This report outlines the action we took against two individuals in relation to a large cash payment by a subsidiary of a scheme’s employer to an entity outside the employer group.
It will be useful for trustees, employers and advisers, and was the first substantive case heard at the Upper Tribunal regarding our anti-avoidance contribution notice (CN) powers. It provided clarity in respect of how CN sums should be calculated, and demonstrated that where we see that harm is caused, we will ensure that it is put right.
This case is also a good example of how we are committed to protecting savers’ interests as we remain open to discussions at any time and will accept a settlement offer if it results in a good outcome for the scheme.
Published: 1 October 2024
Case summary
In this case, we successfully used our CN powers against two individuals. Targets of CNs are required to pay a specified amount of money to a scheme or, in some circumstances, to the Pension Protection Fund (PPF). The CN in this case was issued in relation to a large payment of cash by a subsidiary of the scheme’s employer to an entity outside the employer group.
Following the payment, the employer and its subsidiary went into liquidation, leaving the scheme with a substantial deficit. The scheme entered a PPF assessment period in October 2014.
Our intervention led to a CN of more than £1.8 million being issued to one individual and a settlement with the other. This is the first significant case involving our CN powers to be heard by the Upper Tribunal. The judgment supports our views on how the legislation should be interpreted.
Background
This case involved the Meghraj group of companies, a 100-year-old international investment and banking advisory and fiduciary services organisation with offices in Asia, Africa and Europe. Within that group, Meghraj Financial Services Limited (MFSL) was the last remaining employer of the scheme. MFSL owned a company called Meghraj Properties Limited (MPL), which in turn owned shares in a joint venture company based in India (referred to in this report as the Indian JV).
In 2004, Mr Anant Shah, the sole director of MFSL, wrote a note that Mr Anant and Mr Rohin Shah argued was evidence of an oral agreement entitling Mr Rohin Shah (Anant’s nephew and a director of MPL) to 80% of the profit of the Indian JV. The note was later formalised into a written contract in 2012.
Between 2007 and 2011, MPL paid a series of dividends to MFSL financed by the disposal of shares in the Indian JV. MFSL used some of those funds to meet its liability under the scheme’s recovery plan but also paid large dividends to its Isle of Man parent company, M.P. Group Limited. M.P. Group Limited used the dividends to pay funds to a nominee company at the direction of Mr Rohin Shah and made further dividends into the Shah family trust.
In January 2014, MPL received the last tranche of proceeds from the sale of its remaining shares in the Indian JV. Instead of moving the proceeds through the group and using them to buy out the scheme, Rohin Shah directed that they be paid directly to a nominee company, arguing that the proceeds represented his 80% of the profit share under the 2004 note. The 2014 payment was £3,688,108.
In October 2014, MFSL entered into a creditors’ voluntary liquidation (CVL). The scheme was by far the largest creditor in the CVL with a deficit on a buy-out basis of £5.85 million. We opened an investigation into the circumstances that led to the CVL, which included looking at the 2004 note, the 2012 written contract, the group’s historic dividend flows and the 2014 payment.
Our investigation concluded that there was no legally binding contract made in 2004 (or at any other date) that obliged MPL to make the 2014 payment. As a result, the 2012 agreement and the 2014 payment were materially detrimental to the scheme because funds that could have been made available to support the scheme were put beyond the employer’s reach.
Regulatory action
In May 2018, we issued a Warning Notice to Mr Rohin and Mr Anant Shah. Our case was that the 2014 payment should not have been made. Instead, it should have been used by MPL or distributed via dividends (as had been the case on the sale of previous tranches of shares in the Indian JV). This would have resulted in the funds being available to support MFSL’s creditors, the main one being the scheme. The 2014 payment was therefore materially detrimental to the scheme’s ability to pay member benefits.
The targets sought to challenge our case based on the following.
- The 2014 payment resulted from a contract that was legally binding and therefore the sale proceeds were not part of MPL’s assets.
- We were out of time. The legislation relating to CNs allows us to consider acts and failures to act that occur within six years of a Warning Notice being issued. The targets claimed that a legally binding contract was formed either in 2004 or at various other dates that fell outside the six-year limitation period.
In addition, Mr Anant Shah also argued that a CN should not be issued against him due to his limited financial circumstances. He said the enforcement of a CN against him would likely result in his bankruptcy with little or no gain to the financial position of the scheme and/or the PPF, and no effect on the benefits receivable by scheme members.
Outcome
In June 2020, the Determinations Panel determined that CNs in the sum of £3,688,108 should be issued to Mr Anant Shah and Mr Rohin Shah on a joint and several liability basis. The targets referred the matter to the Upper Tribunal, maintaining their position that there was a valid contract and that we were out of time to bring proceedings.
In the run-up to the Upper Tribunal hearing, we reached a settlement with Mr Rohin Shah.
Following a hearing in May 2023, the Upper Tribunal determined that we should issue a CN to Mr Anant Shah for £1,875,403, and varied the Determination Panel’s determination accordingly. This sum represented 50% of the 2014 payment, plus an additional amount to reflect the time since the acts took place.
The CN was issued on 18 August 2023. The PPF and the scheme trustees are currently pursuing Mr Anant Shah for payment.
Clarifying contribution notice legislation
This case provided helpful clarity on the how the reasonableness and quantum aspects of CN legislation should be interpreted. The following points are particularly relevant.
- If material detriment is found, the question of what CN amount would be reasonable is constrained only by the cap provided by section 39 of the Pensions Act 2004, ie the amount of the section 75 debt. There is no further constraint based on the need to show loss, and the extent of that loss, and no need to consider whether, and the extent to which, the act or failure to act has prejudiced the recoverability of all or any part of the section 75 debt1.
- While a target’s financial circumstances are an important factor in determining whether it would be reasonable to issue a CN against them, it is not the only factor to be taken into account. The Upper Tribunal may decide not to place significant weight on a target’s financial circumstances if they do not make full and frank disclosure of their current finances and the circumstances that have led to that current position.
- The amount that the Upper Tribunal considers it reasonable for a target to pay can be uplifted to reflect the passage of time since the acts and/or failures to act occurred. In this case, the uplift was calculated by reference to historic scheme investment return data.
Footnotes in this section
1 As was suggested in the obiter remarks of Warren J in Re Bonas Group Pension Scheme [2011] Pens. LR 109.