, told the Trustees that Mr Dreyer “wanted the deal to happen quickly” and that he was concerned about asset stripping. He went on to say:

“In an ideal world…we would have spoken to the trustees pre deal and indeed gone to the regulator for clearance however due to the extremely tight timescales placed upon us this was not possible…we recognise that the deal is likely to have resulted in a material detriment to the scheme and as such we would like to start a formal dialogue with the trustees and their advisors as to what type of mitigation the company can offer the scheme…”
On 9 May 2013, the Scheme actuary submitted a notifiable event report, reporting the MBO to TPR. Eversheds similarly advised Mr Cain that the company (and not just the Trustees) should make such a report.
The Trustees met the MBO Buyers to discuss the takeover on 29 May 2013. That meeting is formally minuted by Capita. As well as recording that the MBO was funded by cash from the business, it also records Mr Cain emphasising the very tight timetable and that:

“The CEO at Scharf (Christian Dreyer) had assured him that the parent company would take responsibility for informing the Pensions Regulator (tPR) in respect of any transaction. Further that legal advice had been taken by Scharf on the powers of the Regulator in respect of an overseas parent company”
On 6 June 2013, the Trustees raised concerns about the existence of a charge over some of the Dosco Group’s cash, arising out the replacement of the Scharf guarantee with other security provided to NatWest for banking facilities.
By the summer of 2013, the Dosco Group was experiencing cash flow issues (as recorded in Overseas board minutes of 15 July and 22 August 2013). The position deteriorated over the second half of 2013, with particular pressure on the cash position arising out of the non-payment to Overseas of moneys owed to it arising from a sale of machines in Russia:
1. On 15 July 2013, at an Overseas board meeting, the absence of funds from the “Russian contract” was noted and it was resolved that Overseas would immediately “adopt a 3 day working week as the company currently has no work and the funds need to be stretched to ensure the companies [sic] long-term survivability”. The directors also resolved to seek professional advice.
2. Significant consideration was given to whether Overseas could continue to trade having regard to the cash flow difficulties and continued non-payment on the Russian contract at the Overseas board meeting of 22 August 2013.
3. On 11 September 2013, a fixed and floating charge was executed in favour of NatWest over Overseas.
4. On 17 September 2013, Mr Cain requested by email that the Trustees postpone additional deficit repair contributions for the next four months and pay contributions into escrow. This was followed up by a formal request by letter on 1 October 2013. There were then significant negotiations over the next few months of provision of security to the Trustees for such suspension, but no such security was completed.
5. On 12 December 2013, BDO were instructed by each of the Employers, Holdings and DML to provide pre-insolvency advice to the Dosco Group and advise on strategy.
This led to insolvency procedures being taken in 2014:
1. On 27 January 2014, Mr Player wrote to the Trustees that, because a notice to appoint administrators had been filed, security could not be given to the Trustees.
2. On 28 January 2014, Mr Cain acknowledged to BDO that the use of the cash within the business “will be viewed as a weakening of the employer covenant”.
3. On 30 January 2014, the Employers were placed into administration. As a result, the Scheme entered a PPF assessment period.
4. The administrators made proposals on 24 March 2014, and the administrators’ statements of affairs confirmed that the Scheme was the principal creditor in the administration.
5. On 30 July 2014, a liquidator was appointed to Hollybank.
6. On 2 December 2014, Overseas’ liquidators gave notice to enter creditors’ voluntary liquidation.
In 2014 and thereafter, concern was raised over the MBO and its funding. Relevantly:
1. The Trustees’ solicitors sought information from Squire Patton Boggs (as Squire Sanders had become) and Eversheds in late 2014. No information was provided. The Trustees wrote to TPR raising concerns over the MBO on 3 February 2015.
2. In October 2015, the Employers, Holdings, DML, Messrs Cain and Player and the liquidators reached a settlement agreement to resolve a challenge the liquidators had made to the validity of various transactions, including the Employer Loans. This compromised a wide range of potential liquidators’ claims, including but not limited to those relating to the Employer Loans. Holdings was to pay £482,086.23 to the liquidators.
3. Scharf received £141,913.77 from DML in settlement of the €500,000 deferred consideration.
The Scheme’s PPF assessment period ended on 12 July 2016. As a result of a buy-in with Aviva of PPF-level benefits, the Scheme was authorised to continue as a closed scheme and be wound up outside the PPF, rather than entering the PPF.
As a result of the Scheme’s paying reduced PPF-level benefits, formal complaints to TPR and to a local MP were made by a Scheme member in 2016. TPR issued formal investigation letters on 13 January 2017, including to Scharf. The Warning Notice was issued on 29 March 2019.

The statutory tests: introduction, scheme, and connection tests

The statutory tests (the full wording of which is in Appendix 2) can be usefully divided into five principal tests, with the final test (that of reasonableness) being subdivided:
1. The “Scheme Test”: that the scheme is an occupational pension scheme other than a money purchase scheme or a prescribed scheme or a scheme of a prescribed description (section 38(1));
2. The “Connection Test”: that the target of the regulatory action was at any time during the relevant period (between the act complained of and the Warning Notice) either the employer, or a person connected with, or an associate of, the employer (section 38(3)(b));
3. The “Party Test”: that the target was a party to an act or a deliberate failure to act that falls within section 38(5) (section 38(3)(a));
4. The “Act Test”: that the act or failure to act falls within section 38(5), satisfying the statutory “material detriment” test or “main purpose” test (section 38(3)(a) and 38(5)(a)). The Warning Notice proceeds on the basis of the “material detriment” test only, which is contained in section 38A PA04, and defined at section 38A(1) as “that the act or failure has detrimentally affected in a material way the likelihood of scheme benefits being received”. Section 38A(4) lists non-exhaustive factors to consider in assessing whether the material detriment test has been met.
5. The “Reasonableness Test” requires the Panel to be satisfied it is reasonable to impose liability on the person to pay the sum specified in any CN (section 38(3)(d)). Thus, the Panel must be satisfied it is reasonable to impose liability at all, and also that the quantum of a CN is reasonable. Section 38(7) contains a list of non-exhaustive factors to consider in assessing reasonableness. The Panel has also had regard to TPR’s objectives set out in section 5 PA04 and the matters listed in section 100.
It was not disputed by Scharf in the submissions it did make that the Scheme was a qualifying scheme, nor that Scharf was connected to the Employers within the meaning of section 38(3) PA04. The Panel agrees: both the Scheme Test and Connection Tests are satisfied.

