The Meghraj Group Pension Scheme - Determination notice

Standard procedure - Determination notice under Section 96(2)(d) of the Pensions Act 2004.

The Pensions Regulator case ref: C101257157

The case

The Determinations Panel (the Panel), on behalf of The Pensions Regulator (TPR), met on 5, 6 and 7 February 2020 to decide whether to exercise a reserved regulatory function in relation to the issues raised in a warning notice dated 15 May 2018 (the 'Warning Notice) in respect of Anantkumar Meghji Pethraj Shah (Anant Shah) and Rohin Raja Shah (Rohin Shah) (collectively the Respondents).

Matters to be determined

The Panel was asked to determine whether to issue a contribution notice (CN) under section 38 of the Pensions Act 2004 (PA 04)^[1] to each of the Respondents.

Directly affected parties

The Panel considers the following persons to be directly affected by this determination:

3.1. Mr Anant Shah;

3.2. Mr Rohin Shah;

3.3. Turley Services Limited (formerly Meghraj Financial Services Limited), the sponsoring employer of the Scheme;

3.4. Punter Southall Governance Services Limited, the trustee of the Scheme; and

3.5. The Board of the Pension Protection Fund (PPF).

The remainder of this Determination Notice is divided into the following sections:
- Introduction - paragraphs 5 to 19
- Representation - paragraphs 20 to 24
- Background facts - paragraphs 25 to 131
- Statutory tests under section 38 - paragraphs 132 to 255
- Decision - paragraphs 256 to 257

Footnotes for this section

[1] References to statutory provisions hereafter are to provisions of the PA 04 unless otherwise stated.

Introduction

By the Warning Notice, the Case Team^[2], on behalf of TPR, gave notice that it considered it appropriate for two CNs under section 38 to be issued, one to each of the Respondents. The CNs were sought on a joint and several basis, in the sum of £3,688,108 (plus interest).
The case arises in relation to a group of companies called the Meghraj Group (the Group). One of the companies in the Group, called Meghraj Financial Services Limited (MFSL) was at all relevant times the sponsoring employer of a UK defined benefit pension scheme called the Meghraj Group Pension Scheme (the Scheme). The Scheme is currently in a PPF assessment period following MFSL’s entry into creditors’ voluntary liquidation on 9 October 2014. As at that date the Scheme’s section 75 debt has been estimated by the Scheme Actuary at £5.85 million.
From at least 31 December 2001, MFSL was the sole legal owner of a company called Meghraj Properties Limited (MPL). MPL in turn owned shares in a joint venture company in India. That joint venture company was known by various different names over time; herein we refer to it as the “Indian JV”.
Between 2007 and 2011 MPL received large sums of money from the disposal of its shares in the Indian JV, as well as sums from dividends on those shares. Most of these sums were paid to MFSL and accounted for in MPL’s accounts as paid out by way of dividend.
Most of those payments were then paid by MFSL to its parent company (M.P. Group Limited (a company incorporated and registered in the Isle of Man) (MPGL)). Of those payments to MPGL, some appear to have been used to fund payments to an offshore foundation called the Animegh Foundation and others were paid by MPGL to a company registered and incorporated in Jersey, called Whiteoak Investments Limited (Whiteoak). This was a nominee company of Rohin Shah and the money paid to Whiteoak was paid to it for the benefit of Rohin Shah. The Animegh Foundation was described by Anant Shah in his witness statement as a discretionary settlement for the wider “Shah” family, settled by his brother and from which he said he has received no distribution.
In January 2014, MPL received the last tranche of proceeds from the sale of its shares in the Indian JV. It paid them to another Jersey company, called Paramount Properties Limited (PPL), that was also a nominee for Rohin Shah. The sum paid was £3,688,108 (the 2014 Payment). It was not paid by way of dividend through MFSL and MPGL, but paid directly by MPL to PPL. This is the sum that the Case Team asks the Panel to include in any Contribution Notice (plus interest or a sum equivalent to lost investment returns).
It is this flow of money through companies in the Group, and the agreements and/or understandings that lie behind it, that form the subject matter of this case.
The Case Team argues that at all times until 18 May 2012, MPL’s profits from the Indian JV (including the net proceeds from the sale of MPL’s shares in the Indian JV) were legally and beneficially owned by MPL, and that when they were paid to MFSL this was done by way of dividend. The Case Team argues that these payments thus became the property of MFSL and were available to be paid to its creditors (including contingent creditors such as the Scheme).
By contrast, the Respondents argue that the profits from the Indian JV were never at the free use of MPL or MFSL. They argue that in June and July 2004 the Respondents, acting on behalf of at least MPL and MFSL, entered into a profit-sharing agreement under which the profits from the Indian JV would be split between the two of them (or entities they would choose). The ratio of the split was 80% to Mr Rohin Shah and 20% to Mr Anant Shah. The Respondents stated that this profit-sharing agreement has been performed, without question or dispute, since 2007, when proceeds from the Indian JV began to be received.
They argue that this agreement was varied in 2010 or 2011, to allow Mr Anant Shah to receive an early payment of his 20% entitlement. This meant that he received 40% of the profit from a disposal in 2011, rather than 20%, and gave up his entitlement to 20% of profits on the final disposal (due in 2014).
This difference between the Case Team and the Respondents matters, because on 18 May 2012 MPL and MFSL entered an agreement described as “Agreement relating to the sharing of certain Sale Proceeds” (the 2012 Agreement). Under that agreement, MPL and MFSL agreed, inter alia, “that MFSL shall have no further entitlement to or claim in respect of any Sale Proceeds”. The “Sale Proceeds” are defined as the net consideration from any sale of the entire issued share capital of MFSL or MPL, or the business and assets of those companies. Importantly, those assets are defined as including MPL’s shares in the Indian JV. The 2012 Agreement provided that the party ultimately entitled to such Sale Proceeds was PPL. As noted above, this was a company incorporated in Jersey and was a nominee for Mr Rohin Shah.
The 2012 Agreement either:

16.1. recorded a pre-existing agreement, as varied, as to the division of profits (which is the Respondents’ case) or

16.2. had the effect of depriving MFSL of an entitlement to the Sale Proceeds, thus putting them out of reach of the Scheme (which is the Case Team’s case).
The 2012 Agreement was followed by the 2014 Payment. That payment accords with the provisions of the 2012 Agreement that state that MFSL shall have no claim to the Sale Proceeds, and that it is PPL that is solely entitled to them.
On the Case Team’s case, the 2012 Agreement and the 2014 Payment resulted in the removal of a valuable asset from MFSL, and thus detrimentally affected its ability to meet its liabilities to the Scheme. The Warning Notice therefore seeks the issue of CNs to Rohin and Anant Shah, who were both party to the 2012 Agreement, in the sum of the 2014 Payment (plus interest).
On the Respondents’ case, the value in MPL’s interest in the Indian JV was never an asset of MFSL, and accordingly the Scheme was not detrimentally affected by the 2012 Agreement or the 2014 Payment. They argue that those events simply took place in accordance with the agreement that had been in place since July 2004 (or at least took place in accordance with a non-binding understanding from that time, that had subsequently been ratified by conduct so as to have legally binding effect).

Footnote for this section

[2] The Case Team refers to the team at TPR which handles the case, including preparation of the Warning Notice and the presentation of the case to the Panel.

Representation

The Case Team was represented at the oral hearing by Mr James Walmsley and Mr Nicholas Macklam.
Mr Anant Shah was represented at the oral hearing by Ms Wendy Mathers.
Mr Rohin Shah was represented at the oral hearing by Mr Paul Newman QC. Mr Rohin Shah also gave oral evidence before the Panel and was cross-examined by Mr Walmsley on behalf of the Case Team and Ms Mathers on behalf of Mr Anant Shah.
No other parties were represented at the oral hearing.
We are grateful for the submissions of all representatives, and for the attendance of Mr Rohin Shah before us.

Background facts

The Group was founded in Kenya in 1922 by a Mr MP Shah. In the 1970s it commenced business in the UK. By the 1990s it was ultimately owned and controlled by MP Shah’s sons, Anant Shah and his brother Vipin Shah. Rohin Shah was the son of their sister.
The Shah family are from the Oshwal community, XXXXXXXXXXX Rohin Shah’s Representations described that, in this community, family relationships have a profound significance and that the male line of a family is pre-eminent. Those Representations stated that informal agreements are prevalent in the community, that those agreements are implemented on trust with no or minimal documentation, but that nonetheless they are often considered as binding.
Rohin Shah joined the Group in 1993. By that time he had qualified as a chartered surveyor and worked for Jones Lang Wootton (now Jones Lang LaSalle) for six years. His Representations describe his first role as running a separate division within the Group, using a new company called Meghraj Estates Limited. Rohin Shah was to work on high value property investments, and to form joint ventures with partners in Kenya and India.
XXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXX XXXXXXX XXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXX XXXXXXXXXX XXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXX MPL’s business was the running of a £40 million portfolio of properties. XXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXX.
Once Rohin Shah had joined the Group he set up a business for MPL in India, including informally entering a joint venture with Chesterton International plc (Chesterton). This was formally established as a joint venture between MPL and Chesterton in 1995, with offices in Mumbai and then Delhi. This is the Indian JV referred to above. The Group provided seed capital for the Indian JV, on terms that MPL would pay interest at 15% per annum The Representations record that there were no formal agreements reached at this time as to profit-sharing. It was said this was because it was anticipated profit would not be generated for some time.
In 1995 Rohin Shah became a director of MPL, and the business of Meghraj Estates Limited was transferred to MPL. His father reduced his involvement, and retired in 1999.
By 1999 MPL’s assets under management had increased from £40 million to £200 million, under the control of Rohin Shah. In 1999 he discussed with his uncle Anant Shah the prospect of him purchasing MPL. He sought an informal valuation of it. This valuation excluded the Indian JV which, according to Rohin Shah’s Representations, was because it was already understood to belong to him.
MFSL was incorporated on 27 March 2000 and became the Scheme’s principal employer on 1 January 2001. It also became the immediate parent company of MPL in 2001, from when it owned 100% of the issued shares in MPL. MFSL had no material assets and the Warning Notice states that it was incorporated “in order to deal with the residual employees of the Meghraj Bank”, and that in c. 2001 it acquired the “then still active and viable subsidiaries of the Group’s holding company (MHL)”.

Documentation regarding profit splits: MPL’s UK business

In the event Rohin Shah did not purchase MPL but in 2000 a written document entitled “Heads of Terms” was drawn up. It defined “Shareholders” as “Meghraj Holdings Limited, their successors and their assignees.” It defined “Management” as Rohin Shah and Mr P Bhalla. Mr Bhalla was a colleague of Rohin Shah who worked in MPL’s UK business at that time.
The Heads of Terms defined MPL as “the UK business of Meghraj Properties Limited only excluding the existing joint ventures (JVs) in India (Chesterton Meghraj and India Property Research) and Kenya (Ryden Meghraj)”.
The Heads of Terms primarily dealt with the UK business of MPL, but also referred to the Indian JV. It recorded as follows:

“The following Agreement has been reached on 12 December 2000 between the Shareholders and Management in connection with bonus allocations and working arrangements for MPL.

1. Management will run MPL on a day to day basis reporting to the Shareholders up until end 2000 at formal board meetings and as from 1 January 2001 at regular management meetings.

2. The Shareholders will provide marketing and financial support to Management during the Term [defined as 1 January 2000 to 31 December 2002] by way of Shareholders’ Funds [defined as £200,000], Interest Free Debt [defined as £130,000] and the services of MMU [defined as the Meghraj Marketing Unit].

3. The key objectives of Management will be to maximise the profits of MPL in line with an agreed business plan and budget. …

4. The Shareholders’ intention is to hold MPL as an investment for the Term and thereafter not to consider a sale until the wishes of Management have been duly taken into account.

5. Management will provide a prior return to the Shareholders of 15% on Shareholders’ Funds taken from the profits of MPL as audited by the Auditors.

…

9. Management will manage and regularly report to Shareholders on the JVs and will spend a total time of no less than 4/5 weeks per annum on the India JVs and 3/4 days per annum on the Kenya JV. The reasonable costs (including travelling and accommodation costs) for managing these JVs are to be taken from the MPL expense account in line with the agreed budget. Remuneration/reimbursement for any time and cost that is spent in excess of these approximate times will be the subject of further discussion between the parties. Any capital needed to fund these businesses will be provided by the Shareholders in accordance with the agreed budgets for the respective businesses at no further cost to Management or MPL.

Similarly, any flows of capital and income from the JVs will be credited to the Interest Free Debt account. Any disputes in connection with these JVs should be dealt with as shown in point 12 below.

10. Any budgeted profits remaining after the Shareholders prior return will be available for distribution on the basis of the balance being split in 3 equal proportions between the Shareholders, R R Shah and P K Bhalla. If profits exceed the budgeted figure, the split of the excess will be 20% Shareholders, 80% Management.

…

12. Any dispute arising between the Shareholders and Management should at first be resolved by A M P Shah and R R Shah and failing agreement, by MPL’s Auditors, the cost of which is to be borne by MPL and whose decision will be binding and final.”
The document was signed by Anant Shah, on behalf of the “Shareholders”, and Rohin Shah on behalf of “Management”.

Implementation: UK business

Rohin Shah’s Representations state that “in some cases a little less than 80% was received by RS [ie Rohin Shah] and PB [ie Mr Bhalla]: this was because they had made payments from their share to charities and/or staff”.
Rohin Shah’s Representations say that from 2000 onwards, his understanding and that of his uncles was that the UK business of MPL “was to be RS’ business beneficially”. The shares were still legally owned by a company, but “everyone understood and acted on the basis that it was beneficially owned by RS (in the same way as was the case with the Indian JV)”.
In 2006 Mr Bhalla left MPL and Rohin Shah’s Representations state:

“From then onwards RS received the entire 80% split of profits, which was paid to him and shared with MPL staff at his discretion.

