ML Covered - January 2025

As we welcome the New Year, we are pleased to share our latest version of ML Covered, our monthly round-up of key events relevant to those dealing with Management Liability Policies covering D&O, EPL and PTL-type risks.

Re KRF Services (UK) Ltd: A cautionary tale of a sole director and the Sanctions Regulations

The High Court handed down its decision in KRF Services (UK) Ltd [2024], which provides a long-awaited decision to confirm that a sole director of a company with unmodified Model Articles can make decisions on behalf of the company regardless of how many directors it had in the past.

The court also held that making an administration application or order does not in principle breach The Russia (Sanctions) (EU Exit) Regulations 2019 (Sanctions Regulations).

Background

KRF Services (UK) Ltd is a company that provides management services to the family of a person who is designated under the Sanctions Regulations. 

KRF adopted unmodified Model Articles and used to have more than one director. However, following the imposition of the Sanctions Regulations, KRF found itself in a situation where the Board only constituted one director. The Board passed a resolution to make an administration application.

The questions before the court were whether (1) the resolution passed by the Board amounts to a valid decision and (2) whether it should exercise its discretion to make an administration order in light of the Sanctions Regulations.

The Decision and the Takeaways

The court found that the sole director in this case did have the power to pass the resolution and it was appropriate to make an administration order despite the company being designated or controlled by a sanctioned person. Further, the court considered that the appointment of administrators in isolation does not breach regulations 11-15 and 19 of the Sanctions Regulations.

The judgment has clarified the scope of the decision-making power where there is a sole director:

1. The Model Articles do not, in and of themselves, stipulate the requirement for a minimum number of directors.

2. However, if a company's articles specify the requirement of a minimum number of directors, the sole director would have to appoint other directors before making any valid decisions on behalf of the company.

3. If the Model Articles have been adopted without any amendments (and/or any amendments made are not related to the requirement of a minimum number of directors), the sole director may then have the power to make valid and binding decisions regardless of the number of directors historically.

To read RPC's blog on this case, please click here.

Is time up for the Shareholder Rule? High Court departs from the century-old principle

In the recent case of Aabar Holdings SARL v Glencore PLC & ors [2024] EWHC 3046 (Comm), the High Court departed from a century-old precedent in ruling that the so-called 'Shareholder Rule' – the principle that a company cannot assert privilege against its own shareholders save as for communications regarding litigation between the company and the shareholder – does not exist in English law.

Justice Picken, in delivering the judgment, considered the following issues:

• Does the Shareholder Rule exist in English Law?

• If so, does the Shareholder Rule apply to each of (i) legal advice privilege; (ii) litigation privilege; and (iii) without prejudice privilege?

• Does the Shareholder Rule extend to Aabar?

• Does the Shareholder Rule extend to privileged documents belonging to subsidiary companies within Glencore's corporate group?

The key aspect of this case related to this first question – does the Shareholder Rule exist in English Law. This rule has been applied for over a century, dating back to the 19th century case authorities where the principle was first applied.  Ultimately however, Justice Picken departed from the century-old precedent and held that the Shareholder Rule does not exist as a matter of English Law. In considering this issue, he looked at whether the rule had basis in either proprietary interests or joint interest privilege basis, however ultimately concluded it could not be said to exist under either. As the Shareholder Rule therefore does not, in his view, exist in English law, the issue fell away.

Despite this finding, he went on to consider how the Shareholder Rule, if it did in fact exist, would affect issues 2-4, holding that:

2) Whilst the rule would extend to legal advice and litigation privilege, it could not, in the absence of an interested third party, extend to without prejudice privilege.

3) Despite Aabar not directly holding shares, they did hold shares indirectly through a different company which was itself the ultimate beneficiary. This indirect and unregistered membership was considered sufficient for the rule to extend.

4) Given all subsidiaries share an interest in the success of the holding company, so too do shareholders hold an interest in the ultimate holding company's success. As such, the rule would extend to subsidiaries of the holding company.

To read the full judgment please click here.

Court of Appeal confirms D&Os' final salary pensions are ringfenced from enforcement actions

The Court of Appeal has recently held that occupational pensions are protected from injunctions requiring them to be made available to creditors for enforcement purposes in the judgment of Manolete v White [2024] EWCA Civ 1418.

Mr White was the owner of Lloyds British Testing Limited (the "Company"). He was the only member of an occupational pension scheme which was established by the Company. The Company went into insolvent liquidation in 2017. The Respondent ("Manolete"), which is a litigation funder, took an assignment from the liquidators of claims for breach of fiduciary duty owed by Mr White to the Company. Manolete alleged that Mr White had breached his fiduciary duties to the Company by causing it to make a series of substantial payments in the period of 20 months before it went into administration.

Having obtained judgment against Mr White the Court made an order which resulted in the Pension Scheme trustees drawing down Mr White's pension funds in settlement of the outstanding judgment. On appeal, the Court of Appeal noted that there is no indication in any of the legislative materials that Parliament intended to alter or diminish the general immunity from attack by creditors which was given to entitlements and rights to future pensions under occupational pension schemes.  As a result, the appeal was allowed, meaning that Mr White was not required to draw down money from his occupational pension fund.

