Material Irregularity

Material Irregularity
Posted on 29th June 2016 by Gateleyblogs

Mr Parekh tried to have his IVA (in place for over 10 years) set aside – arguing that:

His modified IVA proposal was conditional on the acceptance of a simultaneous IVA proposal for his wife, which was rejected
That the approval of his IVA proposal depended on the vote of HMRC, whose proxy did not have authority to vote
Both the Court of Appeal and the lower Court found against Mr Parekh on both counts – the wording of the IVA proposal did not support the first assertion and HMRC had by conduct ratified the vote over the years that followed the meeting.

The Court of Appeal took the opportunity to give its opinion on the material irregularity issue.

The relevant provision (s262 Insolvency Act 1986) provides that an IVA can be challenged on grounds that there was a material irregularity at, or in relation to, the meeting of creditors summoned to approve it. Where the Court finds material irregularity, the Court can revoke or suspend creditors’ approval of the IVA – crucially, until the Court decides to do this, the IVA approval remains valid. Up to this case, lower courts had interpreted the provision in two ways:

The provision only dealt with irregularities at the meeting that were not so serious as to mean the IVA was a nullity – so irregularities which went to the heart of the IVA approval would not be within the scope of the provision; or
The provision was wide enough to cover any irregularity at the meeting which might mean that the IVA was a nullity.
In one case the example was given of a situation where a chairman wrongly calculated that 78% (enough) of creditors approved the IVA whereas only 62% in fact approved it (not enough and the IVA would normally fail).

The distinction is crucial – under the second approach, the IVA’s validity is preserved unless the Court orders otherwise. Under the first – the section does not apply and the IVA is void.

The Court of Appeal preferred the second approach, confirming that to use the material irregularity provision, the irregularity must be “material” and “at or in relation to the meeting”.

This is helpful clarification and demonstrates the willingness of the Court to keep a flexible approach in relation to IVAs.

For more information, email

Narandas-Girdhar and another v Bradstock [2016] EWCA Civ 88


British steel: One rule for one or one rule for all?

British steel: One rule for one or one rule for all?
Posted on 28th June 2016 by Gateleyblogs

In a time before talk of the referendum became all consuming, it was widely reported that the Government was considering how to support the UK steel industry. Those considerations are ongoing and as part of them, the Government issued a consultation document on 26 May setting out options for helping the British Steel Pension Scheme (BSPS); the consultation period closed on 23 June.

What did the consultation document suggest?

The Government has expressed its desire to provide a package of support for the British steel industry to enable it to have a sustainable future. In the consultation document, it explains that Tata Steel Limited is looking to sell its subsidiary, Tata Steel UK (TSUK), which is the principal employer of the BSPS, one of the largest defined benefit schemes in the UK with 130,000 members. It is reported to be very unlikely that a buyer for the company will be found who is willing to take on the BSPS, with its sizeable funding deficit, and so the BSPS needs to be separated from TSUK.

The consultation document sets out a number of options which are or could be made available to the trustee of the BSPS, some of which would require changes to existing pensions legislation. The trustee and the Pension Protection Fund (PPF) have provided their responses to the consultation. In looking at their responses, we consider whether it is possible to protect the benefits of BSPS members while not rewriting public policy.

What are the options for dealing with the BSPS?

Option 1 would involve the BSPS being separated from TSUK, using existing regulatory mechanisms, and entering a PPF assessment period.

Option 2 would see TSUK ceasing to participate in the BSPS and paying its Section 75 debt. Tata Steel Limited has already indicated that such a payment would be unaffordable and this option is not under serious consideration.

Option 3 would require new legislation to be enacted, enabling the trustee to pay lower levels of increase to pensions in payment and deferred pensions. The trustee strongly believes that the significant reduction in liabilities which would result from pursuing this option would enable the BSPS to continue outside the PPF. The trustee believes that this option would provide the same or better than PPF level benefits for the majority of its members. This option would also involve putting a new sponsoring employer in place.

Option 4 would also require the enactment of new legislation, to enable a bulk transfer of BSPS members (without their consent) to a new scheme offering reduced increases, as in option 3. Members would be given the right to opt out of the transfer.