In terms of agreeing the precise amounts to be paid under the “80:20” split, the practical application was as follows: from approximately 2000 to 2006, Michael Howell (who was Company Secretary to MFSL, accountant to the Meghraj Group and whose firm AIMS was auditor to the Scheme) prepared end of year profit split calculations based on figures in the management accounts and submitted them to RS for agreement. RS then arranged for the payments to be made by MPL. From 2006 onwards, RS’ accountant Upen Shah fulfilled this task and sent the figures to Michael Howell for approval before payments were made. Payments of RS’ 80% share were made to him through MPL’s payroll, with the remaining 20% being paid by dividend to MPL’s parent company. The essential “80:20” split of MPL’s UK profits continued throughout.”
We note that although the contents of paragraph 39 set out above were not in issue in the case (unlike the practice in relation to profits from the Indian JV), the Panel did not have before it any of the documents that would have been produced by the process they describe. Those would have included the profit split calculations and records of the payments actually made.
Rohin Shah’s witness statement adds to this description: “PB and I received the full 80% profit from MPL’s UK business throughout via PAYE, until PB resigned and thereafter I received the whole 80% share, although again in some years the payments I received were not exactly 80% of profits because I directed that some of this be paid to my staff or to charity. There was no dispute between PB and myself over this profit split and there was no dispute between AS and myself over this profit split for over 13 years. AS took his 20% share via MFSL as a dividend or management charge”.

Documentation regarding profit splits: MPL’s JV business

As regards the Indian JV, in 2004 Chesterton agreed to sell its 45% stake in the Indian JV to MPL and to a nominee company for Rohin Shah’s business partner in India. At this time the Indian JV was not profit making, and the purchase price was £40,000.
This apparently prompted discussions about the ownership structure of the Indian JV and about profit sharing. This in turn resulted in an oral agreement or understanding between Rohin Shah and Anant Shah in 2004, which is evidenced by a handwritten note on Anant Shah’s personal notepaper that contains two entries. The first is dated 17 June 2004 and the second “19/07/04”. They read as follows:

“17 June 2004

Dear Rohin,

OUR ARRANGEMENTS

I have been deliberating on the way we have been working at MPL and CMI. I have seen that your role has been a very active one, whilst I spend most of my time on PR – I am satisfied that our interaction has worked.

So, I thought we should formalise our arrangement from the time we started this new arrangement early last year. My suggestion is that you and I work on a 76% / 24% division of profits (both income and capital) from MPL + CMI. Let me know what you think.

Yours, Anjumama

19/07/04 Met Rohin – he had certain reservations re the split. Finally agreed 80 / 20 from 01/01/2003 with a prior return to MFSL for 2003 + 04 of £30,000 then straight split of the remainder, ie 80 / 20. He also said this should apply to anyone or entity he designates – I said ok.”
Both Anant Shah and Rohin Shah state that this note evidences a legally binding agreement that was entered into in 2004. The Warning Notice denies that the note had legally binding effect, or recorded an agreement that had legally binding effect, and that at best the note records the “loose intentions” of Anant and Rohin Shah regarding profit distributions. The Case Team’s position at the hearing was that Anant Shah and Rohin Shah had at most an understanding, before 2012, that profits from the Indian JV would be shared 80/20 between them.
In this Determination Notice we refer to the note as the 2004 Note (mirroring the definition used in the Warning Notice and Rohin Shah’s Representations). We refer to the agreement or understanding reached in June and July 2004 as “the 2004 Arrangements” in order not to prejudge the issue of whether it was a legally binding agreement. We consider that issue below.

The Scheme, and liabilities of the Group towards it

As noted in paragraph 32 above, MFSL became the Scheme’s principal employer in January 2001. Anant Shah was MFSL’s sole director from 10 August 2010 to its dissolution in August 2019 and a director of MFSL from 2000 onwards.
The Scheme was established in July 1987 by a company called Meghraj Group Limited. This company was the Scheme’s first trustee. From 22 June 2001 to 27 June 2006 the Scheme’s trustee was a company called Meghraj Pension Trustee Limited, whose directors included Rohin Shah and Michael Howell (from 3 September 2001 to at least 30 June 2006). On 27 June 2006 an independent trustee became sole trustee of the Scheme, called PS Independent Trustees Limited (PSIT). It remains the trustee of the Scheme (it is now called Punter Southall Governance Services Limited).
MPL became a participating employer of the Scheme from 1 July 1987 and employed 5 scheme members until 31 December 2004. The Warning Notice explained that there was a potential dispute as to whether MPL is an “employer” for the purposes of section 75 of the Pensions Act 1995 and Part 3 (Scheme funding) of PA 04. In turn this would affect whether MPL had or has any liability to pay a debt to the Scheme calculated under section 75 of the Pensions Act 1995 or to contribute to the Scheme under the Scheme’s schedules of contributions formulated in compliance with Part 3 of PA 04.
At the hearing the Case Team took the position that MPL is not an “employer” for these purposes, but that the Panel need not determine this issue. Neither Respondent disagreed, and the Panel was content to proceed on this basis. However, it is important for an understanding of the facts of this case that at material times it was understood by professional advisers to Anant and Rohin Shah that there was at the very least a risk that MPL was a statutory employer of the Scheme and thus liable under schedules of contributions and/or for any section 75 debt. This can be seen for example in the notes of a meeting of 29 June 2011, attended by Rohin and Anant Shah and four advisers, where the following is recorded:

“AS [Anant Shah] mentioned that – as per the advice they had received some time ago through a lawyer – even though there is no formal deed to this effect, MPL is nevertheless a “participating employer” within the overall Meghraj pension scheme arrangement and that there could thus be ‘joint and several’ obligation. MPL began to participate in the pension scheme from 1 July 1987.”
In addition to MPL’s potential liability to the Scheme under statute, the Warning Notice states that under the Scheme’s Rules MFSL could have requested additional contributions for the Scheme from MPL. The Warning Notice states, at paragraph 10 of Appendix 6:

“TPR has not reviewed all documentation relating to the Scheme but notes that as the Scheme rules provide that “Each Employer shall pay to the Trustees such further contributions as the Principal Employer decides, having considered the advice of the Scheme Actuary”, it would have been open to MFSL as principal employer to require MPL to make additional contributions to the Scheme. As such, TPR submits that:

10.1 Prior to entry into the 2012 Agreement, Anant Shah, as director of MFSL, could have requested that additional contributions be paid directly to the Scheme by virtue of MFSL’s power as principal employer under the Scheme’s contribution rule;

10.2 Post entry into the 2012 Agreement, Anant Shah, as director of MFSL, still exercised a degree of financial control over MPL, in that it could still require MPL to make additional contributions to the scheme. …”
Anant Shah’s Representations on the Warning Notice did not respond to this submission (although we note that those Representations said that Anant Shah’s limited means meant that he was not in a position to review the Appendices to the Warning Notice in detail).
Rohin Shah’s Representations and witness statement assert that in 2004 it was agreed between him and Anant Shah (representing at least MFSL) that because MPL’s five employees in the Scheme were shortly to transfer out of it, Rohin Shah should step down as a member-nominated trustee and MPL would cease to make contributions to the Scheme. Rohin Shah states that Anant Shah assured Rohin Shah that MPL would have no remaining liability to the Scheme.
On 1 July 2006 Rohin Shah, Anant Shah and Vipin Shah (Anant’s brother) signed a document headed “Option Agreement”, under which MFSL promised to grant an option to purchase the issued share capital in MPL to a nominee company of Rohin Shah (called Saffron Capital Limited (Saffron)), for £1. Rohin Shah signed on behalf of Saffron, Anant Shah signed on behalf of MFSL, and Vipin Shah signed on behalf of the parent company of the Group (MP Group Limited).
Clause 2 of this agreement provided “In the event that the above option is exercised [MFSL] and [MPGL] agree jointly and severally to indemnify [Saffron] for any claims made against [MPL] or [Saffron] in connection with past, current or future pension liabilities arising in any form in connection with the Meghraj Group Pension Scheme.” The agreement concluded “By signing this Agreement, [MFSL] agrees this document represents the Parties’ intentions subject to execution of legally binding documentation.”
Rohin Shah’s witness statement records that he prepared this “Option Agreement”, without legal advice, with the intention that the indemnity in it would be effective from the date the agreement was signed. In the event the option was not granted or exercised, but Rohin Shah relies on it as evidence of his belief that the Group had accepted liability for the Scheme, to the exclusion of MPL. It is of note that PSIT has told TPR that it was never informed of this Option Agreement.
The Scheme’s deficit has grown over time. The following figures are taken from Appendix 6 to the Warning Notice, and were not challenged by the Respondents:

56.1. As at 1 January 2002: surplus on the Ongoing Basis of £245,000; surplus on the Minimum Funding Requirement (MFR) basis of £584,000.

56.2. As at 1 January 2005: deficit on the ongoing basis of £634,000; surplus on the MFR basis of £972,000; deficit on the buyout basis of £3.8 million.

56.3. As at 1 January 2007: deficit on the ongoing basis of £310,000; deficit on the buyout basis of £4.2 million.

56.4. As at 1 January 2010: deficit on the ongoing basis of £2.4 million; deficit on the buyout basis of £4.8 million.

56.5. As at 1 January 2013: Valuation not completed as MPL and MFSL entered liquidation on 9 October 2014.

Share sales and implementation of the 2004 Arrangements

As noted above, in 2004 Chesterton sold its interest in the Indian JV to MPL and a company belonging to Rohin Shah’s business partner in India (Sundown Developments Limited, hereafter Sundown).
The following year, 2005, an American company called Trammell Crow acquired 30% of the shares in the Indian JV for $800,000. A news report of this acquisition described the Indian JV at that time as “India’s leading property services company”. The Indian JV changed its name from Chesterton Meghraj Property Consultants Pvt Limited to Trammell Crow Meghraj Property Consultants Private Limited, and its shares were held as follows:

58.1. Sundown: 30%

58.2. MPL: 30%

58.3. A trust for the Indian JV’s employees: 10%

58.4. Trammell Crow: 30%
Rohin Shah’s witness statement describes how the majority of the proceeds from the share sale to Trammell Crow was used by MPL to repay loans to Group companies, and third party creditors. It states that the remaining balance was split 80:20 in accordance with the 2004 Arrangements, with Rohin’s share being paid through MPL’s payroll. It states that from then on, financial ties between Rohin Shah and the Group had all but disappeared. However, MPL remained a 100% wholly owned subsidiary of MFSL and thus ultimately also of MPGL.
In October 2006, CBRE acquired Trammell Crow, which resulted in MPL exercising an option to acquire Trammell Crow’s interest in the Indian JV. This resulted in a valuation of that interest, revealing that it had increased from the $800,000 paid by Trammell Crow to $16 million.
In order to fund the acquisition of Trammell Crow’s shares in the Indian JV, MPL and Sundown entered into a Memorandum of Understanding with Jones Lang Lasalle Inc (JLL) on 14 March 2007 under which the parties agreed:

61.1. a merger of the business of JLL in India and the Indian JV,

61.2. JLL would provide the funding for the purchase of Trammell Crow’s shares in the Indian JV, by way of loan, and

61.3. over three phases, JLL would acquire the entirety of the issued shares in the Indian JV. Thus JLL would buy out the interests of MPL, Sundown and the Employees Trust. This MOU provided that the first phase (under which JLL would acquire 44.8% of the shares in the Indian JV), would take place within 10 working days of the acquisition of shares from Trammell Crow. The second phase was to take place by 31 March 2010 (resulting in JLL acquiring a further 15.2% of the shares in the Indian JV), and the third and final phase was to take place by 31 March 2012.
This MOU led to various agreements entered into on 6 June 2007:

62.1. a Share Purchase Agreement between MPL, Sundown, the Employees Trust and Trammell Crow, providing for the acquisition of Trammell Crow’s shares in the Indian JV;

62.2. a credit agreement governing the loan of funds by JLL for that acquisition;

62.3. a sale and purchase agreement, providing for the “phase one” sale of shares to JLL at a price of £13.9 million (of which £5,975,567 was stipulated in Schedule 1 as due to MPL);

62.4. a Shareholders’ Agreement; and

62.5. an Amalgamation Agreement.
The last three of these agreements were in the papers before the Panel, and all were signed by Rohin Shah on behalf of MPL. The first two of these agreements were not in our papers, but were referred to at Recitals B and C of the Shareholders’ Agreement.
The first phase of the share sales governed by these agreements took place in November 2007. Rohin Shah has confirmed to the Case Team, by way of a response to a request for information under section 72 PA 04, that in the year ended 31 December 2007 MPL received a net gain from the sale of these shares in the Indian JV of £1,484,431. Of that, he stated that £1,175,000 was received by his nominated entity, Whiteoak Investments Limited. He later corrected this to say that it was received by another of his nominated entities, called Lotus Trust. The share received by Rohin Shah’s entity amounts to 79.1% of the net gain.
In 2008 a scheme of amalgamation in relation to the Indian JV was sanctioned by the High Court in Delhi, leading to a revision in the shareholdings in the Indian JV. These revised percentages were recorded in a new Shareholders’ Agreement in 2009, which also described the scheme of amalgamation and specified new dates for JLL’s acquisition of the shares in the Indian JV. These dates were again revised by an amendment to the Shareholders’ Agreement, entered into in 2010. These documents were also signed by Rohin Shah on behalf of MPL. His witness statement describes that the extensions to these dates were at the request of JLL, as the merged business was more successful under the management of Rohin Shah and his partner than had been anticipated.
The revisions to the share acquisition dates meant that what had been agreed as second and third phases were split up and restructured into three new phases:

66.1. Phase 1 – some 8% of the shares in the Indian JV were to be acquired by the end of March 2010, with JLL having a Call Option over those shares for the period of October 2009 and the existing shareholders (including MPL) having a Put Option over the same shares for the period of November 2009, subject to the Indian JV reaching a minimum EBITDA and with the share sale price to be calculated based on the Indian JV’s EBITDA in 2009;

66.2. Phase 2 – 50% of the remaining shares in the Indian JV were to be acquired by 20 May 2011, with JLL having a Call Option over those shares for the period of December 2010 and the existing shareholders (including MPL) having a Put Option over the same shares for the period of January 2011, subject to the Indian JV reaching a minimum EBITDA and with the share sale price to be calculated based on the Indian JV’s value as at 31 December 2010;