To read RPC's blog on this case, please click here.

The Employment Rights Bill: Further Updates

Following on from last month's discussion of the Next Steps to Make Work Pay document, we continue to update you on the developments surrounding the Employment Rights Bill (the Bill).

Proposed amendments published

On 27 and 28 November 2024, an Amendment Paper (the Paper) containing several proposed amendments to the Employment Rights Bill was published, which will be considered by the Public Bill Committee. Many of the amendments are government amendments, made by Justin Madders, Parliamentary Under Secretary of State (Department for Business and Trade). Other amendments have been proposed by various members of Parliament. Some of the key changes are highlighted below.

Right to guaranteed hours

The Paper amends clause 1 of the Bill, which introduces the new right for 'qualifying workers' (zero hours and low hours workers) to be offered guaranteed hours in certain circumstances. The new amendments:

• Require employers to ensure that qualifying workers are aware of their rights to guaranteed hours during an 'initial information period' (2 weeks starting from either the worker’s first day of employment, the date it is reasonable to consider they could become a qualifying worker, or the day the provision comes into force). Once the initial information period ends, the worker should continue to have access to this information, providing they are still employed, and it could reasonably be considered that they might become a qualifying worker.

• Ensure that employers notify a qualifying worker where the employer’s duty to make a guaranteed hours offer to the worker does not apply, or a guaranteed hours offer already made is treated as having been withdrawn.

• Allow workers to bring tribunal claims where their employer has either: failed to give them such a notice, given the notice where they should not have or given the notice but it either does not mention the regulations or cites the wrong provision.

Family provisions

Amendments put forward by Liberal Democrat MPs Steve Darling, Sarah Gibson and Munira Wilson on 28 November 2024, propose to double the rate of statutory maternity, paternity, adoption, shared parental and parental bereavement pay, increase statutory paternity leave to six weeks from two weeks, and introduce the right to 'kinship care leave', whereby a child is raised by a friend, relative or extended family member other than a parent. The provision would entitle the employee to up to 52 weeks' leave if the employee satisfies an eligible kinship care arrangement with a child. An additional amendment would require the Secretary of State to make regulations requiring an employer with more than 250 employees to publish information about the employer’s policies on parental leave and parental pay.

Tribunal time limits

Government amendments will increase the time limit for bringing proceedings in the employment tribunal from three months to six months. Whilst not included in the Bill's original draft, it did feature in Labour’s Plan to Make Work Pay: Delivering a New Deal for Working People which Labour published at the start of the general election campaign.

Increasing time limits has been a topic of discussion for some time, particularly in respect of discrimination claims, where potential claimants may be on maternity leave or recovering from illness. While an increased time limit would give workers and employers more time to resolve a grievance or negotiate before a claim must be lodged, the change will likely lead to an increase in claims, placing a further burden on an already struggling tribunal system. Final hearings are also likely to be scheduled long after a claimant's employment has ended due to the tribunal backlog and claimants having more time to submit their claims. There is also the risk that witness evidence will be negatively impacted by the change; witnesses may face memory fade and relevant witnesses may have left the organisation by the time of the hearing. To counteract this, it will be in both the insured's and insurers' interest to gather witness evidence early to strengthen the defence to any claim.

Regulatory Policy Committee's assessment of the Bill

The Regulatory Policy Committee (the RPC), an advisory non-departmental public body sponsored by the Department for Business and Trade whose function is to review the Bill's impact assessments (IAs) and provide an overall rating on whether the case for the proposed regulation has been sufficiently evidenced, has published an opinion on the IAs for the Bill. It has evaluated the overall rating as 'not fit for purpose'.

The RPC assessed 8 of the 23 individual IAs as not fit for purpose, leading to its overall rating. The issues identified included a lack of evidence supporting the government's claim of an imbalance of power between employers and workers in certain sectors, a failure to consider different options, missing business impacts, a lack of analysis regarding the costs associated with certain provisions in the Bill and an inadequate assessment of risks to businesses and other stakeholders.

It should be noted that the RPC's role is advisory only. Although its concerns may be brought up in consultations and Parliamentary debates on the Bill, its opinion will not directly impact the passage of the Bill through Parliament.

Responses to 'Sexism in the City' inquiry

Another important area of focus, particularly impacting on regulated organisations, is the Sexism in the City March 2024 inquiry released by the House of Commons Treasury Committee. The inquiry welcomed the Financial Conduct Authority (FCA)  and the Prudential Regulation Authority's (PRA) consultations on non-financial misconduct (NFM) discussed in last month's edition, as well as issuing several recommendations to the government and regulators.