There are nuances within the options and the consultation responses which we have not included in this brief blog post. Instead we are focussing on the trustee’s position and some of the concerns raised by the PPF. The perspectives of the trustee and the PPF are very different and ultimately it may be external, political considerations which dictate the decision on which option should be followed.

The trustee’s position

The trustee notes in its response that the BSPS, while it remains outside the PPF, is able to provide benefits to its members which, in the majority of cases, are in excess of PPF compensation. It also claims that the PPF and levy paying schemes would be better off if the BSPS were not to transfer to the PPF. One of the reasons for this is that the BSPS contains a bridging pension provision, whereby members who take early retirement can elect to receive a higher initial pension until State pension age, with a lower pension thereafter. Were the BSPS to transfer to the PPF imminently, members who had made this election and who had not passed State pension age would be awarded PPF compensation based on the higher level of pension, with no reduction being made at State pension age. The cost of this to the PPF (and ultimately to the levy payers) is estimated by the trustee to be around £500 million.

The trustee states that the PPF would be better off if the BSPS were to stay outside the PPF for at least ten years because in the coming years, more members who have retired early on a higher pension will pass state pension age and their benefits will be reduced, meaning a reduction in the level of compensation which would be payable if the BSPS were to transfer to the PPF. The trustee does not address the possibility that more members will elect to take early retirement and so the impact of the bridging pension will remain. However we do not know whether the election to take early retirement is dependent on employer consent, and it is possible that additional amendments to the BSPS could be made to prevent further members taking early retirement on this basis.

The trustee strongly prefers option 3: continuing to run the BSPS outside the PPF, following a flexible apportionment agreement or a regulated apportionment agreement, with a reduction in the level of increases applied to pensions in payment and deferred pensions[1]. The trustee explains in its response that when the BSPS was established, its rules permitted such reductions to be made if they were not affordable, but the effect of Section 67 of the Pensions Act 1995 now prevents them being made. It asks the Government to make regulations disapplying Section 67 to enable the reductions to be made.

Looking at option 4, to enable a bulk transfer to a new scheme offering lower increases to benefits to take place without consent, new legislation would be required. The trustee appears open to considering the option but in its view, it would not achieve better outcomes for the BSPS members, the UK steel industry and PPF levy paying schemes, as compared with option 3. It expresses concerns about the cost of setting up a new scheme, the time such a transfer would take and the effect on the PPF (it assumes that most of those members who had taken early retirement at a higher level would opt out of the transfer, leaving the PPF to meet the £500 million due to the members with bridging pensions). The trustee notes that legislation would most likely require the trustee to be satisfied that a bulk transfer without member consent in such circumstances was “in the best interests of members” – it is not clear whether any detail on what “members’ best interests” should mean would be set out in new regulations.

The PPF’s position

The PPF does not agree with the trustee that the majority of BSPS members will be better off outside the PPF. The PPF’s greatest concern appears to be that treating the BSPS as a special case will mean disparity of treatment between PPF levy paying schemes. It suggests that in the event that options 3 or 4 are chosen, the BSPS should be made ineligible for PPF entry. We can understand this approach, but it seems that broadly speaking, the trustee is hoping to keep the BSPS running on a self-sufficient basis. While as a matter of policy it may not be wise to treat schemes differently, should the BSPS members be penalised if, ultimately, the trustee’s considered attempts to keep the scheme afloat should fail (particularly if their benefits have been transferred to a new scheme without their consent)? A further concern of the PPF is that if option 4 were chosen, it is possible that the sponsoring employer of the new scheme would be a shell company with little capital. In its response, the PPF suggests that the success or failure of the new scheme would depend entirely on the success or failure of the new scheme’s investment strategy.

A matter of policy?

The trustee is working to protect the interests of the BSPS members. The PPF wants to ensure equality as between levy paying schemes. The wider public interest is in avoiding the fallout, should the UK steel industry fail. There is of course a public interest in equality – under the proposals, one employer would see an improvement in its operating position at a time when its competitors and many others are struggling with defined benefit liabilities. The public interest in equality might not be well served, if legislation is passed which would disapply Section 67 for one scheme.

The issues are too numerous to consider in detail here, but there is a debate to be had around the approach to be taken to changing the law when public policies collide in the way that they have in the British Steel case. The protection of members’ accrued benefits (the reason Section 67 was enacted), the protection of the benefits of the members of one scheme at higher than PPF levels (the trustee’s argument for preferential treatment by the Government) and the need to treat levy paying schemes and employers in the market on an equal basis do not sit easily together.