66.3. Phase 3 – the remaining shares in the Indian JV were to be acquired by 31 March 2014, if the existing shareholders (including MPL) exercised a Put Option granted to them and to be exercised during the period of January 2014, subject to the Indian JV reaching a minimum EBITDA and with the share sale price to be calculated based on the Indian JV’s fair value as at 31 December 2013 (with a minimum share sale price of that used for the phase 2 shares).
Phase 1 duly occurred in March 2010, and Rohin Shah’s section 72 Response to TPR stated that this led to a net gain for MPL of £1,573,925, of which Rohin Shah’s nominated entity, Whiteoak, received £1,037,776 (amounting to 66% of the net gain).
In June 2010 or March 2011 Rohin Shah and Anant Shah met and discussed the fact that the rescheduling of share purchase dates meant MPL would not receive its final payment for its shares until 2014, and thus MFSL would not receive its 20% of that final payment until the same time. Anant Shah wished this to occur earlier. Accordingly, Rohin and Anant Shah agreed that MFSL would receive an early payout of its 20% share of the proceeds of sale of MPL’s remaining shares in the Indian JV. This early payout was to be funded from the net proceeds received in 2011, with the effect that MFSL would receive 40% of those sale proceeds (rather than 20%) and would receive none of the proceeds received in 2014.
There is a conflict of evidence between Rohin and Anant Shah as to whether this agreement occurred in June 2010 (Rohin Shah’s evidence) or March 2011 (Anant Shah’s evidence). However, both agree that the effect of these discussions was an agreement between the two of them that MFSL would receive 40% of the 2011 sale proceeds and none of the 2014 proceeds. Anant Shah’s witness statement describes that he “wanted MFSL to take its money out of the Indian JV as soon as possible.”
We did not consider it necessary to resolve the conflict of evidence as to the date of these discussions. Hereafter we refer to this agreement to change the entitlements as the “2010/2011 Variation”.
Potentially more significant is a conflict of evidence as to whether, as part of the discussions, Anant Shah explained to Rohin Shah the Group’s obligations to the Scheme at this time. Anant Shah’s position is that this was discussed; Rohin Shah disagrees. We address below the issue of the Scheme and the parties’ intentions towards it.
Anant Shah exhibited a note apparently recording these discussions in 2011. Rohin Shah stated that he did not recognise much of this, and Anant Shah accepts at least one entry is incorrect (stating “I get my 2% of 10% now”, which he states to be an error for 20%). Although the Panel received some submissions on this note, it was unable to derive great assistance from it. It does include an entry that appears to record that net sale proceeds from MPL were to be paid to the Animegh Foundation and Whiteoak by means of payments through MFSL and MPGL, but also recognises the potential for MFSL to be liable for Capital Gains Tax when MPL is sold:

“16/06/11. RRS. a) Take all the money out from MPL (less fees …) -> MFSL -> MPGL -> Animegh + Whiteoak. b) He will bring MPL onshore c) I will be left with MFSL + MPGL d) Queries: How to avoid CGT for MFSL if MPL sold for value.”
In or about June 2011 MPL received net sale proceeds from the sale of its phase 2 shares in the Indian JV. Rohin Shah’s section 72 Response to the Regulator stated that this amounted to £5,244,116, of which his entity received £2,810,657 (54% of the net gain).
As regards the route used to pay this money to Whiteoak, it is common ground that it was not paid direct from MPL to Whiteoak but instead was paid by MPL to MFSL, and then to MPGL, and then transferred to Whiteoak. This was the practice for Whiteoak’s receipts in 2010 and 2011.
Rohin Shah’s witness statement describes this practice:

“For the first three tranches of the JLL buy out (2007, 2010 and 2011), my share of the capital proceeds from the Indian JV (80% in 2007 and 2010 and 60% in 2011 …) was distributed up the corporate chain (from MPL to MFSL to MPGL) before being paid by MPGL to my nominated company, Whiteoak Investments Limited (Whiteoak), under an offshore corporate structure that was set up in 2007. This was because the Uncles required (and I had no reason to refuse) that my share be paid in this way in order that they could obtain their share (20% in 2007 and 2010 and 40% in 2011) as it flowed up the Group corporate chain and retain it at whichever level they chose and I could use my offshore company.

This differed from payments of income from the Indian JV. My 80% share was paid to me from the first time it was available in 2009 through MPL’s payroll. My 80% share of the capital proceeds from the sale of shares in the Indian JV to Trammell Crow in 2005 (after repayment of Group lending) was also paid to me through MPL’s payroll, as I had not set up any offshore corporate structure for the payment to be made to at that time. 80% of the income from the Indian JV continued to be paid to me through MPL’s PAYE from 2009 onwards at my discretion.”
In his second witness statement Rohin Shah corrected this description in relation to the 2007 payment. He described this being paid to his “trust vehicle” (called Lotus Trust) in 2009, via the Animegh Foundation.
We have already noted that in fact the evidence shows that in 2007 Rohin Shah’s nominated entity received 79% of the capital proceeds rather than 80%, in 2010 it received 66% rather than 80%, and in 2011 it received 54% rather than 60%.

We did not have evidence from payroll records of MPL with which to confirm the position regarding the capital proceeds in 2005, or payments of income from the Indian JV. MPL’s accounts are relevant however, as they record the following dividends receivable by MPL (which can only have come from the Indian JV), directors’ remuneration, and number of directors:

Year	Dividends receivable	80% of dividends receivable	Directors’ remuneration	No. of directors in year
2009	£575,236	£460,189	£481,313	3
2010	£964,084	£771,267	£467,496	3
2011	£319,346	£255,476	£643,388	3
2012	£111,686	£89,348	£290,135	3
2013 [draft]	£135,187	£108,150	£440,135	3

We should note that in his witness statement Rohin Shah accepted that the sums he received did not always add up to 80% of the total profit, as he shared some of his “80% portion” with “the MPL team and various charities”. We were not provided with paperwork showing that to be the case.
It is also convenient at this point to record that the Case Team adduced late evidence (with the consent of Rohin Shah) in the form of an Outline Disclosure Form pursuant to Code of Practice 9 provided by Rohin Shah to HMRC on 23 November 2018 and an extract from a Disclosure Report prepared by BDO into the UK Tax affairs of Rohin Shah, dated 18 December 2019. These documents show that Rohin Shah did not report to HMRC the gains he made on the sale of shares in the Indian JV, and that his deliberate conduct had led to an underpayment of tax.
These documents describe the Indian JV, and the 2004 Arrangements. The latter is described as a profit share agreement between Rohin Shah and his uncles. Its implementation is described, as regards the share sale proceeds in 2007, 2010 and 2011, as involving payments up through MFSL, MPGL and then to Whiteoak under a consultancy agreement. That was described as “simply a mechanism for me to receive my share of the sale proceeds in 2007, 2010 and 2011”.
BDO’s report asserts that all parties understood that Rohin Shah had a beneficial interest in the Indian JV. This meant that Rohin Shah, not MPL, was entitled to 80% of the dividends from the Indian JV when they began to be declared. In fact, BDO state, he waived his share in some dividends so that MPL staff could benefit. As regards the share sale proceeds, BDO’s report confirms that the accounts of MPL and MFSL record these as dividends, and confirms that the payment to PPL of the 2014 Payment took place on 21 January 2014.

Communications with the Trustee of the Scheme

Our papers included evidence of a number of communications between MFSL as principal employer and PSIT as the Scheme’s trustee. They were written or made by Anant Shah. The Panel was most concerned to see that these communications did not reveal the true value of MPL’s interest in the Indian JV, despite being sent on occasions when MFSL had received and was expecting to receive significant sums as a result of the sale of MPL’s interest.
As an example, on 16 February 2008, Anant Shah wrote to PSIT saying that contributions of £9,900 per month, as requested by the trustee, were not affordable: “In the present economic conditions, the performance of our main subsidiary [MPL] has been such that management charges and dividends expected over the foreseeable future will not enable a contribution of this size to be made”. This ignored the sums MFSL had received in 2007, and was expecting in 2010 and 2012, from the Indian JV.
PSIT has confirmed that discussions regarding the 2010 Valuation were all held with Anant Shah. PSIT states that on 23 September 2010 Anant Shah informed PSIT that “the companies” had little value but the “shareholders” would fund the scheme out of moral obligation to former employees of Meghraj Bank who were now Scheme members.
This message that MFSL and MPL had little value was apparently consistently given by Anant Shah to the trustee. It was stated in a letter from Anant Shah to PSIT of 8 February 2011, which states that MFSL “broadly relies” on shareholders’ funds to meet pension liabilities. As the Warning Notice says, this is not borne out by MFSL’s accounts, which do not show funds from MPGL by way of loan or equity and instead suggest that money from MPL was used to pay MFSL’s pension liabilities.
This letter of 8 February 2011 confirms that PSIT had received financial statements for MPL and MFSL for the year ended 31 December 2009. PSIT comments on these accounts that “these do not reflect any income from [the Indian JV]^[3]. Neither were we made aware of the 2010 sale and cash received by [MPL] during the negotiations. Indeed AS did not reveal any information about cash receivables or the prospect of future cash receipts arising from [the Indian JV].” PSIT therefore proceeded without knowledge of these matters, and has stated that the recovery plan agreed in relation to the 2010 Valuation “appears inappropriate in light of the subsequently discovered value of [the Indian JV]”.
Rohin Shah noted these communications by Anant Shah in his Representations, stating that he was not aware of them. Anant Shah appears to dispute this, as his witness statement includes “Rohin Shah was kept fully advised at all times on all material matters relating to the Scheme.”

Discussions regarding extracting MPL from the Group

From mid-2011 Rohin Shah, Anant Shah and various professional advisers discussed the relationship between MPL and MFSL. Rohin Shah’s witness statement says that in or around 2010 he had considered exercising the option under the Option Agreement, but this would have resulted in a significant capital gains tax liability in India. This apparently then led to work between Rohin Shah’s accountants (Godley & Co, XXXXXXXXXXXXXX) and Rohin Shah on alternative structures to separate MPL from the Group.
Our papers contained notes of a meeting apparently held on 29 June 2011. They begin by recording that the meeting had been called by Rohin Shah to explore ways of extracting MPL from “the MFSL Group”. Although headed “Draft” Rohin Shah’s Representations confirm that these notes record discussions about splitting MPL from other Meghraj companies.
The notes begin by recording that MPL’s final tranche of payment for its shares in the Indian JV was not due until April 2014, and its amount was at risk. Anant Shah “mentioned that [MPGL] had been expecting to obtain 20% of the sale consideration figure from MPL in respect of the originally proposed sale of the remaining 10% in [the Indian JV]. However, if MPL is sold by MFSL, then [MPGL] would be expecting 40% of the current sale proceeds.” This appears to evidence the variation to the 2004 Arrangements described above, as well as an expectation that the 20% share of the sale proceeds would ultimately be received by MPGL.
The meeting discussed the Scheme, and the notes record the latest advice Anant Shah had received that contributions would be required of £180,000 per annum for ten years from April 2011, as the deficit had increased to £3 million as at December 2010. Anant Shah is recorded saying that he would “probably like to wind-up MFSL once MPL has been sold”.
The notes then state “the pension fund trustees could question the flow of the dividends from MPL to MFSL to MPG” (emphasis added). We note this description of the payments as “the dividends”, which accords with their description in the accounts of MPL, MFSL and MPGL, but is in some tension with the payments being profit shares.
The notes continue:

“the next valuation update (re the pension fund) will be in March 2014”. They then refer to the advice that MPL might be jointly and severally liable for Scheme liabilities. Finally, the notes refer to a proposed structure to extract MPL from the MFSL group. This involved MPL being transferred from MFSL to a Newco, to be owned by MPGL, which would eventually be acquired by a new offshore trust. The discussion of this structure included reference to the 40% share of the 2011 share sale proceeds being the property of MPGL. It also includes discussion of an undertaking to meet any shortfall in the pension scheme, to be given by MPGL or a new holding company for MFSL (the notes and accompanying slides are not clear which company was proposed to grant the undertaking). The notes conclude “AS to take appropriate advice both in relation to the company law and pension law”.
In the event MPL was not extracted from the Group, but this was apparently still a possibility on 12 December 2011 when MFSL’s solicitor, Mr Glenn Hurstfield, emailed a company law solicitor called Adam Bradley to brief him before a meeting scheduled to take place with Anant Shah and his accountants on 15 December 2011.
The email describes how Anant Shah was the sole director of MFSL, which ran the Scheme and had a single asset, namely MPL. It describes that MPL (wrongly referred to as Meghraj Property Services Limited) has little of value save for a 10% stake in the Indian JV. It refers to Mr Hurstfield having asked Mr Bradley for advice earlier in 2011 as to whether Anant could, as director of MFSL, pay the 2011 share sale proceeds from MFSL to MPGL as a dividend (after retaining money to cover MFSL’s pension obligations to 2014) and how Mr Bradley had agreed this could lawfully be done as a matter of company law.
The email then describes an issue that had arisen, due to the delay in receiving the final tranche of share sale proceeds until 2014. This was also the year when the “pension review date” was due (ie the triennial valuation, in turn leading to calculation of the Scheme’s deficit and to a new schedule of contributions). A higher deficit and new schedule of contributions was likely to mean that the 2014 sale proceeds could not be paid by MFSL to MPGL as a dividend, because the retention required to meet liabilities to the Scheme from 2014 onwards would mean no sale proceeds were left to be paid as dividends.
The email then suggests how to address this issue:

“Now the success of the JLL venture has been due largely to Rohin’s personal endeavours and it was agreed many moons ago that he should receive 80% of the net proceeds of sale of the JLL holding with MFSL receiving 20%. This 20% was of course received last year so arguably the entire balance is due to Rohin (or rather to Rohin’s consultancy company which contracted with [MPGL] to do this deal.)

Originally the idea was that [MPL] would be transferred/sold to Rohin at book value (a figure of £4 million has been calculated) and thereby the ownership of the remaining JLL stake would become his but given the current state of play with MFSL’s potential future pension obligations in 2014, Rohin understandably wants his money but without him being saddled with the pension debts.