Statutory test: the party test

At the hearing the Panel wished to clarify the basis on which the Case Team put its case on this point, as it appeared to it there was a shift in the way the Case Team set out its acts between the original Warning Notice and its position statement for the hearing:
1. The Panel understood the Warning Notice to identify two acts: the Employer Loans, and the Share Sale of Holdings by Scharf to DML. These were both referred to “as part of the MBO” but separately set out.
2. The Case Team’s position statement again listed those two acts but described them as “part of a single transaction” and put them as either as a single act or as two separate acts within a series.
Scharf’s position in its representations was that it was a party to the Share Sale but did not know of the Employer Loans as the source of funding for the MBO. It therefore did not consider it was party to the Employer Loans. The Case Team, in contrast, positively asserted that both through Mr Dreyer and its lawyers Scharf knew of the Employer Loans.
Analytically, the Panel considered that there were three potential routes by which Scharf could be said to be a party to the Employer Loans and Share Sale as part of the MBO:
1. There are two acts, the Employer Loans and the Share Sale, which form part of a series of acts, the MBO, under section 38(12), and Scharf’s involvement in the Share Sale alone is sufficient to make it a party to the series of acts to satisfy the Party Test.
2. There are two acts, and that Scharf in fact knew of the Employer Loans such that it was also a party to it since it thereby knowingly assisted in that act (under section 38(6)(a)), and so was party to both acts in the series and therefore to the series.
3. The MBO be treated as a single act, of which both the Share Sale and the Employer Loans were part, and Scharf being a party to the MBO was a party to the relevant act for the purposes of the Act Test.
The Panel considered that the case was made out on whichever of the three routes were adopted, particularly in circumstances where Scharf accepts that the Party Test is made out in respect of the Share Sale (although it denies the Act Test is satisfied in respect of that act).
As to the first route, Scharf accepts that it is party to the Share Sale. Counsel for the Case Team submitted that it was sufficient for a target to be party to a single act in the series to be a party to that series. It is not necessary for the Panel to decide that question; the Panel was satisfied that in the context of this series of acts Scharf can properly be described as being party to the series of acts of the Share Sale and the Employer Loans. Scharf was party to one of the two relevant acts in the series, the Share Sale was a very substantial act in the series, and the two acts in the series were, at the lowest, very closely interconnected. The reason for that interconnection is that the Share Sale would not have happened without there being funds available to pay the first instalment of the purchase price, and, since no other MBO investors could be found, the only source of the purchase price was the Employer Loans.
As to the second route, the Panel was satisfied on the information before it (and without needing to draw adverse inferences from the absence of evidence from Mr Dreyer) that Scharf knew through either its lawyers or Mr Dreyer of the Employer Loans, or at least the free cash in the Dosco Group, as the source of the funds for the Share Sale:
1. Eversheds’ email to Scharf’s English lawyers on 3 May 2013, which was passed on to their German lawyer and Mr Dreyer, expressly referred to the “extraction” of the purchase price from Holdings, and the draft document list at that stage envisaged dividends being declared to make the payment. This email shows Scharf’s lawyers and Mr Dreyer’s being told that the cash would come from the Dosco Group. It was also really the only point of substance raised in what was a short covering email, making it difficult to overlook. There was no email response, at least in the material the Panel has seen, indicating confusion or raising a query of this approach.
2. Scharf had a direct commercial interest in the security of the payment of the remainder of the purchase price; it had €500,000 deferred consideration. It specifically negotiated a guarantee from Holdings of the outstanding deferred consideration in clause 8 of the SPA. It had legal advice. It was a substantial concern, listed on the Frankfurt stock exchange, employing experienced commercial operatives. The Employers remained under its ultimate control until the initial consideration had been paid. The Panel considers that (a) the commercial incentive to understand the source of the funds for future payment and (b) taking care to ensure that payment was guaranteed are consistent only with Scharf being aware of the source of the initial payment of funds.
3. Mr Dreyer had been central throughout the sales process and was aware of the existence of excess cash because it was included in the March MoU with Quantum, which he signed. He was also a director of Holdings and Overseas until 7 May 2013, with obligations to those companies. Given Mr Dreyer’s assiduity, the Panel does not believe that a substantial loan would have been made by Overseas without his knowing it.
4. Given the importance of the employer covenant (not least in the Clearance Application Scharf made in 2010, just a few years before the MBO) to pensions liability, it would be surprising if these considerations (as well as Scharf’s own commercial considerations) did not focus on the source of funds and the effect of the MBO on the Employers, which would have required identification of the Employer Loans.
5. Scharf refers to the minutes of the Supervisory Board, which refer to Mr Cain having “contacted a financier”. This is the strongest point, and only evidenced point, in favour of Scharf’s argument that “the persons acting on behalf of Scharf were obviously still assuming that [DML] had found an external investor”. However, as the Case Team submitted, the statement of “contacting a financier who provides the following conditions” is very precise, and does not necessarily mean the financier’s conditions were agreed and the finance offered taken. Putting Scharf’s case at its highest, and assuming the statement in the Supervisory Board minutes to be true and honestly made at the time, this minute does not necessarily mean that Scharf believed finance had been agreed and used. Alone, it is ambiguous. Taken with the other evidence, both the documentary evidence of Scharf being informed of “extraction” and the inherent probabilities arising from the commercial realities, the Panel is satisfied that Scharf knew the source of the MBO funds notwithstanding Scharf’s submissions on the interpretation of this minute.
6. Scharf’s other submission on the documents as to why it did not know is that the SPA (a) did not mention the source of the funds, and (b) DML warranted that it was authorised to enter and capable of executing the SPA. Neither of those points assist Scharf. It would not be usual (putting it at its lowest) for an SPA to refer to the source of the funds. The warranty at clause 7.2 is a warranty that DML has “full power to enter into and perform” the SPA. The Panel interprets that as a warranty that DML has power as a matter of company law to agree the SPA, not that it had the funds to perform. Even if Scharf is right and the warranty is that DML is capable of executing the SPA, the warranty was true because DML knew it was able to agree the Employer Loans and so pay the initial consideration of €1.5 million. The SPA was not executed until after Eversheds confirmed it was in funds.
As to the third route, the Panel considered that structurally the Share Sale and Employer Loans could be viewed as a single act, the MBO, inclusive of all the necessary steps that were a part of it, which would include the Share Sale and the Employer Loans.

Statutory tests: act test

There can be no reasonable doubt that both the Share Sale alone, the Employer Loans alone, and those two aspects of the MBO taken together did indeed cause material detriment to the Scheme. They both significantly weakened the Employers’ covenant and so detrimentally affected in a material way the likelihood of accrued scheme benefits being received.
It is important to note that this is a test that addresses the risk to scheme benefits (whether the “likelihood” of receipt is affected). This has two aspects:
1. First, it is not necessary for the detriment to be quantified for the test to be met; a qualitative impact on the likelihood of receiving benefits suffices. (The Panel also came to this conclusion in the BHS determination, at [117]. While previous decisions of the Panel are not binding, and each Panel determination is assessed on its own facts, the Panel considered the approach and analysis of previous decisions to be persuasive and useful in considering this determination.)
2. Secondly, it is not necessary for the Panel to find as a fact what would have happened (whether on a balance of probabilities basis or some other analysis) and indeed it would be wrong for it to do so. The Panel’s statutory task here is to assess changes in risk by comparing the position before and after the relevant act (which approach to the statutory language was taken in, for example, the Carrington Wire determination at [119]). In order to do so, the Panel will often look at a “counterfactual” question of what was likely to have happened but for the act. However, it does not do so in order to make a finding of what would have happened, but rather to consider the different reasonable possible outcomes but for the acts, in order to assess whether there has been a materially detrimental impact on the likelihood of members’ benefits' being received.
Scharf admits that the Employer Loans caused material detriment. They were right to do so: the loss of over £1.4 million in cash from the Employers, particularly in a business like the Dosco Group’s, where cash flow was uneven and so cash reserves important, was a material detriment.
As to the MBO as a whole, it is notable that every person involved who expressed a view at the time considered it was a material detriment to the Scheme. Most obviously, this was Eversheds Advice, which is why they proposed mitigation that was never made. Furthermore, Mr Cain himself, the Trustees and the Scheme actuary, were all in agreement that there had been material detriment.
Starting with the “after” element of the comparison, the Share Sale alone (even leaving to one side the Employer Loans) significantly weakened the Employers’ covenant particularly given the nature of the Dosco Group’s business. As can be seen by the provision of intra-group guarantees and banking facilities, the Scharf Group Advantages significantly (a) supported the Employers through more difficult cash flow periods, and (b) freed up cash to be used for ongoing operations. These advantages were lost after the MBO:
1. An initial bank guarantee of up to €3.4 million was provided to July 2012. Thereafter, various support in excess of £1.5 million was provided until late 2012. Even in the period immediately prior to the MBO, there was the outstanding £500,000 guarantee.
2. Realistically, during the course of Scharf’s ownership of the Dosco Group, Scharf would have provided other informal support and opportunities to the Dosco Group that were more advantageous than the Group being alone. These Scharf Group Advantages, even where not quantifiable, were genuine advantages. Scharf certainly identified in the Clearance Application on purchasing the Dosco Group that being part of the wider Scharf group provided the Scharf Group Advantages to the Dosco Group.
3. Set free from the Scharf group, the Dosco Group, and the Scheme, its principal creditor, were fully exposed to commercial headwinds.
The situation in which the Dosco Group found itself after the MBO precisely illustrates the value of the Scharf Group Advantages. The most significant proximate cause of the Dosco Group’s failure was non-payment of the Russian contract which significantly increased the cash-flow pressures (but, as was set out in Mr Player’s cash flow analysis, cash flow could have been difficult in any event by late 2013). As a result of the MBO, (a) the Dosco Group had €1.5 million less cash to use while trying to recover the sums or sell to a different customer, (b) there was no intra-group support (which had been provided in the past when the Dosco Group had cash-flow issues) and (c) it was necessary to keep £500,000 of the cash that remained in the Group tied up to obtain banking facilities. Both (b) and (c) were a result of not being in a wider group; only (a) related to the Employer Loans.
Turning to the “before” element of the comparison, the Case Team submitted in essence, and the Panel agrees, that there were only three plausible alternative outcomes:
1. The sale to Quantum (given the significant marketing efforts of Scharf, GCI, Mr Cain, Mr Player and RSM Tenon to find other investors, which had not succeeded by May 2013, there was no realistic other purchaser);
2. Ongoing ownership in the Scharf group who would have continued to support; or
3. Ongoing ownership in the Scharf group who decided to put the Dosco Group into insolvency, being unwilling to support it.
On each of those possible bases, Scheme benefits would have been materially more likely to have been received:
1. A Quantum sale would have provided external investment and/or support broadly replacing the historic Scharf support. This would likely have allowed for ongoing contributions to the Scheme, and reduced cash-flow pressure on the Dosco Group giving it a materially greater prospect of success and survival (not least because the Quantum April Offer was back-loaded, in contrast to the MBO which extracted substantial cash immediately). While Mr Cain expressed concern about Quantum’s approach to the Dosco Group business, the Panel can only proceed on the basis that Quantum would have acted lawfully in relation to the Dosco Group, including in relation to its obligation to the Scheme.
2. Ongoing Scharf support had historically been plainly valuable to the Scheme. If the Group had continued to be owned by Scharf, not only would ongoing contributions have had to have been paid, the Employer Loan cash would have remained in the Employers. The Employers would also likely have had the benefit of the Scharf Group Advantages. To give an illustration of the value and utility of these Scharf Group Advantages, historically these had been of the same order of magnitude as, for instance, the Russian contract, the non-payment of which caused the Dosco Group difficulties. The parent support had been of the order of £1.5 million, compared to the Russian contract sum of £2.1 million. Given that this contract was a proximate cause of the Dosco Group’s failure, the Scharf Group Advantages in surviving notwithstanding the non-payment of the Russian contract would have been of considerable importance.
3. An immediate insolvency with the benefit of the Scharf group would have retained not only the cash of the Employer Loans in the Employers, but also other sums that were spent between the MBO date and the ultimate insolvency some months later. Since the Scheme would still have been the principal creditor on any insolvency, its recovery would have been greater.
Cross-referring to the statutory factors of section 38A(4):
1. Factors (a) to (b) relating to the value of the assets or liabilities of the Scheme are not engaged;
2. As to factors (c) to (d), the scheme obligations of any person and the effect of the act on those obligations, they were not directly affected. However, factors (e)-(f), the extent to which any person is likely to be able to discharge a scheme obligation, and the impact of the act on that likelihood, were very significantly affected. A “scheme obligation” is defined in section 38(5) as a liability or other obligation to make a payment or transfer an asset to the scheme. The result of the MBO was that the Employers were significantly less likely to be able to discharge their scheme obligations, whether ongoing scheme payment obligations or a section 75 debt on insolvency.
It is not easy to identify Scharf’s basis for arguing the material detriment test has not been met. Scharf’s argument that the group had no (private law) obligation to support the Scheme and was free (and perhaps, under German law, obliged) to withdraw guarantees or other support is misconceived. The misconception is the assumption that this aspect of the CN regulatory regime requires an assessment of private law rights and obligations. It does not: the statutory material detriment test looks at the outcome of acts, not whether a party was obliged or otherwise permitted as a matter of private law to carry out those acts. The purpose of the regulatory regime and the moral hazard provisions are, at least in part, to intervene and impose liability where as a matter of private law rights there would be no such liability.
Scharf’s other point is that at the MBO date the Dosco Group was not insolvent. Again, that is not the statutory test. If solvency/insolvency were the test, a weakening of the employer covenant would not of itself be enough to amount to a material detriment in the absence of employer insolvency. That is not the case; a weakening of the employer covenant will affect the likely discharge of a scheme obligation, which is a statutory criterion for assessing material detriment (under section 38A(4)(f)). At most, if a target reasonably considered the employer was not only solvent but stable and well able to support the scheme, that could go to the statutory defence of section 38B or the reasonableness of imposing liability (which Scharf did not rely on).
It is accordingly the Panel’s view that, whatever would have happened to the Employers, the material detriment Act Test is met in respect of the Employer Loans and the Share Sale. Scharf’s arguments to the contrary are legally incorrect.

