On 31 March 2015, Mr Justice Richards in the High Court delivered a judgment in Heis and others v MF Global UK Services Ltd, [2015] EWHC 883 (Ch), in which it was held that an implied contract concerning the secondment of staff existed between MF Global UK Services Limited (“Services”), as the supplier of the seconded staff, and MF Global UK Limited (“MFG UK”), as the recipient of the seconded staff, and that the terms of the implied contract incorporated an indemnity on the part of MFG UK in relation to a debt arising under section 75 of the Pensions Act 1995.
Debts arising under section 75 of the Pensions Act 1995 arise in relation to defined benefit occupational pension schemes. Section 75 imposes, in certain circumstances, an obligation on an employer to pay an amount to the trustees of the employer’s pension scheme to satisfy a deficiency in the scheme. Such an obligation can arise upon the commencement of administration proceedings in relation to the employer. The debt that arises under section 75 in such circumstances is the difference in value between the assets of the scheme immediately before the commencement of the administration and the amount of the scheme’s liabilities calculated on a “buy out” basis. In practice, this can give rise to a very substantial deficit.
1. Background
Services and MFG UK were both English companies and wholly-owned subsidiaries of MF Global Holdings Europe Limited (“Holdings”). From July 2007, Services was the employer of all of the staff in the MF group in the UK. The business of Services was to supply those staff on secondment to other MF group companies. On 6 July 2007, Services established a defined benefit pensions scheme for the benefit of its employees (the “Scheme”).
Services seconded most of its staff to MFG UK, although there was never any express agreement between Services and MFG UK as to the terms of provision of those staff. Services had no trading activity and its only income was derived from the secondment of its employees, for which it charged the recipients of the employees on a pound-for-pound basis, with no mark-up. As a matter of practice over a period of years, MFG UK paid to Services the wages and other costs arising from its use of the secondees. These costs included contributions to the Scheme, which were paid both directly to Services and, in relation to certain funding deficits identified during the period 2007 to 2009, directly to the trustees of the Scheme from June 2009 onwards.
Although there was never any express agreement between Services and MFG UK, a written agreement between Services and Holdings was entered into in 2007 as to the terms on which Services would provide staff to the other entities in the MF group in the UK (the “Written Agreement”). It provided that Services would remain the employer of the secondees but that Holdings would procure that all “Payroll Costs” for the secondees would be met by the recipient of the secondees – in the present case, MFG UK.
“Payroll Costs” was defined broadly in the Written Agreement:
“3.2 In this clause “Payroll Costs” shall mean the aggregate costs in relation to each of the Secondees in the period of any assignment under this Agreement of all salary, bonus, and contractual and discretionary cash and non-cash benefits including, but not limited to, medical insurance, pension contributions [emphasis added], employee insurance benefits, company cars or car allowance, statutory and contractual leave entitlements, staff restaurant costs, relocation allowances, payments made on termination of employment and any tax and national insurance contributions thereon….””
Although Holdings was a party to the Written Agreement, its accounts made no reference to the secondment of Services’ staff and no liability for their costs (including any deficit in respect of the Scheme) was recorded in them. The accounts of MFG UK instead referred simply to the costs of the seconded staff to be recharged to MFG UK, and also to the pensions contributions to be made in respect of the seconded staff. Correspondence between the directors of Services and MFG UK (as well as certain of the other MF entities) provided further evidence that, as between themselves, liability for the costs of the seconded employees was considered to fall on MFG UK.
2. Administration of the Companies
On 31 October 2011, Services and MFG UK entered into administration proceedings in England. The commencement of administration proceedings of Services gave rise to a section 75 debt in relation to its Scheme. Accordingly, the administrators of Services and MFG UK entered into an agreement with the Scheme trustees and with the Pension Protection Fund on 15 October 2013 to settle the section 75 debt. MFG UK paid the settlement amount to the Scheme trustees on behalf of itself and Services, although there was disagreement between Services and MFG UK as to which of them was obligated to fund this amount.