His accountants have therefore come up with a scheme whereby Anant would early next year sell [MPL] to another offshore company for £4m so that the JLL investment becomes payable to the offshore company and not [MPL].

The £4m would then flow into MFSL but as the pensions review isn’t until 2014 and Anant has already provided for the agreed pensions contributions until then, the accountants argue that the £4m is again a valid distributable reserve so it too can be paid through to [MPGL] and then on to Rohin’s offshore consultancy company. Anant is then left with MFSL being worth nothing.

Even if the proposed scheme works from a tax and practical point of view I am now [this must be an error for “not”] comfortable as Anant is being asked to connive in an artificial arrangement simply to remove the JLL investment ahead of the payment date, thereby disposing of a valuable asset which could (IF further pension contributions are ordered in 2014) have been used to fund any ongoing shortfall.

As I say, Anant has not given any personal guarantees but in his capacity as director, I fear he may be acting ultra vires and thus expose himself to sanctions of [this must be an error for “if”] he agrees to the sale of the [MPL] shares when he has constructive knowledge of what the sale is designed to achieve. I would much prefer he exhibits the agreement/Memo of Understanding between [MPGL] and Rohin as evidence that the [MPL] share of JLL is of no value as this has already been contractually pledged by [MPGL]”.
It should be recalled that at this time the parties understood that MPL could be liable for Scheme liabilities as a statutory employer of the Scheme. It may be that the reference to being “saddled” with pension debts is a reference to what were seen as MPL’s pension liabilities, which Rohin Shah would take on if he bought MPL.
The email shows that, among the advisers at least, the Scheme was recognised as a significant contingent creditor of MFSL. It also shows recognition that the current retentions to meet Scheme liabilities were very likely to be insufficient, and from 2014 MFSL would be likely to have to increase its payments to the Scheme.
The email is less clear on the critical issue of whether the 2004 Arrangements were legally binding or not. It describes MFSL’s interest in MPL as “a valuable asset which could ... have been used to fund any ongoing shortfall”. However it also refers to the 2004 Arrangements as an agreement that MFSL should receive only 20% of the proceeds from the Indian JV, which had happened by December 2011, and says the 2004 Note “between [MPGL] and Rohin [can be used] as evidence that the [MPL] share of JLL is of no value as this has already been contractually pledged by [MPGL]” (emphasis added).
On 15 December 2011, three days after this email, a meeting was held between Rohin Shah, Anant Shah and advisers including Mr Hurstfield and Mr Bradley. The note of this meeting begins:

“1. Memorandum of Understanding re split of income of MPL 20:80 in RS’s favour. This is an important document that underpins the whole argument of why we are doing what we are doing i.e. that it represents a historical contractual agreement which it is not possible to sidestep and just be ignored, in case there was any comeback from the pension fund trustees and/or the pension fund regulator.

2. There is historical proof of extraction of funds 20:80 which should give further credence to the above mentioned MOU.

3. The MOU should now be put onto a proper legal footing and so that it records the ‘understanding’ from the original date (“MOU Legal”).

4. [Vipin Shah] mentioned that we would need to check up on the tax implications for RS of having MOU Legal.

5. [Adam Bradley] and [Nick French, described as a pensions expert] both mentioned that the pension scheme trustees’ requirements should be satisfied and NF’s suggestion was that, once, the above mentioned MOU Legal is in place, that the trustees should be approached and the proposed transaction to take out the current market value of MPL (c.£4m, say) explained to them and, in this manner, it is then in the clear that the transaction was entered into with their full knowledge.

6. [Anant Shah] said that the current arrangement with the pension fund trustees was for ten years from 2011 and that the next review date was by 31.3.2014 ... but that it was only required to provide for one year’s liability in the accounts ...

7. It was mentioned that the ‘fair’ valuation of MPL should be carried out by an independent body and this, too, should be shown to the pension fund trustees.

8. The sale of MPL should create distributable reserves and it should not matter that whether cash or cash receivable is divi up by MFSL etc.

9. The pension fund trustees had seen the accounts of MFSL when the agreement to reserve £180k per annum was reached earlier this year.

However, the JLLPC (India) investment is only shown at £80,000 book value in the accounts of MPL.

…

14. In conclusion, it was agreed that (i) the drafting of MOU Legal (ii) the Valuation of MPL (including carrying out a market value of its shares in JLLPC) and (iii) eventual passing the documents through the pension fund trustees before the divi up from MFSL to M P Group, should be the way forward in outline.

15. A possible undertaking by [MPGL] to meet any pension fund deficit shortfall and MFSL receiving instructions from [MPGL] for the above mentioned divi up of the value realised from the sale of MPL shares was also discussed.

…”
On 19 December 2011 Mr Hurstfield sent Mr Bradley a copy of the 2004 Note, under cover of a letter that described it as “the informal memorandum between Anant and Rohin …”. The letter said “I suspect this is all that is required to put together the bones of the Memorandum of Understanding ... Might I suggest that a draft is sent to Anant and Rohin in the first place (as this is a private arrangement I think they would prefer to see it first before it goes to the other “professionals” involved) …”.
Mr Bradley circulated a draft agreement in January 2012. This would become the 2012 Agreement. The Warning Notice exhibited the second draft of this agreement, with amendments suggested by Rohin Shah and his accountants on 10 February 2012. We note that this document was given a computer file name of “Meghraj – profit allocation agreement” and was entitled “Agreement relating to the sharing of Certain Sale Proceeds”. It was to be entered into by MPGL, MFSL, MPL and a company to be chosen by Rohin Shah.
The draft agreement included three key recitals:

“2 The parties have agreed to enter into this Agreement for the purpose of recording the terms and conditions and behaviour of their relationship with each other and in particular the basis upon which they will share any Sale Proceeds and any Other Relevant Sums.

3 This Agreement records and clarifies the terms of a memorandum of understanding between certain of the parties dated 17 June 2004 a copy of which is annexed to this Agreement).

4 In particular, this Agreement records and clarifies that the Sale Proceeds or any Other Relevant Sums are effectively ‘ring-fenced’ and are not attributable to MFSL.”
In these recitals, “Sale Proceeds” was defined as the net consideration from the sale of shares in MFSL or MPL, or their business and assets, including MPL’s shares in the Indian JV.
The substance of the remainder of the draft was a clause governing the allocation of the Sale Proceeds. It provided for them to be split between MFSL and MPL in the ratio 20%:80%. It recorded that MFSL had already received its 20% entitlement and stated that the parties agreed MFSL had no further entitlement to Sale Proceeds. Instead the entity to be chosen by Rohin Shah was agreed to be “solely entitled” to all Sale Proceeds. These remained as substantive provisions in the final version of the 2012 Agreement.
Mr Bradley sent a copy of this draft agreement to Mr Frank, the pensions adviser who had attended the meeting of 15 December 2011. He wrote to Mr Bradley on 13 February 2012:

“Hi Adam

I remain concerned by this, much as I was at the meeting we had back in December. I am not talking about the legality of what they are trying to achieve, as that seems to me (and my totally unqualified mind!) to be in order. Rather I am on about the pensions side of things.

Would you happen to know if anyone has addressed the pension trustees to make sure that they do not have any problems with the proposals? I believe I am right in thinking that the monies which came to MFSL last year all passed up to MPG and were then distributed to family members, with none of it going to the pension fund. If the trustees find out now that not only did that happen but that nothing else is going to come from the sale of the JLL shares then they will possibly argue that the last asset of the company has been disposed of with no regard as to the funding of the pension scheme. This seems a major concern to me.

Anant has been very generous with his providing ongoing contributions out of his own pocket, but there is still the chance that this might go very wrong and he will be left holding the fallout.”
It is unclear if these concerns were passed to Anant or Rohin Shah. Rohin Shah states that he only became aware of them on receipt of the Warning Notice. In any event, the trustee was not informed of the 2012 Agreement until after it had been entered into. That eventually occurred on 18 May 2012, and the evidence shows that on 20 May 2012 Anant Shah emailed a representative of the trustee to arrange a meeting “to appraise you of the position of [MFSL] and its proposal to inject funds into [the Scheme]”.

The 2012 Agreement

The parties to the 2012 Agreement were MPGL, MFSL, MPL and PPL. Anant Shah signed for MFSL and Rohin Shah signed for MPL. The provisions of the agreement included:

“Background / Recitals

1. …

2. The parties have agreed to enter into this Agreement for the purpose of recording the terms and conditions and behaviour of their relationship with each other and in particular the basis upon which they will share any Sale Proceeds and any Other Relevant Sums.

3. This Agreement records and clarifies the terms of the Memorandum of Understanding.

4. This Agreement further records and clarifies specifically that the Sale Proceeds and any Other Relevant Sums to which MPL is now entitled (payment of the sums owed to MFSL under clauses 2.2.1 and 2.2.2 having been made to MFSL prior to Completion) are effectively ‘ring-fenced’ as assets of MPL and not of MFSL, which shall have no claim in respect of them.”
As regards Definitions:

111.1. “Commencement Date” meant 1 January 2003.

111.2. “Completion Date” meant the date of the 2012 Agreement, ie 18 May 2012.

111.3. “JLL” and “JLL Shares” meant Jones Lang LaSalle Property Consultants India Pvt Ltd and the 622,991 shares (being 5.09535% of its issued share capital) held by MPL in the capital of JLL.

111.4. “Memorandum of Understanding” meant the 2004 Note.

111.5. “Other Relevant Sums” meant any other sums, not being Sale Proceeds, of a capital or profit nature to which JV (not defined) and/or MFSL may be entitled in respect of MPL.

111.6. “Sale” meant any sale or agreement to sell either the entire issued share capital of MFSL or MPL or the business and the asset, or substantially all of the assets of MFSL or of MPL (including without limitation the JLL Shares).

111.7. “Sale Proceeds” meant all and any net consideration in whatever form arising from any Sale.
As regards substantive provisions:

112.1. Clause 2.1: the 2012 Agreement was deemed to have taken effect from the Commencement Date of 1 January 2003.

112.2. Clause 2.2: upon any Sale the Sale Proceeds or any part thereof should be shared in the following proportions:

An initial sum of £30,000 be paid to or retained by MFSL (clause 2.2.1); and
The balance be divided between MFSL (as to 20%) and MPL (as to 80%) (clause 2.2.2).

112.3. Clause 2.3: it was agreed by the parties that the 20% proportion of the Sale Proceeds to which MFSL was entitled under clause 2.2.2 had become due and been paid to MFSL prior to the Completion Date in respect of the instalments payable for the Sale by MPL of the JLL Shares. The payment had been made in the form of an interim dividend declared and paid by MPL to MFSL around July 2011, in full and final satisfaction of all sums which were owed or would become payable to MFSL after the Commencement Date.

112.4. Clause 2.4: “It is further agreed by the parties that MFSL shall have no further entitlement to or claim in respect of any Sale Proceeds or to any Other Relevant Sums from the Completion Date. PPL, as the party which is ultimately entitled to such Sale Proceeds (through the declaration and payment of further dividends by MFSL) or Other Relevant Sums be solely entitled to receive and be paid all and any further Sale Proceeds or Other Relevant Sums as from the Completion Date absolutely without any deduction, set-off, counterclaim or any other withholding whatsoever in accordance with the terms of this Agreement.”

112.5. Clause 6: the 2012 Agreement constituted the entire agreement between the parties and superseded any previous agreement, understanding, undertaking or arrangement of any nature.

The combined effect of clause 2.4 and the Recitals is to make clear that MFSL was to have no further entitlement to the proceeds of sale of MPL’s shares in the Indian JV.
There is a conflict of evidence between Anant and Rohin Shah as to whether clause 2.4 mistakenly referred to PPL’s entitlement being “through the declaration and payment of further dividends by MFSL”. Anant Shah contended this wording was not a mistake; Rohin Shah contended the words were an error and not intended. Anant Shah made clear through his counsel that he did not contend MFSL had any entitlement to the Sale Proceeds as a result of this wording in clause 2.4; this was simply a point about the mechanism to be used to pay the Sale Proceeds to PPL.
In these circumstances there is little real difference between the Respondents’ positions, since they both agree that the remaining Sale Proceeds were not to be the property or entitlement of MFSL (even if they passed through it), and thus not available to the Scheme. Accordingly, we do not consider it necessary to resolve this difference between the Respondents’ positions.

Engagement with the Trustee of the Scheme

As noted, two days after the 2012 Agreement was signed, Anant Shah sought a meeting with the trustee. This meeting duly took place, apparently on 25 July 2012, followed by a letter from Mr Hurstfield to the trustee of 2 November 2012. This letter attached a copy of the 2012 Agreement and unaudited accounts of MFSL for the years ending 31 December 2010 and 2011 and for MPL for the year ended 31 December 2011. It described the “sole purpose” for MFSL’s continued existence being the need to fund the Scheme. It described MPL as having only one material asset, namely its interest in the Indian JV, and described how “in a Memorandum dated 19 July 2004 between Rohin Shah and the then directors of MFSL, it was agreed that upon liquidation of the Indian investment, 20% of the net proceeds would be paid to MFSL and 80% to MPL”, albeit the 80% “belonged exclusively to Rohin Shah’s consultancy company …”.
The letter concluded with a proposal that MFSL should dispose of MPL on an arm’s length basis, with the sale proceeds being paid to the Scheme, and thereafter be allowed to close. The figure of £48,000 was proposed, based on a valuation of MPL produced by UHY Hacker Young on 18 October 2012.
Representatives of the trustee met Anant Shah, Mr Hurstfield and other advisers on 23 January 2013 to discuss this proposal. The minutes of this meeting record discussions about how to compromise the Scheme’s section 75 debt and a statement that “to obtain clearance the Regulator would require the trustees to investigate, among other matters, the proceeds of the share sales in JLLM [the Indian JV] and the payment of the dividends up to MPG …”. The minutes record Anant Shah’s description of the distribution of share sale proceeds to date:

“AS explained that Paramount Properties Ltd had been set up as a holding vehicle to receive the eventual proceeds of the 5.1% stake in JLLM that was due to MPL. AS advised that Rohin Shah had yet to directly receive any proceeds referred to in the Agreement direct from MPL, although he had received settlement of what he was entitled to from MPG (his 80%), under the terms of the same Agreement. It was noted by AS that this particular aspect of the arrangement should be of no consequence to the trustees.