Statutory tests: reasonableness (liability)

The Panel is firmly of the view that it is reasonable to impose liability on Scharf. The overarching reason for this is that Scharf paid no regard whatsoever to the Scheme in the course of the MBO, instead viewing the Scheme as something to offload from Scharf on to a purchaser. It is clear from the documentary record that the Scheme was viewed as a problem (which would “absorb all” profit and that it was “unacceptable” that Scharf supported the Scheme while it was “skimming off all the profit”), not as a stakeholder with legitimate interests in the Dosco Group business and any sale.
That is not an acceptable approach to an occupational pension scheme. To tolerate such an approach would be contrary to TPR’s objectives to protect members’ benefits, to reduce the risk to the PPF, and to promote the good administration of work-based pension schemes (all under section 5(1) PA04). Nor is tolerating such an approach compatible with taking into account the interests of members (relevant under section 100 PA04).
Scharf appears to have approached the issue of the Scheme as being a problem only for Dosco’s owners. The Panel does not know, and does not need to decide, whether Scharf knew of its obligations under English pensions law and regulation and deliberately failed to engage, so running the risk of regulatory action, or simply chose to proceed not caring of the position. It does not matter. Scharf was a large sophisticated commercial entity which had previously engaged with TPR and instructed specialist English pensions lawyers, and who on this transaction had evidently obtained advice at least that its liability would be limited to what it took out of the Dosco Group. It certainly knew at the time of the Clearance Application in 2010 of the relevance of material detriment to the Scheme arising out of a change in principal employer. On that basis, if it did not understand the pensions regulatory arena in which the MBO took place only a few years later, it wilfully chose not to know.
The following individual aspects of Scharf’s approach are relevant to the reasonableness of the imposition of liability:
1. The apparently deliberate failure to engage with TPR and the Trustees, particularly in circumstances where Mr Dreyer had taken pensions advice in 2012.
2. Scharf knew or should have known from the Clearance Application process that (a) the impact on a pension scheme was relevant to any sale, (b) regulatory action could be taken if clearance was not obtained and (c) a change in group support could be a detriment to a scheme.
3. The apparent failure to consider what if any mitigation should be provided, and the failure to offer any mitigation to the Trustees.
4. Scharf’s motivations as recorded in the Report and the minute of the meeting of 18 September 2012 that it viewed the impact of the Scheme as “unacceptable”.
5. The MBO was structured with a large up-front payment to Scharf (in contrast to the Quantum April offer which was backloaded). Not only does this significantly benefit Scharf, it significantly increased the risk to the Dosco Group business and the Scheme in a way the Quantum structure (with the majority of the consideration based on future proceeds) did not. That position is made worse by the fact that, as the Panel has found, Scharf knew that the upfront payment was coming from the Employers.
6. The very significant detrimental impact on the Scheme of the MBO (as set out above in relation to the material detriment test) and the weakened position the Employers were in as a result of it.
7. Scharf’s statement to TPR when applying for clearance that all intra-group transactions affecting the group were on an arm’s-length basis. The Employer Loans, given they were interest free and subordinated to payment of Scharf’s second instalment of the purchase price, were clearly not an arm’s-length transaction, benefitting Scharf at the expense of the Dosco Group and so the Scheme.
The Panel also considered certain other factors, such as the deliberate delay in putting Hollybank into administration or liquidation so that it remained in place at the time of the MBO, and the apparent attempt to use a separate company (Global Mining Services) as a vehicle for corporate opportunities that could otherwise have gone to the Dosco Group and so been available for the Scheme. The Panel considered these were factors probative of Scharf’s wider attitude to the Scheme rather than of direct relevance.
Scharf argued that its main motivation for the sale was to focus on its core business. That may well have been a factor, but it is clear from the contemporaneous documents that disconnecting the Scheme from Scharf was a main driver to the sale, whatever the other drivers were. In any event, this argument also fails to engage with the substantial criticism that the reasonableness of imposing liability is not limited to Scharf’s motivations to sell, but rather the way it went about selling and the outcome that had for the Scheme. A properly-managed sale, combined with a clearance application and engagement with the Trustees and TPR, would also have allowed Scharf to focus on its core business, but it would not have left the Scheme in a materially-detrimental position.
Cross-checking against the statutory criteria in section 38(7) (which have been substantially covered holistically above):
1. Scharf was very closely involved in the relevant acts, the Share Sale and Employer Loans. It was the prime mover behind selling the Dosco Group, was the seller in the Share Sale and, as has been found above, knew of the Employer Loans (and even if it did not the Share Sale and Employer Loans were very closely connected).
2. Scharf had control of the Scheme Employers, and Mr Dreyer, a senior Scharf employee and manager, was a director of the Employers.
3. Scharf applied for clearance in relation to the Scheme in 2010, and had significant connection to it because it and the Scheme were the two economic recipients of any profit the Employers would make.
4. While the Employers were the “appropriate person” to notify TPR of the MBO for the purposes of the statutory notifiable events regime, it appears the speed of the transaction was at Scharf’s behest. As set out above, clearance was not sought nor TPR notified because of the speed of the transaction, which circumstances Scharf created.
5. At least a main purpose of the Act was to separate Scharf from the pension scheme.
6. Scharf received €1.5 million which was removed from the Employers.
7. The Employer’s creditors were left with a substantial shortfall, with the Scheme as the major creditor.
8. Scharf did not seek to rely on its financial circumstances. It remains a Frankfurt listed company.
The Panel does not take into account the possible recovery from other regulatory and other actions in determining the reasonableness of imposing liability; to do so would lead to circularity and undermine the regulatory scheme (which is consistent with the approach adopted in other regulatory actions such as Carrington Wire and BHS).

