UK Court Decides Pension Deficit for Service Company Employees Must be Paid by Trading Company
Many group companies operate a service company to employ staff and second them to other group companies. These arrangements are often not fully documented, particularly in groups who see themselves as one business. However, this can cause issues on an insolvency, as shown recently in the case of MF Global UK Ltd (In Special Administration), Re  EWCA Civ 569.
The MF Global Group carried on a brokerage business. The main trading company was MF Global UK Limited (the trading company). All relevant employees were employed and supplied by MF Global UK Services Limited (the service company). The service company did not trade, but it charged the trading company for salaries and ongoing pension contributions to a defined benefit scheme.
There was no written contract between the service company and the trading company. The only written agreement was between the service company and the group’s holding company. This agreement said that the holding company must ensure that the trading company paid “payroll costs” to the service company.
The main MF Global Group companies went into administration in October 2011. This triggered a debt payable by the service company of over £35 million under Section 75 of the Pensions Act 1995. The trading company and the service company asked the Court to decide who was liable for the pension deficit.
The service company argued that there was an “implied” contract between it and the trading company. It further argued that the trading company was liable to the services company for the pension deficit under this contract.
The trading company argued that there was no implied contract between it and the service company, since it might have paid payroll costs for services for a number of reasons. These included its relationship with the holding company.
In 2015, the High Court decided in favour of the service company. However, the trading company appealed the decision.
Upholding the 2015 decision, the Court of Appeal decided that:
there was an implied contract between the service company and the trading company. Given the level of overall staff costs (some US $330 million per year), there must have been a contractual agreement.
the contract required the trading company to pay the pension deficit. Otherwise, the service company would have been taking on a potential debt that it would never have been able to pay. Further, the correspondence and accounting documents said nothing to cast doubt on the view that the trading company was to pay the pension deficit.
This decision arose from specific facts and other group arrangements may have been treated differently. Further, there is no suggestion that the decision would extend to a secondment arrangement between companies not in the same group. However, where there are intra-group arrangements, any contracts should carefully identify which company would be liable for a pension deficit.