AS explained that he had originally had a ‘loose’ business arrangement with Rohin Shah which had [led] to the requirement for the subsequently formalised Agreement dated 18 May 2012.”
On 22 March 2013 Mr Hurstfield wrote to representatives of the trustee saying that he had now been able to meet with Rohin Shah in order to put together an offer for the trustee. The letter described the payments to Rohin Shah to date: “the payments to Rohin Shah pursuant to the Agreement [this is not defined] were made by MPG Limited from the net dividend received from MFSL and after deduction of the relevant tax liabilities and the obligations for the pension contributions. Payment pursuant to the Agreement was made to Rohin by MPG Limited …”.
This letter was discussed between representatives of the trustee and representatives of Rohin and Anant Shah on 31 May 2013. In the minutes of this meeting Mr Hurstfield is shown explaining that the 2004 Arrangements, “which [led] to the requirement for the subsequently formalised Agreement, should be seen as a binding document … and that this should also be viewed in a cultural light to reflect the intentions set out in 2004”.
From around this time MPL lent money to MFSL to allow it to make its required monthly contributions to the Scheme. Rohin Shah’s witness statement says that this was to prevent MFSL entering an insolvency process, and to protect the interests of MPL employees who were still members of the Scheme. This continued until March 2014. MFSL did not repay this loan.
In the meantime, no agreement was reached with the trustee over a settlement figure. On 20 August 2013 Rohin and Anant Shah met with counsel. The Instructions to Counsel (drafted by Mr Hurstfield’s firm and presumably by Mr Hurstfield) record that MPL was a statutory employer and had 10% of the Scheme’s estimated section 75 debt attributed to it. Those Instructions state that MFSL has paid contributions to the Scheme since 2003 but would shortly run out of assets. Accordingly, counsel was told that MFSL would like to wind up and transfer the Scheme into the PPF.
As regards MPL, the Instructions describe the Indian JV and the 2004 Arrangements, providing for the 80/20 profit split (“80% for RS and 20% for MPL/MFSL”). The Instructions state “To date, the 80%/20% split has been achieved by the payments from the JLLM [the Indian JV] deal being paid by way of dividend from MPL to MFSL. MFSL pays a dividend to MPGL and MPGL then pays 6.67% of the payment as a commission to a third party who brokered the JLLM deal and the balance is split 80% to an offshore company and 20% via ML to the Liechtenstein trust…”
The Instructions state that the final tranche of sale proceeds from the Indian JV “is entirely for the benefit of RS”. However as part of advising on the proposal to be put to the trustee and TPR, counsel was asked whether the 2012 Agreement and 2004 Note were “sufficiently strong to meet any arguments the Pensions Regulator or the PPF might raise that the final payment from the JLLM deal, which is purely for the benefit of RS, should be withheld and paid towards the MGPS deficit? If so, what steps, if any, can the parties take to mitigate this liability?”
Counsel advised in conference on 20 August 2013. Rohin and Anant Shah attended. The note of that conference, dated 14 October 2013, shows counsel’s view as being that MPL’s interest in the Indian JV appeared from the documents to be owned legally and beneficially by MPL. As a result “it would be difficult to argue any sale proceeds could be withheld from [the] Scheme, a third party creditor”. Counsel considered the courts were unlikely to find a trust had been created over the shares. As a result, any sale of MPL by MFSL, or transfer of sale proceeds to a third party, could form the basis for a contribution notice under PA 04.
Counsel considered the 2012 Agreement and raised certain issues with it. However, he is recorded as saying that they could be remedied by explanation or supplemental agreement. He is then recorded as advising that if it was simply an agreement for MPL’s profits to be distributed in a certain manner year by year, this did not constitute a trust “and would not be binding on MPL”. This conclusion is not easy to follow. It may refer to the fact that a profit sharing agreement would not be “binding on MPL” if the Scheme liabilities were such that MPL had no profits to distribute. It is clear that counsel was proceeding on the basis that MPL was a statutory employer of the Scheme.
Counsel considered an argument that MPL would be estopped from denying Rohin Shah was entitled to the final tranche of sale proceeds. He “thought there was merit to this argument”, and would consider the strength of it further.
Counsel concluded by advising that the next step was to clarify and strengthen the argument that the shares in the Indian JV belonged beneficially to Rohin Shah. This would require further documents (including statements from Rohin and Anant Shah on the factual background to the split of profits). Once those were prepared, Anant and Rohin Shah should approach the trustees. Until then, there should be no sale of MPL or transfer of the shares in the Indian JV, in order not to aggravate TPR.
However, in January 2014 the final tranche of the proceeds of sale from MPL’s shares in the Indian JV was received by MPL. Rohin Shah’s statement describes that he directed that they be paid to his nominee, PPL, “the same day”. He does not dispute the evidence of Anant Shah that he only found out about this payment in April 2014.
In March 2014 MFSL stopped making contributions to the Scheme and MPL stopped lending money to MFSL. The trustee sought to engage with MFSL over this and over the triennial valuation as at 1 January 2013. This had not been progressed due to the wider affordability issues. On 6 May 2014 Mr Hurstfield informed the trustee that MFSL and MPL could make no further payments to the Scheme beyond the residual value in MPL.
Rohin Shah engaged separately with the trustee in mid 2014 in order to make proposals to fund the liabilities that were attributed to MPL.

However, these were not accepted and the trustee resolved to wind up the Scheme on 30 September 2014. MPL and MFSL entered liquidation on 9 October 2014.

Footnotes for this section

[3] The 2009 accounts for MPL that the Panel was provided with show dividend income of £575,236, although they do not state expressly that this is from the Indian JV. It is possible that PSIT was provided with abbreviated accounts that did not show this.

Statutory tests under section 38

Section 38 imposes five tests or conditions for the issue of a CN to a target. They are:

132.1. That the scheme in question 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)), the “Scheme test”.

132.2. That the target was at any time during the relevant period^[4] either the employer or a person connected with, or an associate of, the employer (section 38(3)(b)), the “Connection test”.

132.3. That TPR is of the opinion that the target was a party to an act or a deliberate failure to act which falls within section 38(5) (section 38(3)(a)), the “Party test”.

132.4. That the act or failure to act falls within section 38(5), the “Act test”. As explained below, this requires either the “material detriment test” or the “main purpose test” to be satisfied as well as that the act or failure to act occurred within certain time limits.

132.5. That TPR is of the opinion that it is reasonable to impose liability on the target to pay the sum specified in the CN (section 38(3)(d)), the “Reasonableness test”
.
The Case Team submitted to the Panel that each of these five tests is satisfied in the present case. We take them in turn.

The Scheme test

It was common ground between the parties that the Scheme test was met in this case.
The Panel agrees. The evidence shows that the Scheme is an “occupational pension scheme” within the meaning of that phrase in section 38(1). The definition of “occupational pension scheme” is given in section 1 of the Pensions Schemes Act 1993, and applied to section 38 by section 318 of PA 04.
The definition provides:

““occupational pension scheme” means a pension scheme–
(a) that–
(i) for the purpose of providing benefits to, or in respect of, people with service in employments of a description, or
(ii) for that purpose and also for the purpose of providing benefits to, or in respect of, other people,
is established by, or by persons who include, a person to whom subsection (2) applies when the scheme is established or (as the case may be) to whom that subsection would have applied when the scheme was established had that subsection then been in force, and
(b) that has its main administration in the United Kingdom or outside the EEA states, …”
The subsection referred to in this definition, namely subsection (2), applies to persons including employers.
The Scheme was established by a company called Meghraj Group Limited, by a Declaration of Trust dated 1 July 1987. This Declaration is signed by a director and the secretary of that company. It provides that the company establishes the Scheme with an object to provide benefits for directors and employees of Meghraj Group Limited (and of other associated companies that may become participating employers).
The Warning Notice states that the Scheme has its main administration in the United Kingdom. That was not disputed.
The Panel was asked to infer, from the fact that the Declaration was signed next to the word “Director”, that at the time the Scheme was established there was a director of that company and therefore an individual eligible to join the Scheme. The Panel was prepared to draw that inference.
In those circumstances the Scheme is an “occupational pension scheme”, as defined, and the Scheme test is met.

The Connection test

It was also common ground that both Respondents were connected with the employer at a time in the “relevant period”, ie the period between the first of the acts relied upon (namely the 2012 Agreement, dated 18 May 2012) and the giving of the Warning Notice. The Warning Notice was dated 15 May 2018.
The terms “connected with” and “associate of” the employer that are found in section 38(3)(b)(ii) are taken from sections 249 and 435 of the Insolvency Act 1986. For the purposes of section 38, those sections of the Insolvency Act 1986 apply (see sections 38(10)(a) and (b)).
Anant Shah was “connected with” the employer, MFSL, within the meaning of section 249(a) of the Insolvency Act 1986 as he was a director of that company at all material times.
Rohin Shah was “connected with” the employer because he was an “associate” of a director of the employer. He was an “associate” of Anant Shah because he was at all material times a nephew of Anant Shah. Section 435(2) and 435(8) of the Insolvency Act 1986 provide that a person is an associate of an individual if he is a relative of the individual, which is defined to include his nephew.
Rohin Shah argued that although the test was met as a matter of technicalities, the “usual mischief that the connected party test is designed to catch (i.e. uncommercial arrangements between family members) is not present since RS and AS negotiated their business arrangements on an arm’s length basis”. Rohin Shah argued that it would accordingly be unreasonable for him to be liable to fund MFSL’s liability to the Scheme. The Panel considered this a point to address under the Reasonableness test.

The Party test and the Act test

It is convenient to deal with the Party test and the Act test together.
In order for a CN to be issued, section 38(3)(a) requires that:

“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)”.
This can be broken down into three stages:

149.1. identifying the “act” or “deliberate failure to act” relied upon;

149.2. establishing that the Respondent(s) is “a party” to that act or deliberate failure to act; and

149.3. satisfying the requirements of section 38(5) (which, as explained below, in the present case means meeting the “material detriment test” or the “main purpose test”).
By reason of amendments introduced by the Pensions Act 2008, TPR is able to rely not only on acts or deliberate failures to act but also on a “series” of acts or failures to act. Sections 38(12) and (13) provide:

“(12) Subsection (13) applies if the Regulator is of the opinion that—
(a) a person was a party to a series of acts or failures to act,
(b) each of the acts or failures in the series falls within subsection (5)(b) and (c), and
(c) 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).

(13) 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 within subsection (5) is to the first of the acts or failures to act in the series)”.
In these proceedings the Case Team relies on two “acts”, namely the 2012 Agreement and the 2014 Payment, and argues they should be treated as a “series”, alternatively as separate acts.
This is important because Anant Shah argues that he was not a party to the 2014 Payment, as he did nothing to procure it and only found out about it some three months after it occurred. The Case Team contends that he knowingly assisted in it, and so is a party to it by reason of section 38(6)(a). However, the Case Team’s primary answer to Anant Shah’s argument is that the Panel should see the two acts as a series, and be satisfied that Anant Shah was a party to that series.
Anant Shah argued that these two acts were not a “series” for the purposes of PA 04, as they ignored the prior acts of the 2004 Arrangements, the 2010/2011 Variation, and others. Anant Shah argued that as a result they were not a “series of acts” properly so-called, but had been reverse engineered to act as a freestanding series because section 38 does not allow reliance on acts or failures occurring more than six years before the giving of the Warning Notice.
In the paragraphs that follow the Panel proposes to take the following course. We propose to consider first the 2012 Agreement. It is common ground that both Rohin and Anant Shah were party to that act. If either the material detriment test or the main purpose test is met in relation to that act, then the Act test and Party test will have been met and it will be unnecessary to go on to consider:

154.1. whether Anant Shah was party to the 2014 Payment,

154.2. whether that act also meets the material detriment test or the main purpose test, and

154.3. whether the two acts should be seen as a series.
On the facts of this case, it also makes no difference to the amount of the “shortfall sum” whether the Panel determines to issue CNs based on the 2012 Agreement and the 2014 Payment, or just the 2012 Agreement, or a series comprising both. The “shortfall sum” is a sum that caps the amount of any CN (section 39(1) of PA 04). It is defined in section 39(2) and is either:

155.1. TPR’s estimate of the section 75 debt due in relation to the Scheme (if one has been triggered by the “relevant time”) or

155.2. the amount which TPR estimates as the amount of the section 75 debt that would become due if none has been triggered by the relevant time, but that time were designated as the date of the trigger event under section 75(2) of the Pensions Act 1995.
The “relevant time” in the case of a series of acts is determined by reference to whichever of the acts in the series is, in TPR’s opinion, most appropriate (section 39(4A)). In the case of an act, the relevant time is the time of the act (section 39(4)(a)).
The Case Team relied on estimates of the section 75 debt that had been calculated by the Scheme Actuary as at the dates of (i) the 2012 Agreement (£7.3 million) and (ii) the 2014 Payment (£5.3 million). Because the estimated section 75 debt is higher as at the date of the 2012 Agreement, it makes no difference to the “shortfall sum” if the Panel were to conclude that the Act test were met in relation to the 2012 Agreement alone, or in conjunction with the 2014 Payment.

The 2012 Agreement

Rohin Shah and Anant Shah accepted they were party to the 2012 Agreement. This is because Anant Shah signed it on behalf of MFSL and Rohin Shah signed it on behalf of MPL. They were both also clearly involved in procuring that it be drawn up and executed; both attended the meetings of 2011 that gave rise to it and the professionals who drafted or commented on it were acting on their instructions.
The dispute between the Case Team and the Respondents focussed on whether the 2012 Agreement satisfied the material detriment test or the main purpose test.

Material detriment test

The material detriment test is defined in section 38A(1) and (2) of PA 04:

“(1) 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).