This post was edited by Jill Walters. For more information, email

[1] The increase to deferred benefits would be for future periods of deferment only.

What does Brexit mean for pension schemes?

In case you missed it, the UK public have voted to leave the EU. After months of claim and counterclaim what will this actually mean for pension schemes? The honest answer is that we still don’t know.

In the short term it’s expected that there will be volatility in the markets until the details of the post-Brexit world become clearer. This will affect many schemes’ funding positions and possibly also trustees’ views on the strength of their employer covenant. Longer term predictions still vary wildly.

From an individual member perspective, the impact of market uncertainty is most likely to be felt by those in DC schemes, particularly those close to retirement. The majority of members’ fund values are likely to have fallen today whilst the impact on the cost of buying an annuity is still to be seen. It is possibly now more important than ever that members seek guidance when making their retirement decisions. Employers and trustees of DC schemes may wish to review their retirement procedures to ensure that appropriate support is being provided.

From a legal perspective, it will take at least 2 years for the process of withdrawing from the EU to be complete and until that time the UK will continue to be subject to EU law, but what then?

A large amount of legislation affecting pension schemes has its roots in EU law, for example equal treatment requirements and the scheme funding provisions in the Pensions Act 2004 – if you’d ever wondered where the term “technical provisions” came from, it was the EU’s IORP Directive. The Pension Protection Fund is also (at least in part) the UK’s response to its obligations under IORP. However, these provisions are now enshrined in UK law and so will continue to apply unless and until they are changed and we would not anticipate any radical changes, at least not in the immediate future.

Certainly issues like equal treatment are accepted principles and it is difficult to see there being political will or popular support for curbing existing protections. One potential positive of Brexit (as far as most of the pensions industry is concerned) is that proposals to require the equalisation of GMPs might be kicked into the long grass – the Government’s stance on this (contrary to the views of many lawyers) was that GMP equalisation was required under EU law.

On scheme funding we did, of course, have minimum statutory requirements long before IORP (though MFR itself has been discredited) and there is nothing to suggest that the current system of scheme funding under Part 3 of the Pensions Act 2004 would be replaced. But over time might there be more scope for flexibility within both the scheme funding and the PPF regimes to better cope with situations such as those currently being experienced by the British Steel and the BHS pension schemes among others? Of course “flexibility” in this context might be seen as a euphemism for watering down member protection and any steps in this direction should be taken with great caution.

Although any changes to the existing legislative framework for pension schemes are likely to be limited, further integration with any new EU requirements (for example, should Solvency II rear its head) is also unlikely, though it remains to be seen what (if any) conditions the UK will be required to agree to as part of any trade deals.

This post was edited by Michael Collins. For more information, email

The reasonable expectations of honest, sensible businessmen

The reasonable expectations of honest, sensible businessmen

One of the requirements for a valid and binding contract is for an offer by one party to be accepted by another.

In our previous blog, ‘Get it in writing!’ Not necessarily…’we looked at how the courts considered a contract with a specific provision in writing stating that it cannot be varied by an oral agreement and then held that it is in fact possible for the parties to vary such a contract with an oral agreement.

In the case of Reveille Independent LLC and Anotech International (UK Limited), the courts considered whether a contractual term requiring both parties to actually sign the contract in order for it to be legally binding can be waived.


Party one sent a deal memo to Party two setting out the proposed terms. It contained a requirement for both parties to sign it. Party two altered, signed and returned the deal memo to Party one effectively making a counter offer. Party one did not sign the amended deal memo. Negotiations between Party one and Party two for a long form agreement broke down but Party one still performed all of its obligations as set out in the amended deal memo.

The case

Party two subsequently argued that there was no contract based on the amended deal memo because Party one did not accept the terms as it never signed it. The court disagreed.

The court held that it is already established law that a party to a contract can waive a prescribed form of acceptance if the other party accepts in some other way, provided the acceptance has not somehow prejudiced the other party. Party two argued that it had been prejudiced because Party one’s actions created uncertainty over whether a contract had been formed. The court did not agree and responded that the only uncertainty arising was the precise date on which the contract was formed. The fact that Party two was receiving all of the benefits of Party one’s performance of the terms of the amended deal memo meant Party two’s position had not been prejudiced.