By way of a separate agreement, Services and MFG UK agreed to use their reasonable endeavours to agree a settlement of Services’ claim against MFG UK for an indemnity in relation to the settlement amount paid in satisfaction of the section 75 debt. Under the terms of the separate agreement, the parties agreed that if no resolution between Services and MFG UK was reached within 6 months, the matter would be referred to the Court for determination. No such agreement was reached; accordingly, the application was made to the Court.
3. The Issues Before the Court
The Court was asked to consider two issues:
(i) was there any contract between Services and MFG UK in respect of the secondment of the staff from Services to MFG UK and the reimbursement of Services’ costs in respect of the seconded staff; and
(ii) if a contract did exist, did it incorporate an agreement for MFG UK to indemnify Services against any section 75 debts?
4. Decision
On the question of whether there was a contract between Services and MFG UK, the Court found no difficulty in identifying offer and acceptance between Services and MFG UK, on the basis that Services had offered the secondees to MFG UK and MFG UK had accepted the offer in consideration for being responsible for the costs associated with the secondees. The Court had no doubt that MFG UK’s historical conduct in regularly paying to Services the employment costs of the secondees and, further, in paying the Scheme deficit contributions directly to the trustees of the Scheme were evidence of MFG UK’s intent to satisfy contractual obligations, as it was clearly not making these payments gratuitously. Furthermore, notwithstanding the existence of the Written Agreement, the Court rejected the notion that there was any need for the intervention of Holdings between Services and MFG UK and, as a matter of fact, found that there was no indication that Holdings had been involved in the arrangements between the two. Thus, the Court readily accepted that there was an implied contract between Services and MFG UK (the “Implied Contract”).
Having found that a contract existed between Services and MFG UK, the Court turned to the question of whether the Implied Contract incorporated an agreement by MFG UK to indemnify Services for section 75 debts. The Court found that there was such an agreement on the following bases:
(i) The organisation of the MF group was such that it could never have been intended otherwise: Services was established not as a profit-making entity, but rather as the supplier of staff to other MF entities, for which it would charge those MF entities on a pound-for-pound basis. That is to say, it had no ability to satisfy liabilities other than through amounts recharged to the recipients of the secondees. Therefore, if one were to argue that section 75 debts were excluded from MFG UK’s obligations to satisfy the costs of the secondees, it would follow that Services would be automatically rendered insolvent were a section 75 debt ever to arise, which could never have been the intention of the parties.
(ii) Against this background, the Court construed the wording of clause 3 of the Written Agreement, which, it was submitted by MFG UK, provided the terms for any implied contract that might exist between Services and MFG UK. The Court found that there was no justification in distinguishing a section 75 debt from other “pension contributions” referred to in the clause. In reaching this decision, the Court considered whether the applicable legislative regime made any meaningful distinction between pensions contributions that an employer had agreed to make (as MFG UK had done previously) and those that are imposed upon it, as is the case with a section 75 debt. The Court found no such distinction.
(iii) The Court found that, in any case, pensions are a form of deferred remuneration and, therefore, a cost in relation to seconded staff. As such, the Court found that a liability for a section 75 debt would fall within the broader definition of Payroll Costs in clause 3 of the Written Agreement, being:
“…..the aggregate costs in relation to each of the Secondees in the period of any assignment under this Agreement of all salary, bonus, and contractual and discretionary cash and non-cash benefits….”
5. Application of the Case
The case concerns specific facts and much of the Court’s analysis turns on the particular set-up of the MF group and the manner in which Services and MFG UK interacted with each other over a number of years. It is not inconceivable, however, that other groups of companies might be set up in a similar manner, including as to their staff service arrangements.
Putting aside the issue of the implied contract itself, the Court’s analysis of the wording of clause 3 of the Written Agreement may be of considerable interest. As described above, the Court construed the reference to “pensions contributions” to include section 75 debts and, moreover, found that a broad reference to the costs of employing the seconded staff would also encompass liability for section 75 debts. Practitioners may wish to take account of this when drafting similar provisions.