Statutory tests: reasonableness (quantum)

The statutory maximum for the quantum of a CN is the “shortfall sum”, essentially the level of the section 75 debt at the relevant time, here some £38.8 million. The Case Team seeks a significantly lower sum than that, totalling £2,317,278.70, made up of the following elements:
1. £1,270,200, being the sterling value of the €1.5 million received by Scharf on the MBO (calculated at the time of its payment);
2. £141,913.77, being the amount paid to Scharf in respect of its deferred consideration;
3. £905,164.93, being lost investment returns to the Scheme (calculated from the MBO date); alternatively, a lower figure for lost investment returns or interest.
In addition to whether it is reasonable to award those sums, there is also the question of whether the £482,086.23 recovered by the liquidators to the benefit of the Scheme under the Settlement Agreement (the Recovery) should be credited against the quantum of the CN to reduce Scharf’s liability.
In making this decision, the Panel has had regard to the decision of Warren J in the Bonas decision in the Upper Tribunal to compensate the Scheme for the detriment it has suffered (at [100]). The Panel has borne in mind that this exercise requires, in part, putting a monetary value on a loss that is not easily quantifiable, being the loss of the Scharf Group Advantages. The Panel has also had regard, in the round, to the statutory reasonableness factors and the factors listed in the previous section, as well as the relation between the amount claimed and the shortfall sum.

The Principal Sums

The Panel is satisfied that it is reasonable to award £1,270,200 and £141,913.77 (the Principal), and not to take into account the Recovery.
As to the award of the Principal:
1. The £1,270,200 reflects the direct financial loss to the Employers, which could otherwise have been available to the Scheme if required. It is also, as the Case Team submits, a lower-end estimate because it fails to take into account the financial deterioration between the MBO and the Employers’ insolvency and the valuable support of the Scharf Group Advantages.
2. As well as direct loss, it also reflects the gain made by Scharf and is accordingly reasonable.
3. The other element of the Principal is simply the value of the deferred consideration. By parity of reasoning, it is also a detriment to the Scheme and the benefit to Scharf, such that it is also reasonable to award it.
As to the Recovery, the Panel considered that it should not be taken into account, for two principal reasons.
1. First, contributions under other regulatory actions are not to be taken into account. The regulatory regime would be undermined if potential recovery by other routes (whether CN action or other insolvency action) were to be taken into account. That is particularly so in the case of the Recovery, where the payment was made in respect of a suite of claims not all of which were against Scharf and not all of which related to the Scheme; it is not possible to identify the extent to which the Recovery was designed to compensate specifically for the impact on the Scheme. On this issue, the Panel takes the same view in the present case as it did in Carrington Wire (at [159]) and in BHS (at [120] in relation to the material detriment test, and at [135]ff in relation to reasonableness).
2. Secondly, the Panel is satisfied that the detriment to the Scheme has not been fully compensated by the Recovery such that it should not affect the quantum awarded. The Scheme is only paying out PPF-level benefits, and there was significant qualitative detriment to the Scheme by the MBO and the loss of the Scharf Group Advantages.
Accordingly, the Panel awards the Principal sum sought by the Case Team of £1,412,113.77.

The Additional Sum

The Panel’s decision on awarding the additional sum sought by the Case Team was driven by three factors:
1. The logical and just basis for awarding an additional sum based on Scheme investment returns is that the Principal sum would have been part of the Scheme assets invested so as to make those returns. In this case, the Case Team seeks to apply Scheme returns from the date of the MBO. For the reasons set out below, this date seems to the Panel too early.
2. However, on the contrary, as a matter of principle, had the Share Sale and Employer Loans not intervened, by some unknown date in the future the Principal sum of around £1.4 million would have been paid into the Scheme. It would therefore be equally wrong in principle not to award investment returns at all, just because that date is not easy to identify.
3. Any additional sum award can only be an estimation of what would have happened, with the Panel doing its best reasonably to award a sum that compensates for the detriment of the deprivation of the Principal sum. In the real world, it is unlikely, for instance, that the sums would all come into the Scheme in a single amount, the precise date of Scheme funds receipt is unknown, and the impact of receiving Scheme funds and their generating returns over time may well have led to a different net asset outcome (whether by way of a different investment strategy being adopted or different costs being chargeable on the larger fund). In acting reasonably, the Panel considers it appropriate to decide cautiously and not move into the realm of unfounded speculation.
Taking that holistic estimation, the Panel considered that to award investment returns from the date of the MBO could not be justified:
1. Had the MBO not occurred and Scharf continued ownership, the cash would have remained in the Employers and could have been available to the Scheme. Absent any insolvency, the Scheme would have received ongoing contributions and deficit repair contributions. It is fair to say that, given the increased deficit revealed in the 2013 actuarial valuations, higher deficit repair contributions would likely have been payable in the future compared to the level payable at the time of the MBO.
2. Had the MBO not taken place and a controlled insolvency occurred instead, a large proportion of the Employer Loans would have been available to the Scheme as the most substantial creditor. There would still have been a delay between Scharf (acting reasonably) deciding that no sale could occur and an insolvency was necessary, and that insolvency process resulting in cash being payable into the Scheme. That said, Hollybank continued as an entity specifically to avoid the pensions issues that would have arisen on an insolvency, and on that basis it could fairly be said that the Hollybank returns to the Scheme could have been received earlier.
3. Had the sale to Quantum occurred, ongoing and deficit repair contributions would have been paid, or if an insolvency were to occur, on the basis that Quantum acted lawfully funds would have been available to the Scheme. Further, it is at least reasonably likely that some mitigation would also have been payable to the Scheme immediately around the time of the notional Quantum sale.
At the time of the MBO, deficit repair contributions were £43,750 per month. The Scheme secured its buy-in with Aviva in December 2015, after the Settlement Agreement in October 2015. December 2015 is 31 months after May 2013 and 28 months after Overseas stopped paying deficit repair contributions in September 2013. Another 28 months of deficit repair contributions paid at the level of £43,750 would have resulted in £1,225,000 being paid into the Scheme by December 2015.
Taking a broad brush approach appropriate to an interest calculation based on an assessment of what may have happened, that £1,225,000 figure is close to the Principal sum of £1,412,113.77. Moreover, it assumes no increase in deficit repair contributions over the period notwithstanding the need for a Scheme valuation and the deteriorating financial position. Nor does it assume any other route by which cash into the Scheme would have been accelerated, whether by the provision of mitigation on a Quantum sale, a return on an orderly insolvency, or an earlier receipt of Hollybank moneys. Taking those other unquantified factors into account, even on a conservative basis, the Panel considers that it is appropriate to proceed on the basis that the Principal sum would have been available for investment in the Scheme by 15 December 2015.
From the investment report from Capita provided, the overall return to the Scheme from 15 December 2015 to 31 December 2020 was 39.1% (calculated by multiplying the Scheme returns for the three periods provided: 16.8% for 15 December 2015 to 30 September 2018, 10.9% from 1 October 2018 to 31 December 2019, and 7.4% from 31 December 2019 to 31 December 2020).
As to the period of 7 May 2013 to 15 December 2015, the Panel does not consider it appropriate to make no award. To do so would fail to reflect both the detriment to the Scheme in not having some funds available to it and the benefit to Scharf of the time value of the money in its hands. For the reasons given above, the Panel considers that an award of Scheme investment returns would be too speculative and uncertain. However, an interest award at some level is appropriate. The Case Team suggested 2% above base rate. Scharf did not in its submissions specifically challenge that rate of interest or put forward its cost of capital. Further, the “vendor loan” at 6% in May 2013 was 5.5% above Bank of England base rate, 5.1% above 12-month LIBOR, and 5.5% above 12-month EURIBOR. On that basis, a 2% above base rate award compounded on an annual basis is not only justifiable but conservative. There are two different payments and so the interest runs for two different periods: from 7 May 2013 (for the first payment under the MBO), and from 31 October 2015 (when the second payment was received), both interest periods to run until 15 December 2015, from when the Scheme investment return award is applied to the sums.
Accordingly, the Panel considers a reasonable additional sum to be awarded to be:
1. Interest at 2.5% compound pa from receipt to 15 December 2015:
  
  Original payment received by Scharf on 7 May 2013: £1,270,200 x ((1.025) ^ (952/365)-1) = £84,493.70
  
  Further payment received by Scharf on 31 October 2015: £141,913.77 x ((1.025) ^ (45/365)-1) = £432.69
  