The court also highlighted that the conduct of parties after the date on which the contract was made is relevant in confirming their beliefs that there is in fact a binding contract.


The case is a reminder that a specific requirement as to how acceptance of an offer can be made (here, by countersigning the deal memo) can be waived. When investigating whether an offer has been accepted and a contract has come into existence, the principle applied by the courts will be ‘the reasonable expectations of honest sensible businessmen’.

This post was edited by Paul Simpson. For more information, email

Are you telling the truth?

Are you telling the truth?
During the course of Court proceedings, a party will prepare a number of documents in support of its case, including a Claim Form and Particulars of Claim (if the party is the Claimant), a Defence (if the party is the Defendant), witness evidence and expert reports. These are examples of documents which, under the Court rules, should be verified by a Statement of Truth.

A Statement of Truth does exactly that: it is a clear statement that the person signing the document believes that the facts contained within it are true. The Court treats Statements of Truth very seriously: under the Court rules proceedings for contempt of Court may be brought against a person if he makes, or causes to be made, a false statement in a document verified by a Statement of Truth without an honest belief in its truth (CPR 32.14), the rationale being that a false Statement of Truth is viewed as an attempt to interfere with the course of justice. The penalties for contempt of Court include a fine and/or imprisonment (Contempt of Court Act 1981).

A recent Commercial Court case* provided some guidance as to how the Court will approach sentencing for contempt. In brief, this was the Claimant’s application for committal of the Second Defendant arising out of the First Defendant’s breach of an undertaking it gave during the course of the proceedings. The Second Defendant was the Chief Executive and President of the First Defendant and the First Defendant acted through him in these proceedings. In concluding that an immediate custodial sentence of 18 months “would reflect the gravity of the contempt”, the Court took into account the fact that the Second Defendant:

Committed the contempt deliberately and “for very substantial financial gain”;
Subverted “a consensual arrangement”;
Deliberately concealed his actions and “allowed the solicitors and Counsel to unintentionally mislead the Claimants and the Court”;
“Swore a false affidavit and signed a false Statement of Truth”; and
Failed to explain his actions or offer an apology.
Whilst the above case is an extreme example, in which the false Statement of Truth was but one of several factors the Court took into account in committing the Second Defendant for contempt, it does illustrate that if a party to legal proceedings lies to the Court, they do so at their peril.

*Todaysure Matthews Limited and another –v- Matthews International Corporation and another [2016] EWHC 584 (Comm).

For more information, email

The ideal commercial lease

The ideal commercial lease

Have things changed since the financial crisis?

The saying goes that beauty is in the eye of the beholder and as much is true when it comes to commercial leases.

Whilst the notion of an ‘ideal commercial lease’ is a brilliant and awe-inspiring idea, sadly, such a thing does not exist. Tenants and landlord will be alert to the key terms likely to affect their on-going interests.

For tenants this often focuses on the practicalities of paying rent (monthly or quarterly), their ability to assign or underlet the property to a third party if business doesn’t work out as hoped and the on-going liability for service charges and insurance rent.

For their part, Landlords will do their upmost to secure a clean rental stream by minimising their obligations in terms of providing services and making sure rent review clauses are as favourable as possible.

Landlords will increasingly have to take into account the extensive ‘green’ leasing provisions which now prevail in the regulatory environment. Landlords will often want built into new leases obligations on both parties to co-operate in obtaining energy efficiency information about a property and taking steps to improve energy efficiency. Don’t be fooled by this outbreak of bonhomie between landlords and tenants though. Landlords will certainly want to make sure that the costs of upgrading the energy efficiency of their buildings are picked up by their tenants by way of service charge. Tenants will battle hard against this arguing that it is the landlord on whom the regulatory burden should fall.

The struggle between the competing interests of landlords and tenants has become increasingly intense since the financial crisis. Whilst the bottom of the market just after the recession certainly provided an opportunity for savvy tenants to renegotiate some of the more challenging clauses of their leases, the recent upturn in the market and the shortfall of high-end commercial property in popular areas has put the ball firmly back in the landlords’ court.