(2) 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.”
Section 38A(4) lists matters to which the Panel must have regard when deciding whether the material detriment test is met, if relevant:

“(4) 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)—
(a) the value of the assets or liabilities of the scheme or of any relevant transferee scheme,
(b) the effect of the act or failure on the value of those assets or liabilities,
(c) the scheme obligations of any person,
(d) 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),
(e) 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),
(f) 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
(g) such other matters as may be prescribed.”
The words “scheme obligation” are defined in section 38A(5):

“(5) 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—
(a) the scheme, or
(b) any relevant transferee scheme in respect of any persons who were members of the scheme before the relevant time.”
In this case, the “scheme obligations” include MFSL’s contingent liability to pay the section 75 debt, and its liability to pay contributions under a schedule of contributions.
The Case Team did not particularly rely on any of the matters listed in section 38A(4), although it drew our attention to matters (e) and (f) as the most relevant. Instead it put its case on the basis that the 2012 Agreement had the effect that MFSL was no longer entitled to sale proceeds from the sale of MPL’s shares in the Indian JV.
The Case Team’s position, as submitted to us, was “based on the fact there was nothing legally binding before” the 2012 Agreement (Transcript, Day 3, p.23, line 5; which is consistent with the case in the Warning Notice at paragraph 109.2). It argued that “by reason of” the 2012 Agreement (alternatively by reason of the 2014 Payment), none of the sale proceeds received in 2014 benefitted the Scheme.
The Warning Notice alleged, at paragraph 109:

“… the effect of the 2012 Agreement was to give rise to a “sole entitlement” (i.e. a legal right) in PPL’s favour to “receive and be paid” the “Sale Proceeds” as defined in the 2012 Agreement. Further, in the 2012 Agreement MFSL agreed that it shall have no entitlement or claim in respect of any Sale Proceeds.

Thus, the effect of the 2012 Agreement was to enable / facilitate the proceeds of the 2014 Purchase to be paid to PPL by MPL.”
The Respondents argued that the 2012 Agreement had no effect on the likelihood of accrued scheme benefits being received, so that the material detriment test was not met in relation to it. They argued that even before the 2012 Agreement MFSL had no entitlement or claim in respect of the proceeds of sale of MPL’s remaining shares in the Indian JV. Their position was that the 2012 Agreement simply recorded the 2004 Arrangements, the 2010/2011 Variation and the payments of sale proceeds in 2011; it did not remove an entitlement from MFSL.
Alternatively, the Respondents argued that all parties to the 2012 Agreement believed that it simply recorded the 2004 Arrangements and the 2010/2011 Variation. They therefore argued that the 2012 Agreement had no effect on the likelihood of accrued scheme benefits being received, as the 2014 sale proceeds would have been dealt with in the same way whether or not the 2012 Agreement was entered into.
On the material detriment test, Rohin Shah’s Position Statement submitted that neither the 2012 Agreement nor the Payment caused any material detriment to the likelihood of Scheme benefits being received, as:

“(i) the contractual effect of the 2004 Agreement meant that neither the 2012 Agreement, which did no more than record the operation of the 2004 Agreement in the factual circumstances then applicable, nor the Payment, caused any sums which were otherwise due to MFSL to be paid instead to RS, so that the Payment was never due to MFSL and available to be applied to the deficit in the Scheme; and

(ii) even if the 2004 Agreement did not have that effect, AS believed that it did, and so would in any event have permitted those proceeds to be paid to PPL without interference from the Group companies. Thus, as a matter of causation, the Scheme would not have benefited from those proceeds. Whether that would have caused AS to be in breach of his duties as a director of MFSL is irrelevant in this context: that is, in fact, what would have happened.”
The first key issue is therefore whether the 2004 Arrangements had contractual effect, either on their own or together with subsequent conduct that ratified them so that they had contractual effect before the 2012 Agreement and therefore the legal position was materially unchanged by the 2012 Agreement. The second key issue is whether, if the 2004 Arrangements did not have contractual effect but the parties believed they did, the material detriment test can be met.
We address this first key issue as follows:

171.1. The legal test for whether an arrangement amounts to a legally binding contract;

171.2. The evidence on this issue; and

171.3. Whether subsequent conduct ratified the arrangement.

The Legal test

Both Rohin Shah and the Case Team^[5] relied on the case of RTS Flexible Systems Ltd v Molkerei Alois Muller GmbH & Co KG [2010] 1 WLR 753, at para 45:

“The general principles are not in doubt. Whether there is a binding contract between the parties and, if so, upon what terms depends upon what they have agreed. It depends not upon their subjective state of mind, but upon a consideration of what was communicated between them by words or conduct, and whether that leads objectively to a conclusion that they intended to create legal relations and had agreed upon all the terms which they regarded or the law requires as essential for the formation of legally binding relations. Even if certain terms of economic or other significance to the parties have not been finalised, an objective appraisal of their words and conduct may lead to the conclusion that they did not intend agreement of such terms to be a precondition to a concluded and legally binding agreement.”
Rohin Shah also cited the Court of Appeal decision of Trentham (G Percy) v Archital Luxfer Ltd [1993] 1 Lloyds Rep 25 at 27:

“… it is important to consider briefly the approach to be adopted to the issue of contract formation in this case. It seems to me that four matters are of importance. The first is the fact that English law generally adopts an objective theory of contract formation. That means that in practice our law generally ignores the subjective expectations and the unexpressed mental reservations of the parties. Instead the governing criterion is the reasonable expectations of honest men. And in the present case that means that the yardstick is the reasonable expectations of sensible businessmen. Secondly, it is true that the coincidence of offer and acceptance will in the vast majority of cases represent the mechanism of contract formation. It is so in the case of a contract alleged to have been made by an exchange of correspondence. But it is not necessarily so in the case of a contract alleged to have come into existence during and as a result of performance. See Brogden v. Metropolitan Railway (1877) 2 A.C. 666; New Zealand Shipping Co. Ltd. v. A.M. Satherwaite & Co. Ltd. [1975] A.C. 154, at 167 D-E; Gibson v. Manchester City Council [1979] 1 W.L.R. 294. The third matter is the impact of the fact that the transaction is executed rather than executory. It is a consideration of the first importance on a number of levels. See British Bank for Foreign Trade Ltd. v. Novinex [1949] 1 K.B. 628, at 630. The fact that the transaction was performed on both sides will often make it unrealistic to argue that there was no intention to enter into legal relations. It will often make it difficult to submit that the contract is void for vagueness or uncertainty. Specifically, the fact that the transaction is executed makes it easier to imply a term resolving any uncertainty, or, alternatively, it may make it possible to treat a matter not finalised in negotiations as inessential. In this case fully executed transactions are under consideration. Clearly, similar considerations may sometimes be relevant in partly executed transactions. Fourthly, if a contract only comes into existence during and as a result of performance of the transaction it will frequently be possible to hold that the contract impliedly and retrospectively covers pre-contractual performance. See Trollope & Colls Ltd. v. Atomic Power Construction Ltd. [1963] 1
W.L.R. 333.”
We therefore must focus on the communications between Rohin Shah and Anant Shah in 2004, whether oral, written or by conduct, to see “whether [consideration of them] leads objectively to a conclusion that they intended to create legal relations and had agreed upon all the terms which they regarded or the law requires as essential for the formation of legally binding relations” (see the RTS case quoted above).
The parties agreed that the available evidence of these communications included material post-dating July 2004. Thus the Panel had regard to the 2004 Note, material preceding it in the form of the 2000 Heads of Terms, but also the parties’ conduct after 2004 (including their letters, notes of meetings they attended, their relationship and the evidence of dealings in the Oshwal community, and the way in which payments under the 2004 Arrangements are described in the accounts of MPL and MFSL). All of these, it seems to us, are relevant when trying to establish what was agreed in 2004 and whether it was legally binding.
The Case Team bears the burden of showing that the material detriment test is met (see para 28 of the Determinations Panel Procedure). That means that it bears the burden of showing, in its words, that there was “nothing legally binding before”. The standard of proof is “the balance of probabilities”.

Evidence from 2000-2004

It is appropriate to start with the 2004 Note, being the only contemporaneous record of the 2004 Arrangements.
The Case Team raised a query as to the authenticity of this document, based in part on it first being referred to in correspondence in December 2011 and in part on what appeared to us to be a misreading of Rohin Shah’s witness statement. These two points did not seem to us strong enough to support a finding that the 2004 Note was a forgery. We proceed on the basis that the document is authentic.
The Case Team relied on certain marks of informality in the 2004 Note to suggest there was no intention to create legal relations (the use of a handwritten note on notepaper from a personal address, the use of “I” and “we” rather than reference to corporate entities, Rohin Shah not signing and Anant Shah signing as “Anjumama” ie “Uncle Anju”). The majority of the Panel agreed that these matters pointed towards the parties not considering that the arrangements recorded in the Note were intended to be legally binding. The language is informal, and the Note is far from a comprehensive record of all key aspects of the alleged agreement (such as which parties were to be bound by it).
Perhaps more important however is the simple fact that the alleged agreement was entirely oral. The 2004 Note is put forward only as evidence of an agreement, not the agreement itself. It is surprising to find that Rohin and Anant Shah were prepared not only to reach a binding profit-sharing agreement entirely orally, but also that they were content to have only the 2004 Note as evidence of that agreement. Such evidence was important because the alleged effect of the 2004 Arrangements is inconsistent with the position recorded in the filed accounts of MPL and MFSL, namely the 100% share ownership of MPL by MFSL without explaining that MFSL had no entitlement to MPL’s profits.
That is all the more surprising after 2007, when millions of pounds were allegedly paid out on the basis of the agreement and when the prospect of further large profits from the Indian JV was clear because of the entry into the Share Purchase Agreement with Trammell Crow and the arrangements with JLL. Even after 2007 there is no record in the papers before the Panel that the 2004 Note was placed on the books or records of MPL or MFSL, or even made known to other officers of those companies. It is not referred to in the filed accounts of either company, nor did we hear evidence that it was described to the Group’s accountants, bank, lawyers, or any other professional advisers. Certainly it was not described to the trustee of the Scheme.
This only changed in December 2011 and early 2012, when the 2004 Note and 2004 Arrangements start being referred to in correspondence and meeting notes. If a legally binding agreement had been reached in mid-2004 that bound MPL and MFSL as to their entitlement to the profits of their subsidiaries, it is surprising that the agreement was not referred to in any document until December 2011.
Nor, it appears, was it described to third parties until that time. This is surprising given the long-term nature of the alleged agreement (it concerns all profits of the Indian JV, with no time limit) and the risk that Rohin and/or Anant Shah might become incapacitated during that period. One would have thought both of them would have recorded the terms of the agreement with greater care and to a wider audience if it had been intended to be legally binding, particularly on third parties.
The Panel contrasted this with the other occasions where agreements between the same parties were committed to writing: the 2000 Heads of Terms and the 2006 Option Agreement. The 2004 Arrangements appear to be the only oral agreement between Rohin and Anant Shah and yet they deal with arguably the most important agreement between them. The evidence before us did not disclose any other occasion when MPL or MFSL had been bound to a legally binding agreement without a document put in place to effect the agreement.
The Respondents sought to explain the fact that the 2000 Heads of Terms were committed to writing by saying that this was because they affected Mr Bhalla, a non-family member, who requested more formal documentation. That does not however explain why the 2006 Option Agreement was committed to writing and signed by all parties to it. Indeed, having committed the 2000 Heads of Terms to writing in order to ensure a formal record was kept one might have expected a later agreement, ie the 2004 Arrangements, to be dealt with the same way if it was also intended to have legal effect. Both arrangements concern profit shares and purportedly affect Rohin Shah, Anant Shah and third parties.
The Panel took account of the point in Rohin Shah’s representations that both he and Anant Shah were part of the Oshwal community, in which informal agreements were prevalent, implemented on trust with little documentation but with parties considering themselves bound by word of honour. The Panel considered this offered some support to the Respondents’ case, by helping to explain the informality and lack of documentation. However, it does not explain why third parties were not informed, nor why matters such as which entities were bound were left unrecorded (even informally). The parties before us were agreed that we should apply an objective test to the question of whether the communications between the parties reveal an intention to create legal relations.
The Case Team also relied on Anant and Rohin Shah’s relationship of uncle and nephew. The Panel saw this as relatively neutral on the question of whether they intended the 2004 Arrangements to be legally binding. Those arrangements had a commercial subject matter, which meant the Panel was unwilling to apply any presumption that the 2004 Arrangements were not legally binding because they were made between family members.
The Case Team argued that the 2004 Note and 2004 Arrangements left key matters uncertain, including the essential terms, which party was entitled to the 20% profit share, and which parties were bound by the 2004 Arrangements.
The Panel did not accept that there was uncertainty as to all of the key terms; on the contrary the essential terms of a profit share arrangement were catered for (including a description of profit as including both income and capital, and the percentage split).
However, it is certainly true that the 2004 Note leaves it unclear which persons are intended to be bound by the profit share arrangement, and which parties gain entitlements under it. There is simply the loose reference in the Note to Anant’s suggestion that “you and I” should “work on a 76%/24% division of profits”. There is no mention in the 2004 Note that MPL or MFSL would be bound or gain entitlements. On the contrary, when MFSL is mentioned it is to state that it would receive a payment of £30,000, not a profit share.
There is also no statement in the 2004 Note that either Rohin or Anant Shah were acting on behalf of companies (in particular, MPL or MFSL). Rohin Shah was a director of MPL in 2004, and Anant Shah was one of three directors of MFSL in 2004, but there is no evidence that MFSL’s board gave him authority to bind MFSL and the personal language of the 2004 Note suggests this was not the case.
The Panel had regard to the fact that Anant Shah’s evidence is that he did enter the 2004 Arrangements as a director of MFSL. It was also Anant Shah’s evidence to the liquidator of MPL and MFSL in 2016 that the 2004 Arrangements were a profit split between MFSL on the one hand and Rohin Shah on the other (or any entity he designated). Further, we noted that in 2000 Anant Shah signed the Heads of Terms on behalf of MHL, as shareholder of MPL. That document, like the 2004 Arrangements, sets out to determine the sharing of profits in MPL and is signed on behalf of those who need to be bound by it. However, this only highlights the lack of evidence regarding who was to be bound by the 2004 Arrangements. The Panel was reluctant to put any great weight on Anant Shah’s witness evidence given his choice not to be cross- examined and the evidence that he had withheld information from the trustee in relation to this same subject matter.
In the view of the majority of the Panel, the evidence up to the end of 2004 points more toward the existence of a non-binding understanding between Anant Shah and Rohin Shah than a legally binding agreement binding them and their companies, or indeed any legally binding agreement at all.