  Total: £84,926.39
2. Investment returns of 39.1% from 15 December 2015 to 31 December 2020: (£1,412,113.77 + £84,926.39) x 0.391 = £585,342.70
3. totalling £670,269.09
That would mean a total to 31 December 2020 of £2,082,382.86

Further Sum Until Payment

Unless and until Scharf pays the above sum, the Scheme continues to suffer the loss of funds as a result (and Scharf continues to benefit from holding those funds). The Panel considers that, on the facts of this case, it is appropriate to include in the contribution notice a further sum calculated on an ongoing basis to reflect that fact.
As to jurisdiction to make such an order, by section 38(2) of PA04, the effect of a CN is to impose “a liability to pay the sum specified in the notice”. By section 6(c) of the Interpretation Act 1978, the singular includes the plural unless the contrary intention appears. The Panel considers there is no contrary intention in section 38 and it therefore has power to issue a CN which includes a principal sum and an ongoing sum until payment, provided that sum is “specified” in the CN, and otherwise within the statutory power.
As a matter of principle, ongoing interest awards at a reasonable level are reasonable for the reasons given at the start of this section. Therefore, provided the amount is less than the “shortfall sum” which is the statutory limit for a CN, there is both jurisdiction and it is reasonable to award a sum reflecting interest.
As to the level of interest, the Panel considers 2% to be conservative. This would give a daily rate of interest of £114.10 per day, to run from 1 January 2021 until payment calculated as follows:

£2,082,382.86 x 0.02/365 = £114.10
In this case, the Panel proposes to limit the maximum sum to the maximum sought by the Case Team of £2,317,278.70.

Decision

The Panel has determined that a CN should be issued to Scharf pursuant to section 38 PA04 in the amount of £2,082,382.86 (being a principal sum of £1,412,113.77 and an additional sum of £670,269.09), with a further sum payable specified as £114.10 per day until payment, subject to a maximum total sum of £2,317,278.70.
Such issue must not take place during the period within which this Determination may be referred to the Upper Tribunal (Tax and Chancery Chamber) or if this Determination is so referred, until the final disposal of the reference and any onward appeal.
Appendix 1 to this Determination Notice contains important information about the rights of reference to the Upper Tribunal of directly affected parties against this decision.

Signed:

Name: Antony Townsend

Dated: 24 March 2021 revised on 6 August 2021

Appendix 1

Referral to the Tax and Chancery Chamber of the Upper Tribunal

Paragraphs 4 and 110 of this Determination Notice set out who the directly affected parties are and the determination made by the Panel. You have the right to refer any determination you are directly affected by to the Tax and Chancery Chamber of the Upper Tribunal (the Tribunal)^[1].

A reference to the Tribunal is made by way of a written notice signed by you or your representative on your behalf and sent or delivered to the Tribunal with a copy of this Determination Notice. The reference notice must be received by the Tribunal no later than 28 days after this Determination Notice is given to you, unless you obtain an extension from the Tribunal.

The Tribunal’s address is:

Upper Tribunal
(Tax and Chancery Chamber)
Fifth Floor
Rolls Building
Fetter Lane
London
EC4A 1NL

Tel: 020 7612 9730

The detailed procedures for making a reference to the Tribunal are contained in section 103 PA 04 and the Tribunal procedure rules.

You should note that the Tribunal procedure rules provide that at the same time as sending or delivering a reference notice with the Tribunal, you must send a copy of the reference notice to the Pensions Regulator. Any copy reference notice should be sent to:

Determinations Panel Support The Pensions Regulator
Napier House
Trafalgar Place
Brighton
BN1 4DW

Tel: 01273 811852

Email: panelsupport@tpr.gov.uk

A copy of the form for making a reference, FTC3 ‘Reference Notice (Financial Services)’, can be found on the GOV.UK website.

Footnotes for this section

[1] Section 96(3)(b) PA 04 also stipulates that a reference may be made by “any other person who appears to the Tribunal to be directly affected by the determination”.

Appendix 2

Pensions Act 2004

Section 4 Regulator's functions

The Regulator has–
1. the functions transferred to it from the Occupational Pensions Regulatory Authority by virtue of this Act or any provisions in force in Northern Ireland corresponding to this Act, and
2. any other functions conferred by, or by virtue of, this or any other enactment.
As regards the exercise of the Regulator's functions–
1. the non-executive functions listed in subsection (4) of section 8 must, by virtue of subsection (2) of that section, be discharged by the committee established under that section,
2. the functions mentioned in the following provisions are exercisable only by the Determinations Panel–
  1. section 10(1) (the power in certain circumstances to determine whether to exercise the functions listed in Schedule 2 and to exercise them), and
  2. section 99(10) (the functions concerning the compulsory review of certain determinations), and
3. the exercise of other functions of the Regulator may be delegated by the Regulator under paragraph 20 of Schedule 1.
Subsection (2) is subject to any regulations made by the Secretary of State under paragraph 21 of Schedule 1 (power to limit or permit delegation of functions).

Section 5 Regulator's objectives

The main objectives of the Regulator in exercising its functions are–
1. to protect the benefits under occupational pension schemes of, or in respect of, members of such schemes,
2. to protect the benefits under personal pension schemes of, or in respect of, members of such schemes within subsection (2),
3. to reduce the risk of situations arising which may lead to compensation being payable from the Pension Protection Fund (see Part 2 ), [...]
  
  [(cza) in relation to the exercise of its functions under Part 3 only, to minimise any adverse impact on the sustainable growth of an employer,]
  
  [(ca) to maximise compliance with the duties under Chapter 1 of Part 1 (and the safeguards in sections 50 and 54) of the Pensions Act 2008, and]
4. to promote, and to improve understanding of, the good administration of work-based pension schemes.
For the purposes of subsection (1)(b) the members of personal pension schemes within this subsection are–
1. the members who are employees in respect of whom direct payment arrangements exist, and
2. where the scheme is a stakeholder pension scheme, any other members.
In this section–

“stakeholder pension scheme” means a personal pension scheme which is or has been registered under section 2 of the Welfare Reform and Pensions Act 1999 (c. 30) (register of stakeholder schemes);

“work-based pension scheme” means–
1. an occupational pension scheme,
2. a personal pension scheme where direct payment arrangements exist in respect of one or more members of the scheme who are employees, or
3. a stakeholder pension scheme.

Section 38 Contribution notices where avoidance of employer debt

This section applies in relation to an occupational pension scheme other than–
1. a money purchase scheme, or
2. a prescribed scheme or a scheme of a prescribed description.
The Regulator may issue a notice to a person stating that the person is under a liability to pay the sum specified in the notice (a contribution notice)–
1. to the trustees or managers of the scheme, or
2. where the Board of the Pension Protection Fund has assumed responsibility for the scheme in accordance with Chapter 3 of Part 2 (pension protection), to the Board.
The Regulator may issue a contribution notice to a person only if–
1. the Regulator is of the opinion that the person was a party to an act or a deliberate failure to act which falls within subsection (5),
2. the person was at any time in the relevant period–
  1. the employer in relation to the scheme, or
  2. a person connected with, or an associate of, the employer,
3. the Regulator is of the opinion that the person, in being a party to the act or failure, was not acting in accordance with his functions as an insolvency practitioner in relation to another person, and
4. [the Regulator is of the opinion that it is reasonable to impose liability on the person to pay the sum specified in the notice, having regard to—
  1. the extent to which, in all the circumstances of the case, it was reasonable for the person to act, or fail to act, in the way that the person did, and
  2. such other matters as the Regulator considers relevant, including (where relevant) the matters falling within subsection (7).]
But the Regulator may not issue a contribution notice, in such circumstances as may be prescribed, to a person of a prescribed description.
An act or a failure to act falls within this subsection if–
1. the Regulator is of the opinion that [the material detriment test is met in relation to the act or failure (see section 38A) or that ]2 the main purpose or one of the main purposes of the act or failure was–
  1. to prevent the recovery of the whole or any part of a debt which was, or might become, due from the employer in relation to the scheme under section 75 of the Pensions Act 1995 (c. 26) (deficiencies in the scheme assets), or
  2. [...] to prevent such a debt becoming due, to compromise or otherwise settle such a debt, or to reduce the amount of such a debt which would otherwise become due,
2. it is an act which occurred, or a failure to act which first occurred–
  1. on or after 27th April 2004, and
  2. before any assumption of responsibility for the scheme by the Board in accordance with Chapter 3 of Part 2, and
3. it is either–
  1. an act which occurred during the period of six years ending with the [giving of a warning notice in respect of] the contribution notice in question, or
  2. a failure which first occurred during, or continued for the whole or part of, that period.
For the purposes of subsection (3)–
1. the parties to an act or a deliberate failure include those persons who knowingly assist in the act or failure, and
2. “the relevant period” means the period which–
  1. begins with the time when the act falling within subsection (5) occurs or the failure to act falling within that subsection first occurs, and
  2. ends with the [giving of a warning notice in respect of] the contribution notice in question.
[The matters within this subsection are—]
1. the degree of involvement of the person in the act or failure to act which falls within subsection (5),
2. the relationship which the person has or has had with the employer (including, where the employer is a company within the meaning of subsection (11) of section 435 of the Insolvency Act 1986 (c. 45), whether the person has or has had control of the employer within the meaning of subsection (10) of that section),
3. any connection or involvement which the person has or has had with the scheme,
4. if the act or failure to act was a notifiable event for the purposes of section 69 (duty to notify the Regulator of certain events), any failure by the person to comply with any obligation imposed on the person by subsection (1) of that section to give the Regulator notice of the event,
5. all the purposes of the act or failure to act (including whether a purpose of the act or failure was to prevent or limit loss of employment),
  
  [(ea) the value of any benefits which directly or indirectly the person receives, or is entitled to receive, from the employer or under the scheme,
  
  (eb) the likelihood of relevant creditors being paid and the extent to which they are likely to be paid,]
6. the financial circumstances of the person, and
7. such other matters as may be prescribed.
  