The Code for Leasing Business Premises 2007 was designed to provide a level playing field for tenants and landlords by setting down a set of institutionally acceptable terms on key lease clauses such as break and assignment/underletting conditions. The new Model Commercial Lease (commissioned by the British Property Federation) was another tool designed to reduce the number of areas of disagreement between tenants and landlords and reduce the time and cost of negotiating a lease.

However, use of the Business Code has been slow at best. It is non-binding and therefore bypassed by many landlords who continue to use their own standard documents as the basis for negotiation.

So what makes a good new lease? For tenants this increasingly boils down to a few key clauses (break conditions and key assignment/underletting pre-conditions to name a few). For landlords, locking in their tenants to secure a long term rental income is (and will always be) a key aim and a tenants ability to break or assign a lease can often lead to intensive negotiation.

So despite the efforts to introduce more standardised lease terms through the Code and Model Commercial Lease, for the moment it is still the case that all is fair in love and war (and lease negotiation).

This post was edited by Tim Swallow. For more information, email

Don’t shoot the DD messenger

Don’t shoot the DD messenger

The documents are signed, you’ve done the deal – congratulations! But some time later things are not as rosy as they seemed: revenues are not what you expected and you’re beginning to question the wisdom of your investment decision. Looking round for someone to blame, the accountants who provided the due diligence reports seem a prime candidate.

Luxury health club deal

In late 2006 Ernst & Young were engaged to provide limited due diligence services on the acquisition of the Esporta group of premium health and fitness clubs. Esporta’s revenues were largely determined by membership so a key part of the accountants’ role was reviewing the forecasts for new member growth in the business plan provided by Esporta’s management. Esporta predicted that the number of new members joining its existing clubs would grow by 2.73% in 2007. Ernst & Young took a more conservative approach: their due diligence report revised this forecast down to 0.8%.

A done deal?

An unusual feature of this deal was that, by the time the accountants were engaged to provide the top up due diligence, the buyer had already signed a sale and purchase agreement agreeing to buy the Esporta clubs for £474 million. If the buyer decided to withdraw from the deal, either because it was unhappy with the contents of its due diligence report or for another reason, it would forfeit the £23 million deposit already paid to the seller.

In fact, the deal went ahead but when post-completion revenues were significantly lower than expected the buyer brought a negligence claim against Ernst & Young. The buyer argued that the accountants should have been even more conservative in their revised forecasts and that the predicted growth rate, based on information available at the time, should actually have been 0%. The buyer argued that “but for” the accountants’ negligence it would not have completed the transaction and would instead have withdrawn from the deal and forfeited the deposit.

The decision

The High Court has now dismissed the buyer’s claim. The court found that Ernst & Young had not been negligent at all: their analysis was “entirely reasonable and complete”. In case it was wrong on that point, however, the court also considered whether the alleged negligence by the accountants actually caused the buyer any loss. Here, the court said the alleged failures in the accountant’s reporting made no difference to the buyer’s decision to proceed with the deal: even if they had revised their forecast downwards, as the buyer said they should have done, the buyer would still have acquired Esporta on the agreed terms.

The judge also took a dim view of a late change in the buyer’s case where it emphasised that the accountants’ were aware of the key information several months earlier than previously thought. That was viewed as an “opportunistic and unprincipled attempt” by the buyer to rescue its case which had already been exposed as “lacking in merit”.

Hindsight is a wonderful thing…

Whenever something doesn’t turn out quite as expected, it is probably inevitable that decisions are reconsidered with the benefit of hindsight. The buyer clearly felt that had the forecasted growth been revised down it would not have gone ahead with the deal. But the judge considered the buyer’s decision to proceed only on the basis of the information available to it at the time that decision was made and found that the further £1 million reduction in EBITDA that would have resulted from the buyer’s calculations was immaterial in the context of the deal as a whole.

It also seems likely that the poor joining figures experienced immediately after completion could have been affected by Esporta featuring in the BBC’s “Watchdog” programme which alleged that sales staff had misled prospective members about the terms of membership and that the business had breached those terms by refusing to allow seriously ill members to terminate their membership. Something which presumably Ernst & Young (and the buyer) knew nothing about at the time of the deal.

This post was edited by Sophie Brookes. For more information, email