Evidence from communications after 2004

The description of the proposed 2012 Agreement in the notes of the meeting of 15 December 2011 as a “transaction”, and the reference to seeking advice on its tax implications, suggest it was doing more than simply recording or clarifying an arrangement that already had legal effect. That appears to have been the reason for Mr Frank’s “major concern” in February 2012.
Further, the minutes of the 23 January 2013 meeting record Anant Shah as saying that “he had originally had a ‘loose’ business arrangement with Rohin Shah which had [led] to the requirement for the subsequently formalised Agreement dated 18 May 2012”. These references suggest the 2004 Arrangement was not seen as legally binding.
Set against that however are references in communications to the 2004 Arrangements having “contractually pledged” the profits of MPL and to the 2004 Note as a “historical contractual agreement” (notes of the meeting of 15 December 2011).
The evidence from communications after 2004 is therefore conflicting; it does not demonstrate whether the 2004 Arrangements were legally binding or not.

The evidence of the accounts

The accounts of MPL and MFSL in the years 2007 to 2011 disclose three key matters that bear on the question of whether the 2004 Arrangements were treated as legally binding by MPLS, MFSL and their directors. The accounts are signed by the directors, including Rohin Shah in the case of MPL, who confirmed in cross-examination that he understood the meaning of signing accounts to declare they gave a true and fair view of the state of affairs of a company.
The first key matter is that MPL’s shares in the Indian JV are recorded in MPL’s accounts as an asset of MPL. There is no reference to these shares being held on trust for Rohin Shah, or any other person (unlike client monies, which were specifically referred to in the accounts as being kept separate from MPL’s company funds). The same is true in MFSL’s accounts, which in 2010, 2011 and 2012 record MPL as MFSL’s only trading subsidiary. MFSL’s 2010 and 2012 accounts also record the shareholding that MPL held in the Indian JV. This is despite the 2010/2011 Variation having taken place by the date of the 2012 accounts, meaning that (on the Respondents’ case) MFSL had no further interest in the value of those shares. Yet there is no note in any of the accounts to show that the shares in the Indian JV, or in MPL, were not in fact an asset of the legal owners of those shares because the benefits from them had been contractually pledged to Rohin Shah.
The second key matter is the repeated reference in those accounts to the payments to and by MFSL of proceeds from the sale of MPL’s shares in the Indian JV as “dividends”. That is a word that is only applicable to payments out of distributable profits which are the property of the paying party. It does not apply to payments that a company makes to discharge contractual liabilities. It is common ground that until 2014 the sale proceeds were paid to Rohin Shah by a route that involved them being paid by MPL to MFSL, to MPGL, and then to Whiteoak pursuant to a consultancy agreement (or, in respect of the 2007 sale proceeds, to the Animegh Foundation and then to the Lotus Trust). If the accounts were giving a true and fair view of these payments, and they were truly made under the 2004 Arrangements, the accounts would have made clear that they were payments to discharge liabilities under those arrangements.
The distinction between dividends and payments to discharge liabilities was explored with Mr Shah in cross-examination. It is fair to say, as Mr Newman QC submitted, that Mr Rohin Shah appeared at times not to understand the premise of those questions and that they represented a “lawyer meets businessman” difference of view. As far as Mr Shah was concerned, they were simply payments that gave effect to the 2004 Arrangements and the label “dividend” was not important.
However, in Rohin Shah’s witness statement the distinction was drawn in stark terms between a mechanism for paying him that depended on the profitability of companies above MPL, and a mechanism that ensured he received 80% of the profits of MPL:

“Part of the 2004 Agreement was that my 80% share of profit would be due to me from MPL and calculated at MPL level, having first taken into account MPL expenses. This is the way the profit share was understood and implemented throughout. What it meant was that my profits from MPL and the Indian JV were not dependent on the profitability of the wider Group, with which I had nothing to do. I would not have agreed for my share of profits to be dependent on the performance of companies higher up the corporate chain in this way, as that was totally out of my control and would have meant that all my efforts and successes could have been wiped out by any difficulties encountered by the wider Group. It appeared to me then, and continued to do so for many years, ... that AS (and I believe VS also), representing the Group, had exactly the same understanding as me on this point.”
If that was an important point to Mr Rohin Shah, it is surprising that he allowed the accounts of MPL and MFSL to describe his profit share as dividends. Given this, and Mr Shah’s obvious experience in business over many years and the fact that the accounts were prepared by accountants (although not audited), the Panel put considerable weight on the fact that these payments were described as dividends.
The third key matter is that Rohin Shah did not in fact receive the share of the profits in MPL that he was entitled to, and the reason for this appears to be retentions at MFSL and MPGL level. We have noted that on Rohin Shah’s own information to TPR, he received only 66% of MPL’s profits from the sale of shares in the Indian JV in 2010 when he should have received 80%, and 54% in 2011 when he should have received 60%.
The Case Team relies on this in support of its position that the 2004 Arrangements were at most an understanding. Paragraph 125 of the Warning Notice states that “there was no consistent practice in relation to the financial benefit arising from MPL’s interest in the joint venture. Further, Rohin Shah (or his nominated entity) does not appear to have received an amount equal to 80% of the profit received by MPL from the sale of shares in the joint venture either overall or in any given year …”.
Rohin Shah’s witness evidence recognises that he did not always receive “exactly 80%” of MPL’s profit, although this rather downplays the degree of variance between his apparent entitlement and actual receipts:

“From 2004 onwards, all proceeds received from the Indian JV, including any and all annual dividends from profits and all sale proceeds, were split between me and AS/the Group in the ratio 80:20, although in practice it was a few years before there was any income from the Indian JV to share. There has never been a dispute between me and the Uncles [i.e. Anant and Vipin Shah] over the sums that were split. I chose to share some of my portion with the MPL team and various charities so the sums I personally received did not always add up to exactly 80% of the total profit”.
What is notable however is that the reason why Rohin Shah received less than his entitlement in 2010 and 2011 is not that sums were retained in MPL for its staff or charities, but that sums were retained by MFSL and MPGL. For example, in 2010 MPL received a net gain from its shares in the Indian JV of £1,573,925. It paid a dividend to MFSL in that year of £1,603,261. Of this, £1,485,000 was paid to MPGL, and of that £250,000 was paid to the Animegh Foundation and £1,037,776 was paid to Whiteoak.
On these figures, while MFSL retained £118,261 which is less than Anant’s 20% share, MPGL also retained £167,888, and £250,000 was paid to the Animegh Foundation. Whiteoak received the remainder. No explanation was given to the Panel for why Rohin Shah received so much less than his entitlement, and why he did nothing to assert his entitlement as a result.
The same can be seen in 2011, albeit with less divergence from the entitlement. In that year MPL received a net gain from shares in the Indian JV of £5,244,116. It paid almost all of that by way of dividend to MFSL (£5,222,866; the difference could be due to Rohin Shah sharing the proceeds with staff or charities). MFSL retained £440,120 (in part to fund pension contributions), which is less than the 20% it could have retained under the 2004 Arrangements. However, MPGL retained £1,972,089, meaning that Whiteoak received only 54% of the sale proceeds rather than its 60% entitlement. The “missing” 6% is greater than the sum retained at MPL level, so cannot be explained by Rohin Shah diverting sums at that level to benefit him or his staff. Again, no explanation was given to the Panel for why Rohin Shah received less than his entitlement, and why he did nothing to assert his entitlement as a result.
Importantly, in all relevant years MFSL’s dividends to MPGL did not exceed its distributable reserves, after taking account of accumulated losses in prior years. This further suggests that MFSL considered the dividends it received from MPL were “true” dividends that it was entitled to receive and use, rather than money to be distributed according to a pre-agreed profit split.
It was an important part of each Respondents’ case that the 2004 Arrangements were complied with, without dispute, for many years. Rohin Shah’s witness statement says “the terms of the 2004 Agreement were abided by precisely and accurately for many years dividing very substantial sums of money between the parties.”
Anant Shah agrees that 80% of profits from MPL were paid to Rohin Shah or his nominees from 2006 onwards.
In fact, the practice in 2010 and 2011, dealing with the largest sums of sale proceeds from the Indian JV, did not accord with an 80/20 profit split. The Case Team had raised this issue in the Warning Notice, and in the view of the majority of the Panel, no satisfactory explanation had been provided. This casts real doubt on whether the 2004 Arrangements were seen in 2010 and 2011 as legally binding, or simply vague understandings.

Conclusion

The Case Team bears the burden of proof of establishing that the material detriment test has been met. As set out at paragraph 193 above the conclusion of the majority of the Panel on the evidence up to the end of 2004 is that the totality of such evidence points away from there being a legally binding agreement governing the distribution of profit from the Indian JV. The important pointers include the absence of documentation that would have been expected if there had been an agreement binding the companies, such that the alleged effect of the 2004 Arrangements was inconsistent with the filed accounts of MPL and MFSL for several years. The only contemporaneous written evidence of the 2004 Arrangements was the 2004 Note. That Note did not address key matters such as whether companies were intended to be bound by the 2004 Arrangements, or to gain entitlements under them. The 2004 Note could only be evidence of an agreement, rather than an agreement itself, but it had numerous features of informality. It was handwritten, on personal notepaper, from a personal address, signed by one party only (and then in a family not business name). Whilst the Panel did not accept all of the Case Team’s many arguments about the 2004 Note, for the majority of the Panel the weight of the evidence pointed away from the 2004 Arrangements being a legally binding agreement.
The Respondents understandably relied extensively on the practice since 2007, especially the payments actually made. However, the conclusion of the majority of the Panel is that, when all relevant factors are considered, including how those payments were made and described, the practice points away from a legally binding agreement that binds the companies as contended. The majority of the Panel placed particular weight on (i) the fact that no governing documentation (to reflect what would have been a significantly different legal position from that shown in company records) was put in place until 2012 nor were the 2004 Arrangements even apparently described to third parties (ii) the contents of the accounts (i.e. both MPL’s and MFSL’s accounts), over several years, referring to payments as dividends and as shares in the Indian JV as an asset of MPL and (iii) the fact that the actual practice of payments did not match an 80/20 split. Having regard to these matters, as well as the other evidence before it, the majority of the Panel concluded that the Case Team had discharged the burden of proof of establishing on the balance of probabilities that the 2004 Arrangements were not legally binding.
It follows from this that the 2012 Agreement was materially detrimental to the likelihood of benefits being received from the Scheme. The 2012 Agreement changed a non-binding loose arrangement between Anant Shah and Rohin Shah into a legally binding agreement that removed from MFSL its legal entitlement to the Sale Proceeds (as defined in the 2012 Agreement).
One member of the Panel (Antony Townsend) agreed that the absence of documentary evidence between 2004 and 2011 and the treatment of the payments in the accounts (which were not entirely clear) weighed against a legally binding agreement. However, the combination of the evidence of the practices of the Oshwal community, the written evidence from 2004, the fact that after 2004 substantial sums of money were split in a way which was very largely consistent with the 2004 Arrangements and the other written evidence of intentions arising from the 2006 Option Agreement and the documents in 2011 and 2012, led him to the conclusion that the Case Team had not discharged its burden of proof on the key question of whether the 2004 Arrangements were legally binding, and that the material detriment test had therefore not been met.

Ratification

It follows from the conclusion of the majority of us in paragraph 215 above that the practice, both in the accounts throughout and of the payments in 2010 and 2011, did not establish that the 2004 Arrangements were complied with, without departure for many years. This is an end to the argument that MFSL and MPL (and perhaps the wider group) ratified the 2004 Arrangements by their practice.

Counterfactual

We should finally deal with the Respondents’ argument that the material detriment test is not met because the parties believed the 2004 Arrangements were legally binding, or at least binding in honour. On this analysis, even without the 2012 Agreement, MFSL and the Scheme would not have received any part of the Sale Proceeds because they would have been treated by all relevant parties as the entitlement of Rohin Shah.
This argument engages the question of whether the Panel need look at a counterfactual in order to decide whether the material detriment test is met. The Case Team’s position at the hearing was that it is not necessary, albeit it is permissible, to do so. Rohin Shah’s position was that it is necessary to do so, in order to assess whether, without the act or failure to act that is being considered, there would have been a greater likelihood of accrued scheme benefits being received.
The Panel considered that in this case at least it was necessary to consider a counterfactual. While we can see that in some cases it may be possible to say that the material detriment test is met without considering what would have happened but for the act or failure, we suspect such cases will be a minority. Certainly in this case we propose to address the Respondents’ argument set out in paragraph 219 above by asking what, but for the act of entering the 2012 Agreement, would be likely to have occurred.
In answering that question the parties were agreed that one must assume the relevant individuals act reasonably, honestly and in accordance with their legal duties (including as company directors). Thus Rohin Shah cannot be heard to say that but for the 2012 Agreement he would have procured MPL to make the 2014 Payment to PPL in any event, if to do so would have breached his legal duties.
The Panel accepted the Case Team’s argument that without the 2012 Agreement the position as to MFSL’s entitlement to the 2014 Sale Proceeds would have been at best uncertain. We considered that a director of MFSL, acting in accordance with his duties to safeguard the assets of MFSL and aware of the Scheme’s deficit, would have taken legal advice before allowing the Sale Proceeds to be paid out by MPL or to be paid as a dividend by MFSL. That legal advice would have revealed, as the analysis above shows, that MFSL had a legal entitlement to those Sale Proceeds and they would then have been retained for MFSL’s creditors (namely the Scheme).
Rohin Shah argued that the legal advice would also have revealed an argument of estoppel, i.e. that MPL and MFSL were estopped from denying Rohin Shah’s right to the 80% share. This is an argument that counsel advised in 2013 had “merit”, although he said it needed to be considered further. However, it seems to us that it depends on Rohin Shah establishing a representation in part by conduct that he was entitled to receive 80% of MPL’s profits. As the accounts show, no such representation by conduct could in fact have been established. Accordingly, we do not consider that it is right for the Respondents to argue that even without the 2012 Agreement, the 2014 Sale Proceeds would still have been unavailable to the Scheme.