  [(7A) In subsection (7)(eb) “relevant creditors” means—
  1. creditors of the employer, and
  2. creditors of any other person who has incurred a liability or other obligation (including one that is contingent or otherwise might fall due) to make a payment, or transfer an asset, to the scheme.]
For the purposes of this section references to a debt due under section 75 of the Pensions Act 1995 (c. 26) include a contingent debt under that section.
Accordingly, in the case of such a contingent debt, the reference in subsection (5)(a)(ii) to preventing a debt becoming due is to be read as including a reference to preventing the occurrence of any of the events specified in section 75(4C)(a) or (b) of that Act upon which the debt is contingent.
For the purposes of this section–
1. section 249 of the Insolvency Act 1986 (connected persons) applies as it applies for the purposes of any provision of the first Group of Parts of that Act,
2. section 435 of that Act (associated persons) applies as it applies for the purposes of that Act, and
3. [section 229 of the Bankruptcy (Scotland) Act 2016] (associated persons) applies as it applies for the purposes of that Act.
For the purposes of this section “insolvency practitioner” , in relation to a person, means–
1. a person acting as an insolvency practitioner, in relation to that person, in accordance with section 388 of the Insolvency Act 1986, or
2. an insolvency practitioner within the meaning of section 121(9)(b) (persons of a prescribed description).
[Subsection (13) applies if the Regulator is of the opinion that—
1. a person was a party to a series of acts or failures to act,
2. each of the acts or failures in the series falls within subsection (5)(b) and (c), and
3. the material detriment test is met in relation to the series, or the main purpose or one of the main purposes of the series was as mentioned in subsection (5)(a)(i) or (ii).
The series of acts or failures to act is to be regarded as an act or failure to act falling within subsection (5) (and, accordingly, the reference in subsection (6)(b)(i) to the act or failure to act falling with subsection (5) is to the first of the acts or failures to act in the series).]
[In this section “a warning notice” means a notice given as mentioned in section 96(2)(a).]

Section 38A Section 38 contribution notice: meaning of “material detriment test”

For the purposes of section 38 the material detriment test is met in relation to an act or failure if the Regulator is of the opinion that the act or failure has detrimentally affected in a material way the likelihood of accrued scheme benefits being received (whether the benefits are to be received as benefits under the scheme or otherwise).
In this section any reference to accrued scheme benefits being received is a reference to benefits the rights to which have accrued by the relevant time being received by, or in respect of, the persons who were members of the scheme before that time.
In this section “the relevant time” means—
1. in the case of an act, the time of the act, or
2. in the case of a failure—
  1. the time when the failure occurred, or
  2. where the failure continued for a period of time, the time which the Regulator determines and which falls within that period;
    
    and, in the case of acts or failures to act forming part of a series, any reference in this subsection to an act or failure is a reference to the last of the acts or failures in that series.
In deciding for the purposes of section 38 whether the material detriment test is met in relation to an act or failure, the Regulator must have regard to such matters as it considers relevant, including (where relevant)—
1. the value of the assets or liabilities of the scheme or of any relevant transferee scheme,
2. the effect of the act or failure on the value of those assets or liabilities,
3. the scheme obligations of any person,
4. the effect of the act or failure on any of those obligations (including whether the act or failure causes the country or territory in which any of those obligations would fall to be enforced to be different),
5. the extent to which any person is likely to be able to discharge any scheme obligation in any circumstances (including in the event of insolvency or bankruptcy),
6. the extent to which the act or failure has affected, or might affect, the extent to which any person is likely to be able to do as mentioned in paragraph (e), and
7. such other matters as may be prescribed.
In subsection (4) “scheme obligation” means a liability or other obligation (including one that is contingent or otherwise might fall due) to make a payment, or transfer an asset, to—
1. the scheme, or
2. any relevant transferee scheme in respect of any persons who were members of the scheme before the relevant time.
In this section—
1. “relevant transferee scheme” means any work-based pension scheme to which any accrued rights to benefits under the scheme are transferred;
2. any reference to the assets or liabilities of any relevant transferee scheme is a reference to those assets or liabilities so far as relating to persons who were members of the scheme before the relevant time.
For the purposes of subsection (6)(a) the reference to the transfer of accrued rights of members of a pension scheme to another pension scheme includes a reference to the extinguishing of those accrued rights in consequence of the obligation to make a payment, or transfer an asset, to that other scheme.
In this section—
1. “work-based pension scheme” has the meaning given by section 5(3);
2. any reference to rights which have accrued is to be read in accordance with section 67A(6) and (7) of the Pensions Act 1995 (reading any reference in those subsections to a subsisting right as a reference to a right which has accrued).
In deciding for the purposes of this section whether an act or failure has detrimentally affected in a material way the likelihood of accrued scheme benefits being received, the following provisions of this Act are to be disregarded—
1. Chapter 3 of Part 2 (the Board of the Pension Protection Fund: pension protection), and
2. section 286 (the financial assistance scheme for members of certain pension schemes).
Regulations may amend any provision of subsections (4) to (8).

Section 38B Section 38 contribution notice issued by reference to material detriment test: defence

This section applies where—
1. a warning notice is given to any person (P) in respect of a contribution notice under section 38, and
2. the contribution notice under consideration would be issued wholly or partly by reference to the Regulator's opinion that the material detriment test is met in relation to an act or deliberate failure to act to which P was a party.
If the Regulator is satisfied that P has shown that—
1. conditions A and C are met, and
2. where applicable, condition B is met,
  
  the Regulator must not issue the contribution notice by reference to its being of the opinion mentioned in subsection (1)(b).
Condition A is that, before becoming a party to the act or failure, P gave due consideration to the extent to which the act or failure might detrimentally affect in a material way the likelihood of accrued scheme benefits being received.
Condition B is that, in any case where as a result of that consideration P considered that the act or failure might have such an effect, P took all reasonable steps to eliminate or minimise the potential detrimental effects that the act or failure might have on the likelihood of accrued scheme benefits being received.
Condition C is that, having regard to all relevant circumstances prevailing at the relevant time, it was reasonable for P to conclude that the act or failure would not detrimentally affect in a material way the likelihood of accrued scheme benefits being received.
P is to be regarded as giving the consideration mentioned in condition A only if P has made the enquiries, and done the other acts, that a reasonably diligent person would have made or done in the circumstances.
For the purposes of condition C—
1. “the relevant time” means the time at which the act occurred or the failure to act first occurred;
2. the reference to the circumstances mentioned in that condition is a reference to those circumstances of which P was aware, or ought reasonably to have been aware, at that time (including acts or failures to act which have occurred before that time and P's expectation at that time of other acts or failures to act occurring).
In the case of acts or failures to act forming part of a series, P is to be regarded as having shown the matters mentioned in subsection (2) if P shows in the case of each of the acts or failures in the series that—
1. conditions A and C are met, and (where applicable) condition B is met, in relation to the act or failure, or
2. the act or failure was one of a number of acts or failures (a “group” of acts or failures) selected by P in relation to which the following matters are shown.
The matters to be shown are that—
1. before becoming a party to the first of the acts or failures in the group, condition A is met in relation to the effect of the acts or failures in the group taken together,
2. condition B is (where applicable) met in relation to that effect, and
3. condition C is then met in relation to each of the acts or failures in the group (determined at the time at which each act or failure concerned occurred or first occurred).
If at any time P considers that condition C will not be met in relation to any particular act or failure in the group—
1. the previous acts or failures in the group are to be regarded as a separate group for the purposes of subsection (8), and
2. P may then select another group consisting of the particular act or failure concerned, and any subsequent act or failure, in relation to which P shows the matters mentioned in subsection (9).
  
