Sea Containers – the Regulator reveals its reasoning

Background

Last week we reported that the Pensions Regulator had issued determination notices in relation to two pension schemes of the Sea Containers group (see previous Law-Now). The notices stated the Regulator's intention to issue its first financial support directions (FSDs) to Sea Containers Limited ("SCL"), a Bermuda-based holding company. The directions will require SCL to put arrangements in place so that it underwrites the liabilities of its UK-subsidiary service company, Sea Containers Services Limited, to the schemes.

The Determinations Panel of the Regulator, which heard argument on the issues at an oral hearing earlier this month, has now issued its detailed reasoning. This provides a useful insight into the Regulator's interpretation of its "moral hazard" powers.

The facts

The reasoning confirms that, following concerns raised on behalf of scheme trustees as far back as June 2006, the Regulator had written to SCL suggesting that it could be subject to a financial support direction. However, the Regulator did not issue a formal "warning notice" of its intention to issue an FSD until 19 October, four days after the SCL group had filed for Chapter 11 bankruptcy protection with the US courts.

It is worth noting that whereas the determination notices suggested a combined estimated statutory debt of c. £91m in the two schemes, it now appears that the correct figure (albeit still based on valuation data from 2006) is around £133m.

"Reasonableness"

The legislation requires the Regulator to be of the opinion that it is "reasonable" to issue an FSD. One of the factors to be taken into account is "the value of any benefits received directly or indirectly by [the recipient]". Importantly, the Regulator said that these words, along with other factors to be taken into account when determining reasonableness, were deliberately framed very widely. As such, it was relevant that SCL not only received the services of SCSL (for which it did not have to pay within normal commercial timescales), but also was able to maintain a European trading presence through SCSL, whilst itself retaining privileged tax treatment in Bermuda.

Issues relating to insolvency proceedings

The Regulator was unsympathetic to SCL's argument that the issue of an FSD would place it in an "impossible position" if the US Bankruptcy Court subsequently refused to approve any FSD-based claim. The Regulator said that if this were to happen, that would be an issue for it to take into account in deciding whether or not to subsequently issue a demand for payment against SCL for non-compliance with the FSD. It was not a reason for failing to issue an FSD at this stage.

The Regulator was not swayed by the fact that a successful FSD might reduce the potential recovery of other unsecured creditors of SCL. The Panel was also unimpressed by the suggestion that its anti-avoidance powers should not be used in insolvency cases: as it noted, those powers were "likely to be of particular significance in insolvency situations".

Other points

The Regulator dismissed argument that it had been premature in taking any steps against SCL. SCL had been given ample opportunity to put its case. SCL was wrong to argue that the Regulator should have waited for it to make its own application for clearance of any reorganisation.

The Regulator also rejected SCL’s attempts to draw parallels with other cases with which the Regulator had reportedly been involved. This confirms how difficult it is for employers to try and use "precedent" cases in any argument with the Regulator over its powers, as full details of past cases will never be in the public domain.

What happens now?

It is not yet known whether it will now make a reference (i.e. appeal) to the Pensions Regulator Tribunal.

Whether such a reference is made, and whether SCL complies with any issued FSD, will determine not only the further trajectory of this case, but help to shape the industry's perception of whether the Regulator is prepared not only to bare its teeth, but to bite.