Main purpose Test

Section 38 allows the Act test to be satisfied either by means of the material detriment test or by means of the main purpose test (see section 38(5)(a) of PA 04).
Given the Panel’s conclusion that the material detriment test is met in relation to the 2012 Agreement, we do not see that any useful purpose would be served by also considering the main purpose test.

The 2014 Payment

The Panel also considered it unnecessary to consider whether the material detriment test or the main purpose test was met in relation to the 2014 Payment, whether that payment was seen as part of a series with the 2012 Agreement or as a separate act for the purposes of section 38.
Properly analysed, it appears to us that the 2014 Payment simply gave effect to the terms of the 2012 Agreement. It is true that it was not paid in accordance with the bracketed words in clause 2.4 of that agreement (which provided for payment “(through the declaration and payment of further dividends by MFSL)”). However even if those words were not retained in error, the clear meaning of the 2012 Agreement when it is read in its entirety is that PPL was solely entitled to the remaining Sale Proceeds, to the exclusion of MFSL.
As a result, we consider that the 2014 Payment simply gave effect to that earlier agreement. We do not consider it adds to the analysis in this case to treat the 2014 Payment as a separate act, or as part of a series with the 2012 Agreement. It is the 2012 Agreement that put the value of MPL’s interest in the Indian JV out of the reach of the Scheme, not the 2014 Payment. For the reasons given above, we consider that the Act test and the Party test are met in relation to the 2012 Agreement.

The Reasonableness test

The final test to consider is the Reasonableness test. This requires assessment of whether it is reasonable to impose liability on the proposed recipient of a CN to pay the sum specified in the notice (section 38(3)(d)).
The sum sought by way of CN in the Warning Notice is £3,688,108 plus interest at 8% p.a. In its Position Statement the Case Team indicated that rather than seeking interest it would instead seek an amount to take account of the passage of time since the 2014 Payment, with such amount being calculated by applying the investment return on the Scheme’s assets since the 2014 Payment was made. This resulted in a total CN sum of £5,750,000 (using net investment return figures for the period from 2014 to 31 December 2019).
As an alternative approach the Case Team sought a sum that would allow the Scheme to replicate the buyout funding level that it would have had if the 2014 Payment had been added to the Scheme’s assets. That results in a total CN sum of £4,143,000.
Both Respondents argued that it would be unreasonable to issue a CN in any sum at all.
Section 38(3) provides that a CN may only be issued if:

“(d) 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-
(i) 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
(ii) such other matters as the Regulator considers relevant, including (where relevant) the matters falling within subsection (7).”
The matters listed within section 38(7) are the following:

“(a) the degree of involvement of the person in the act or failure to act which falls within subsection (5),
(b) 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),
(c) any connection or involvement which the person has or has had with the scheme,
(d) 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,
(e) 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;
(f) the financial circumstances of the person…”
The definition of “relevant creditors” in section 38(7)(eb) is given in section 38(7A). It refers to creditors of the employer or of any other person who has incurred an obligation or liability to pay money or transfer assets to the Scheme. In this case that means creditors of MFSL. The Panel did not consider that this matter supported or undermined the case for CNs; there is no indication that Anant Shah or Rohin Shah would use money intended for relevant creditors in order to pay a CN.
The Panel also placed little reliance on the financial circumstances of Rohin Shah. He made no representations on this subject, and the evidence suggested he would be able to afford the CN sum sought. This did not, in our view, lend support to the Case Team’s case. At best it is neutral.
Anant Shah stated that he now had no material assets, having given them away for religious reasons. The Case Team suggested that money would be made available to Anant Shah from other family members if a CN were issued to him. There was no real evidence that this would occur, but in any event the Panel considered that Anant’s current limited financial means ought not to prevent a CN being issued to him if the other matters listed in section 38(7) and the circumstances of the case supported that outcome.
The Panel considered whether it was reasonable to impose liability on Anant Shah and Rohin Shah to pay the sum of £3,688,108 (plus lost investment returns) having regard to the extent to which, in all the circumstances of the case, it was reasonable for them to act, or fail to act, in the way that they did. The Panel also considered at the same time their degree of involvement in the 2012 Agreement, their involvement with the Scheme and their relationship with MFSL.
The Panel also considered the impact of their acts, which it considered to be consistent with the approach to section 38 in the Upper Tribunal’s decision of Michel van de Wiele NV v The Pensions Regulator [2011] Pens LR 109. In paragraph 100 of that decision Mr Justice Warren described section 38 as providing for the imposition of liability on a person who has caused a detriment to a scheme by preventing recovery of a section 75 debt and continued “the scheme can be compensated for that detriment”. Although that was a case concerned with the “main purpose” test, in this case the Panel considered it gave some useful guidance on the question of whether it was “reasonable” to impose liability on the Respondents in a particular sum.
The impact of the 2012 Agreement was to deprive MFSL of its entitlement to the remaining Sale Proceeds (as defined in that agreement). That caused detriment to the Scheme because it meant those sums were not available to MFSL to use to support the Scheme. It is apparent from the concerns of professionals such as Mr Frank that, but for the 2012 Agreement, MFSL should have acted differently regarding Sale Proceeds. Rather than pay them as dividends, MFSL’s directors would have been advised to retain all of the Sale Proceeds that were received by it in 2014, and use them to support the Scheme.
The Panel therefore considered that the starting point for the CN sum in this case is the full amount of the 2014 Payment. It considered this was the starting point for both Respondents, for the reasons that follow. These are the other matters specified in section 38(7).
Anant and Rohin Shah were both significantly involved in the 2012 Agreement, participating in the 2011 meetings that gave rise to it, instructing professionals who prepared or commented on it, and signing it to give it contractual effect.
The purpose of that agreement appears to have been to produce it to the trustee of the Scheme in order to justify the lack of contributions from MFSL. It placed the 2004 Arrangements onto a more formal documentary footing, in the hope the trustee would accept that MFSL’s assets were indeed limited and did not include a right to any further share in the Indian JV.
That purpose must be seen in the context of an increasing deficit in the Scheme, as reported to the meeting of 29 June 2011 attended by Anant and Rohin Shah. It must also be seen in the context of the money that had already been paid out of MFSL as dividends in the years before the 2012 Agreement:

2007: £1.1m

2010: £1.485m

2011: £3.69m
These are significant sums and stand in contrast to the needs of the Scheme. Those needs were apparent to Anant Shah at least from late 2010. On 26 November 2010 he attended a meeting of the trustee of the Scheme, in his capacity as director of MFSL, and heard from the Scheme’s advisers that the current estimate of the deficit as at 1 January 2010 was £2.85m on a technical provisions basis. Both Anant and Rohin Shah attended the meeting of 29 June 2011 which reported that the Scheme’s deficit had increased to c. £3m as at December 2010. That meeting noted that the required deficit repair contributions currently stood at £180,000 per year for 10 years, from April 2011.
Rohin Shah reported to that meeting that MPL had received $8.5 million from the sale of the 2011 tranche of shares in the Indian JV to JLL. Other entries in the notes strongly suggest that those monies had not yet been distributed by MPL. However, the majority of them were paid by way of dividend to MFSL and then MPGL.
Given the size of the dividends from MFSL preceding the 2014 Payment, and the weak position of the Scheme at that time, the Panel considered it was reasonable to require the Respondents to compensate the Scheme for the 2014 Payment not being made available to the Scheme. In the Panel’s view, that payment ought to have been made available to the Scheme, just as Anant Shah ought to have ensured MFSL retained greater amounts for the Scheme in 2010 and 2011 after payment of dividends. MFSL’s 2011 accounts show that its retained profits as at December 2011, following payment of the £3.6m dividend to MPGL, were only £272,208.
As regards Anant Shah, his failure to provide full information to the trustee as to the value of the Indian JV is a striking feature of this case. It continued over several years, and led to lower recovery plan payments and, potentially, to a higher Scheme deficit today. Although this failure was not relied on as a separate failure to act in the Warning Notice, and could not have been since it occurred more than six years before the Warning Notice, nonetheless it is part of his involvement with the Scheme.
As regards Rohin Shah, the Panel could accept that he genuinely believed he was entitled to the 2014 Sale Proceeds. However, he also recognised the risk that the Scheme might obtain them, particularly if they were only received once the recovery plan and 2013 valuation had been concluded. This risk lay behind the planning to separate MPL from the Group in December 2011, and (we suspect) the very hasty arrangement to pay the 2014 Payment to PPL as soon as MPL received it. In these circumstances we consider Rohin Shah ought to have taken legal advice on his entitlement before directing that the money should be transferred offshore and out of the reach of the Scheme.
The Panel accepted that he had no material involvement with MFSL at any time, or with the Scheme after PSIT became the trustee in 2006. It also accepted that he only satisfied the test of being “connected with” the employer by reason of being a nephew of Anant Shah. However, the Panel did not accept his submission that the “usual mischief that the connected party test is designed to catch (i.e. uncommercial arrangements between family members) is not present since RS and AS negotiated their business arrangements on an arms length basis”. The Panel considered:

251.1. There is no evidence that the connected party test was designed to catch any particular “usual mischief”. It appears intended simply to identify those with a specified degree of connection to the employer;

251.2. Rohin Shah and Anant Shah did conduct their arrangements in part in an “uncommercial” way (in particular as regards recording their profit-share arrangements, and indeed implementing them consistently). It is an important feature of the case that they were part of a family business, with a lack of formality over money flows and documents. It is in such circumstances that “non-family” third parties such as the Scheme may not be treated equitably, as appears to have happened in this case.
Having regard to all of these matters, in particular:

252.1. the impact of the 2012 Agreement on the Scheme’s ability to access the Sale Proceeds and

252.2. the Respondents’ conduct in not seeking legal advice on MFSL’s entitlement but instead presenting the trustee with the fait accompli of the 2012 Agreement and then (in Rohin Shah’s case) procuring a rapid transfer of the 2014 Payment to PPL before MFSL or the trustee were aware, the Panel determined that it was reasonable to specify in the CNs the sum of the 2014 Payment.
As noted above, the Case Team sought an extra payment by way of lost investment returns, between the date of the 2014 Payment and December 2019. This raises certain issues that were not explored with the Panel or apparent from the evidence. In particular there was no evidence or discussion of the events of the years after 2014. Relevant events in that period would include any changes in the Scheme’s investments and reasons why these contribution notice proceedings were not commenced sooner. That evidence might identify factors making it reasonable to impose liability on the Respondents for any lost investment returns (as opposed to that loss being due to other matters and potentially being the responsibility of third parties).
The Case Team bears the burden of satisfying the Panel that it is reasonable to impose liability in relation to the sum it claims for lost investment returns. The Panel did not consider the Case Team had discharged that burden in this case, and accordingly was satisfied that the reasonable sum to include in the contribution notices was the sum of the 2014 Payment.
The Panel has reached its decision by a majority. Antony Townsend dissents as to the outcome and he would not determine that there be a Contribution Notice against either Anant Shah or Rohin Shah, principally for the reasons articulated in paragraph 217 above.

Footnotes for this section

[4] The “relevant period” begins with the time when the act or failure to act falling within section 38(5) first occurs and ends with the giving of a warning notice (section 38(6)).
[5] RS Position paper paragraph 36; CT paper, paragraph 16.

Decision

For all of these reasons the Panel determined by a majority that CNs should be issued to Anant Shah and Rohin Shah, on a joint and several basis, specifying the sum of £3,688,108.
The CNs must not be issued during the period within which this Determination may be referred to the Upper Tribunal (Tax and Chancery Chamber) (the Upper Tribunal) or, if this Determination is so referred, until the final disposal of the reference and of any appeal against the Tribunal's determination.
Appendix 1 to this Determination Notice contains important information about the rights of directly affected parties to refer this decision to the Upper Tribunal.

Chair: Andrew Long

Dated: 10 June 2020 revised on 5 August 2020

Appendix 1

Referral to the Tax and Chancery Chamber of the Upper Tribunal

You have the right to refer the matter to which this Determination Notice relates to the Tax and Chancery Chamber of the Upper Tribunal (the Tribunal). You have 28 days from the date this Determination Notice is sent to you to refer the matter to the Tribunal or such other period as specified in the Tribunal rules or as the Tribunal may allow. A reference to the Tribunal is made by way of a written notice signed by you and filed with a copy of this Determination Notice.

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 of PA04 and the Tribunal Rules.

You should note that the Tribunal rules provide that at the same time as filing a reference notice with the Tribunal, you must send a copy of the reference notice to TPR. Any copy reference notice should be sent to:

Determinations Panel Support
The Pensions Regulator
Napier House
Trafalgar Place
Brighton BN1 4DW
Tel: 01273 811852

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

The Meghraj Group Pension Scheme - Determination notice

The case

Matters to be determined

Directly affected parties

Contents

Footnotes for this section

Introduction

Footnote for this section

Representation

Background facts

Documentation regarding profit splits: MPL’s UK business

Implementation: UK business

Documentation regarding profit splits: MPL’s JV business

The Scheme, and liabilities of the Group towards it

Share sales and implementation of the 2004 Arrangements

Communications with the Trustee of the Scheme

Discussions regarding extracting MPL from the Group

The 2012 Agreement

Engagement with the Trustee of the Scheme

Footnotes for this section

Statutory tests under section 38

The Scheme test

The Connection test

The Party test and the Act test

The 2012 Agreement

Material detriment test

The Legal test

Evidence from 2000-2004

Evidence from communications after 2004

The evidence of the accounts

Conclusion

Ratification

Counterfactual

Main purpose Test

The 2014 Payment

The Reasonableness test

Footnotes for this section

Decision

Appendix 1

Referral to the Tax and Chancery Chamber of the Upper Tribunal

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