  Nothing in paragraph (b) is to be read as preventing P from showing the matters mentioned in subsection (8)(a).
If—
1. P is unable to show in the case of each of the acts or failures in the series that the matters set out in subsection (8)(a) or (b) are met, but
2. does show in the case of some of them that those matters are met, the acts or failures within paragraph (b) are not to count for the purposes of section 38A as acts or failures to act in the series.
In this section—
1. “a warning notice” means a notice given as mentioned in section 96(2)(a);
2. any reference to an act or failure to which a person is a party has the same meaning as in section 38(6)(a);
3. any reference to the accrued scheme benefits being received has the same meaning as in section 38A;
  
  and subsection (9) of section 38A applies for the purposes of conditions A to C as it applies for the purposes of that section.
Regulations may amend this section.

Section 39 The sum specified in a section 38 contribution notice

The sum specified by the Regulator in a contribution notice under section 38 may be either the whole or a specified part of the shortfall sum in relation to the scheme.
Subject to subsection (3), the shortfall sum in relation to a scheme is–
1. in a case where, at the relevant time, a debt was due from the employer to the trustees or managers of the scheme under section 75 of the Pensions Act 1995 (c. 26) (“the 1995 Act”) (deficiencies in the scheme assets), the amount which the Regulator estimates to be the amount of that debt at that time, and
2. in a case where, at the relevant time, no such debt was due, the amount which the Regulator estimates to be the amount of the debt under section 75 of the 1995 Act which would become due if&ndash
  1. subsection (2) of that section applied, and
  2. the time designated by the trustees or managers of the scheme for the purposes of that subsection were the relevant time.
Where the Regulator is satisfied that the act or failure to act falling within section 38(5) resulted–
1. in a case falling within paragraph (a) of subsection (2), in the amount of the debt which became due under section 75 of the 1995 Act being less than it would otherwise have been, or
2. in a case falling within paragraph (b) of subsection (2), in the amount of any such debt calculated for the purposes of that paragraph being less than it would otherwise have been,
  
  the Regulator may increase the amounts calculated under subsection (2)(a) or (b) by such amount as the Regulator considers appropriate.
For the purposes of this section “the relevant time” means [(subject to subsection (4A))]–
1. in the case of an act falling within subsection (5) of section 38, the time of the act, or
2. in the case of a failure to act falling within that subsection–
  1. the time when the failure occurred, or
  2. where the failure continued for a period of time, the time which the Regulator determines and which falls within that period.
    
    [(4A) In the case of a series of acts or failures to act, “the relevant time” is determined by reference to whichever of the acts or failures in the series is, in the Regulator's opinion, most appropriate.]
For the purposes of this section–
1. references to a debt due under section 75 of the 1995 Act include a contingent debt under that section, and
2. references to the amount of such a debt include the amount of such a contingent debt.

Section 96 Standard procedure

The procedure determined under section 93 must make provision for the standard procedure.

[(1A) In any case where—
1. a warning notice is given to any person in respect of a contribution notice under section 38, and
2. the contribution notice under consideration would be issued wholly or partly by reference to the Regulator's opinion that the material detriment test is met in relation to an act or failure,
3. the standard procedure must provide for the following matters.
(1B) The matters are—
1. a requirement for the warning notice to explain the general effect of section 38B, and
2. a requirement for the person to be given an opportunity before the contribution notice is issued to show the matters mentioned in subsection (2) of that section.]
The “standard procedure” is a procedure which provides for–
1. the giving of notice to such persons as it appears to the Regulator would be directly affected by the regulatory action under consideration (a warning notice),
2. those persons to have an opportunity to make representations,
3. the consideration of any such representations and the determination whether to take the regulatory action under consideration,
4. the giving of notice of the determination to such persons as appear to the Regulator to be directly affected by it (a determination notice),
5. the determination notice to contain details of the right of referral to the Tribunal under subsection (3),
6. the form and further content of warning notices and determination notices and the manner in which they are to be given, and
7. the time limits to be applied at any stage of the procedure.
Where the standard procedure applies, the determination which is the subject-matter of the determination notice may be referred to the Tribunal [...] by–
1. any person to whom the determination notice is given as required under subsection (2)(d), and
2. any other person who appears to the Tribunal to be directly affected by the determination.
Subsection (3) does not apply where the determination which is the subject-matter of the determination notice is a determination to issue a clearance statement under section 42 or 46.
Where the determination which is the subject-matter of the determination notice is a determination to exercise a regulatory function and subsection (3) applies, the Regulator must not exercise the function–
1. during the period within which the determination may be referred to the Tribunal [...] , and
2. if the determination is so referred, until the reference, and any appeal against the Tribunal's determination, has been finally disposed of.
…

(6A) Subsection (6B) applies in relation to a warning notice given to a person—
1. in respect of a contribution notice under section 38, or
2. in respect of a financial support direction under section 43.
(6B) Regulations may provide that no determination notice in respect of the contribution notice or the financial support direction may be given after the end of the prescribed period beginning with the day on which the warning notice is given.]
In this section “the Tribunal” , in relation to any reference under subsection (3), means—
1. the First-tier Tribunal, in any case where it is determined by or under Tribunal Procedure Rules that the First-tier Tribunal is to hear the reference;
2. the Upper Tribunal, in any other case.

Section 100 Duty to have regard to the interests of members etc

The Regulator must have regard to the matters mentioned in subsection
–
1. when determining whether to exercise a regulatory function–
  1. in a case where the requirements of the standard or special procedure apply, or
  2. on a review under section 99, and
2. when exercising the regulatory function in question.

Those matters are–
1. the interests of the generality of the members of the scheme to which the exercise of the function relates, and
2. the interests of such persons as appear to the Regulator to be directly affected by the exercise.

Section 303 Service of notifications and other documents

This section applies where provision made (in whatever terms) by or under this Act authorises or requires—
1. a notification to be given to a person, or
2. a document of any other description (including a copy of a document) to be sent to a person.
The notification or document may be given to the person in question—
1. by delivering it to him,
2. by leaving it at his proper address, or
3. by sending it by post to him at that address.
The notification or document may be given or sent to a body corporate by being given or sent to the secretary or clerk of that body.
The notification or document may be given or sent to a firm by being given or sent to—
1. a partner in the firm, or
2. a person having the control or management of the partnership business.
The notification or document may be given or sent to an unincorporated body or association by being given or sent to a member of the governing body of the body or association.
For the purposes of this section and section 7 of the Interpretation Act 1978 (c. 30) (service of documents by post) in its application to this section, the proper address of a person is—
1. in the case of a body corporate, the address of the registered or principal office of the body,
2. in the case of a firm, or an unincorporated body or association, the address of the principal office of the firm, body or association,
3. in the case of any person to whom the notification or other document is given or sent in reliance on any of subsections (3) to (5), the proper address of the body corporate, firm or (as the case may be) other body or association in question, and
4. in any other case, the last known address of the person in question.
In the case of—
1. a company registered outside the United Kingdom,
2. a firm carrying on business outside the United Kingdom, or
3. an unincorporated body or association with offices outside the United Kingdom,
  
  the references in subsection (6) to its principal office include references to its principal office within the United Kingdom (if any).
In this section “notification” includes notice; and references in this section to sending a document to a person include references to making an application to him.
This section has effect subject to section 304.

Insolvency Act 1986

Section 435.— Meaning of “associate”.

For the purposes of this Act any question whether a person is an associate of another person is to be determined in accordance with the following provisions of this section (any provision that a person is an associate of another person being taken to mean that they are associates of each other).
[A person is an associate of an individual if that person is–
1. the individual's husband or wife or civil partner,
2. a relative of–
  1. the individual, or
  2. the individual's husband or wife or civil partner, or
3. the husband or wife or civil partner of a relative of–
  1. the individual, or
  2. the individual's husband or wife or civil partner.]
A person is an associate of any person with whom he is in partnership, and of the husband or wife [or civil partner] or a relative of any individual with whom he is in partnership; and a Scottish firm is an associate of any person who is a member of the firm.
A person is an associate of any person whom he employs or by whom he is employed.
A person in his capacity as trustee of a trust other than—
1. a trust arising under any of the second Group of Parts or the [Bankruptcy (Scotland) Act 2016], or
2. a pension scheme or an employees' share scheme [...], is an associate of another person if the beneficiaries of the trust include, or the terms of the trust confer a power that may be exercised for the benefit of, that other person or an associate of that other person.
A company is an associate of another company—
1. if the same person has control of both, or a person has control of one and persons who are his associates, or he and persons who are his associates, have control of the other, or
2. if a group of two or more persons has control of each company, and the groups either consist of the same persons or could be regarded as consisting of the same persons by treating (in one or more cases) a member of either group as replaced by a person of whom he is an associate.
A company is an associate of another person if that person has control of it or if that person and persons who are his associates together have control of it.
For the purposes of this section a person is a relative of an individual if he is that individual's brother, sister, uncle, aunt, nephew, niece, lineal ancestor or lineal descendant, treating—
1. any relationship of the half blood as a relationship of the whole blood and the stepchild or adopted child of any person as his child, and
2. an illegitimate child as the legitimate child of his mother and reputed father;
  
  and references in this section to a husband or wife include a former husband or wife and a reputed husband or wife [ and references to a civil partner include a former civil partner] [and a reputed civil partner].
For the purposes of this section any director or other officer of a company is to be treated as employed by that company.
For the purposes of this section a person is to be taken as having control of a company if—
1. the directors of the company or of another company which has control of it (or any of them) are accustomed to act in accordance with his directions or instructions, or
2. he is entitled to exercise, or control the exercise of, one third or more of the voting power at any general meeting of the company or of another company which has control of it;
  
  and where two or more persons together satisfy either of the above conditions, they are to be taken as having control of the company.
In this section “company” includes any body corporate (whether incorporated in Great Britain or elsewhere); and references to directors and other officers of a company and to voting power at any general meeting of a company have effect with any necessary modifications.

Pensions Act 1995

Section 75.— Deficiencies in the assets.

This section applies in relation to an occupational pension scheme other than a scheme which is–
1. a money purchase scheme, or
2. a prescribed scheme or a scheme of a prescribed description.
If–
1. at any time which falls–
  1. when a scheme is being wound up, but
  2. before any relevant event in relation to the employer which occurs while the scheme is being wound up,
    
    the value of the assets of the scheme is less than the amount at that time of the liabilities of the scheme, and
2. the trustees or managers of the scheme designate that time for the purposes of this subsection (before the occurrence of an event within paragraph (a)(ii)),
  
  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 subject to subsection (3).
(3) Subsection (2) applies only if–
1. either–
  1. no relevant event within subsection (6A)(a) or (b) occurred in relation to the employer during the period beginning with the appointed day and ending with the commencement of the winding up of the scheme, or
  2. during the period–
    
    (a) beginning with the occurrence of the last such relevant event which occurred during the period mentioned in sub-paragraph (i), and
    
    (b) ending with the commencement of the winding up of the scheme, a cessation notice was issued in relation to the scheme and became binding, and
    
    (b) no relevant event within subsection (6A)(c) has occurred in relation to the employer during the period mentioned in paragraph (a)(i).
Where–
1. immediately before a relevant event (the current event) occurs in relation to the employer the value of the assets of the scheme is less than the amount at that time of the liabilities of the scheme,
2. the current event–
  1. occurred on or after the appointed day, and
  2. did not occur in prescribed circumstances,
3. if the scheme was being wound up immediately before that event, subsection (2) has not applied in relation to the scheme to treat an amount as a debt due from the employer to the trustees or managers of the scheme,
4. if the current event is within subsection (6A)(a) or (b), either–
  1. no relevant event within subsection (6A)(a) or (b) occurred in relation to the employer during the period beginning with the appointed day and ending immediately before the current event, or<
  2. a cessation event has occurred in relation to the scheme in respect of a cessation notice issued during the period–
    
    (a) beginning with the occurrence of the last such relevant event which occurred during the period mentioned in sub-paragraph (i), and<
    
    (b) ending immediately before the current event, 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)–
1. the current event is within subsection (6A)(a) or (b), and
2. 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–
1. a scheme failure notice being issued in relation to the scheme after the current event and the following conditions being satisfied–
  1. the scheme failure notice is binding,
  2. no relevant event within subsection (6A)(c) has occurred in relation to the employer before the scheme failure notice became binding, and
  3. a cessation event has not occurred in relation to the scheme in respect of a cessation notice issued during the period–
(a) beginning with the occurrence of the current event, and

(b) ending immediately before the issuing of the scheme failure notice,

and the occurrence of such a cessation event in respect of a cessation notice issued during that period is not a possibility, or

(b) the commencement of the winding up of the scheme before–
1. any scheme failure notice or cessation notice issued in relation to the scheme becomes binding, or
2. any relevant event within subsection (6A)(c) occurs in relation to the employer.
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.
In calculating the value of any liabilities for those purposes, a provision of the scheme rules which limits the amount of its liabilities by reference to the amount of its assets is to be disregarded. In this subsection “scheme rules” has the same meaning as in the Pensions Act 2004 (the 2004 Act) (see section 318 of that Act).

(6A) For the purposes of this section, a relevant event occurs in relation to the employer in relation to an occupational pension scheme if and when–
1. an insolvency event occurs in relation to the employer,
2. the trustees or managers of the scheme make an application under subsection (1) of section 129 of the 2004 Act or receive a notice from the Board of the Pension Protection Fund under subsection (5)(a) of that section, or
3. a resolution is passed for a voluntary winding up of the employer in a case where a declaration of solvency has been made under section 89 of the Insolvency Act 1986 (members' voluntary winding up).
(6B) For the purposes of this section–
1. a “cessation notice” , in the case of a relevant event within subsection (6A)(a), means–
  1. a withdrawal notice issued under section 122(2)(b) of the 2004 Act (scheme rescue has occurred),
  2. a withdrawal notice issued under section 148 of that Act (no insolvency event has occurred or is likely to occur),
  3. a notice issued under section 122(4) of that Act (inability to confirm status of scheme) in a case where the notice has become binding and section 148 of that Act does not apply,
2. a “cessation notice” in the case of a relevant event within subsection (6A)(b), means a withdrawal notice issued under section 130(3) of the 2004 Act (scheme rescue has occurred),
3. a cessation event occurs in relation to a scheme when a cessation notice in relation to the scheme becomes binding,
4. the occurrence of a cessation event in relation to a scheme in respect of a cessation notice issued during a particular period (the specified period) is a possibility until each of the following are no longer reviewable–
  1. any cessation notice which has been issued in relation to the scheme during the specified period,
  2. any failure to issue such a cessation notice during the specified period,
  3. any notice which has been issued by the Board under Chapter 2 or 3 of Part 2 of the 2004 Act which is relevant to the issue of a cessation notice in relation to the scheme during the specified period or to such a cessation notice which has been issued during that period becoming binding,
  4. any failure to issue such a notice as is mentioned in subparagraph (iii),
5. the issue or failure to issue a notice is to be regarded as reviewable–
  1. during the period within which it may be reviewed by virtue of Chapter 6 of Part 2 of the 2004 Act, and
  2. if the matter is so reviewed, until–
    
    (a) the review and any reconsideration,
    
    (b) any reference to the Ombudsman for the Board of the Pension Protection Fund in respect of the matter, and
    
    (c) any appeal against his determination or directions, has been finally disposed of, and
    
    (f) a “scheme failure notice” means a scheme failure notice issued under section 122(2)(a) or 130(2) of the 2004 Act (scheme rescue not possible).
(6C) For the purposes of this section–
1. section 121 of the 2004 Act applies for the purposes of determining if and when an insolvency event has occurred in relation to the employer,
2. “appointed day” means the day appointed under section 126(2) of the 2004 Act (no pension protection under Chapter 3 of Part 2 of that Act if the scheme begins winding up before the day appointed by the Secretary of State),
3. references to a relevant event in relation to an employer do not include a relevant event which occurred in relation to him before he became the employer in relation to the scheme,
4. references to a cessation notice becoming binding are to the notice in question mentioned in subsection (6B)(a) or (b) and issued under Part 2 of the 2004 Act becoming binding within the meaning given by that Part of that Act, and
5. references to a scheme failure notice becoming binding are to the notice in question mentioned in subsection (6B)(f) and issued under Part 2 of the 2004 Act becoming binding within the meaning given by that Part of that Act.
(6D) Where–
1. a resolution is passed for a voluntary winding up of the employer in a case where a declaration of solvency has been made under section 89 of the Insolvency Act 1986 (members' voluntary winding up), and
2. the voluntary winding up of the employer—
1. is stayed other than in prescribed circumstances, or
2. becomes a creditors' voluntary winding up under section 96 of that Act (conversion to creditors' voluntary winding up), this section has effect as if that resolution had never been passed and any debt which arose under this section by virtue of the passing of that resolution shall be treated as if it had never arisen.
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.
A debt due by virtue only of this section shall not be regarded—
1. as a preferential debt for the purposes of the Insolvency Act 1986, or
2. as a preferred debt for the purposes of the Bankruptcy (Scotland) Act 2016.

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