In response to a request for an update on the implementation of the inquiry's recommendations sent by Dame Meg Hillier MP, Chair of the Treasury Committee, the FCA, PRA and HM Treasury have announced their progress in the area:

• The FCA stated that it intends to publish a final policy statement on NFM in early 2025 and set out next steps jointly with the PRA in Q2 2025. It also plans to strengthen its messaging to whistleblowers and better promote whistleblowing reporting channels.
• The PRA acknowledges that developments in government policy (such as proposals for gender equality action plans and the plan for broadened pay gap reporting) may have an impact on its reporting and target setting proposals. It will also seek to review the impact of its bonus cap policy and whether it has affected gender pay gaps when sufficient evidence is available.
• HM Treasury's letter outlines key priorities for supporting the development of women in the financial services sector. It highlights the Women in Finance Charter, which will continue to prioritise senior management roles.

TPR publishes updated DB covenant guidance

The Pensions Regulator (TPR) has released updated guidance on employer covenant assessments for trustees of defined benefit (DB) schemes, in line with the new DB funding code. This revised guidance is a crucial part of helping pension schemes carry out valuations under the new rules. It includes the first regulatory definition of employer covenant, aiming to provide clarity and consistency across schemes.

The key changes to the guidance include cash flow analysis, affordability assessments, maximum affordable contributions, reliability periods, covenant longevity, and contingent assets. TPR emphasises proportionality in covenant assessments and provides worked examples for more complex areas. Trustees have been urged to review their current covenant analysis to ensure it remains focused and proportionate, particularly if their scheme’s funding position has changed significantly in recent years.

An employer covenant refers to the legal obligation and financial ability of the sponsoring employer to support a final salary/DB pension scheme. It also includes support from contingent assets, such as guarantees. Trustees should also assess the employer’s ability to make cash contributions and the availability of contingent assets to eliminate any funding deficits and address potential future shortfalls. This assessment is crucial for developing a recovery plan if needed, and should be conducted at each scheme valuation.

TPR’s new funding code applies to DB pension schemes with actuarial valuation dates on or after 22 September 2024, in line with the Occupational Pension Schemes (Funding and Investment Strategy and Amendment) Regulations 2024. The release of this updated guidance completes the framework for pension valuations under the new DB funding code, supporting TPR’s mission to protect member benefits and ensure employer support aligns with each scheme's risk profile.

The guidance is relevant to PTL Insurers given trustees will need to follow the updated guidance when conducting covenant assessments and make sure that they are cognisant of the guidance when negotiating deficit recovery plans.  A failure to follow the guidance could expose trustees to potential regulatory action.

To read the guidance, please click here.

Bank of England praises resilience of pension funds

In December 2024, the Bank of England (BoE) published the results of its 'system-wide exploratory scenario' (SWES) exercise. The BoE stated that the pensions sector has seen a marked improvement in its operational and financial resilience following the liability-driven investment (LDI) fund crisis, which came as a result of Liz Truss' mini budget in 2022.

As part of the SWES exercise, the BoE asked around 50 participating firms (including banks, insurers, pension schemes, hedge funds and asset managers) to evaluate how they would be affected by, and respond to, a hypothetical scenario to test how well financial institutions react to severe market stress coming from the non-banking sector.

The BoE believes that the results of the SWES exercise show that actions taken by the Financial Conduct Authority (FCA) and the TPR have materially improved the resilience of the LDI sector in comparison to 2022. The BoE gives specific reference to the importance of guidance published by the TPR in 2023, which advised that scheme trustees should only invest in LDI funds with liquidity buffers capable of withstanding yield movements of 250 basis points, as well as having reasonably sized 'operational' buffers.

TPR's chief executive, Nausicaa Delfas has welcomed the findings of the report, stating that TPR recognises "the important role pensions play in the wider financial ecosystem and continue to guard against systemic risks by understanding how schemes act during stressed market conditions, as well as exploring improvements to our data collection to make sure we keep savers safe".

The developments are relevant to PTL insurers and indicate a potential reduced risk for PTL insurers when it comes to scheme deficit issues.

To read the BoE's full report, please click here.

TPR plans shift to 'prudential' regulatory style

TPR's chief executive, Nausicaa Delfas, has confirmed that the regulator is shifting to a more prudential style of regulation amid ever growing pension schemes and the Government's push for consolidation.

In a speech delivered to the DG Publishing Private and Public Pensions Summit, Delfas stated that TPR modelling suggests that, even without Government intervention, in 10 years’ time the master trust market will contain schemes of 'systemically important' size. TPR estimates that there will be seven schemes with more than £50bn assets under management on a consolidated basis, four of which will be responsible for well over £100bn each. To address this, Delfas said that TPR "are shifting to a more prudential style of regulation, addressing risks not just at an individual scheme level, but also those risks which impact the wider financial ecosystem".

It is not yet clear how this shift will impact the day-to-day life of pension professionals. However, Delfas has offered reassurance that TPR will not act outside of its powers but will simply operate "in a different way". This will include a focus on scheme investments, data quality, and trusteeship, utilising a new regulatory toolkit that includes tiered master trust supervision, and a pensions market innovation hub to guide safe product development.

To read the full text of Delfas' speech, please click here.

Virgin Media case update: ACA, APL and SPP issue joint statement

On 17 December 2024, the Association of Consulting Actuaries (ACA), Association of Pension Lawyers (APL) and Society of Pension Professionals (SPP) released a statement about the impact of the Court of Appeal's decision in Virgin Media Ltd v NTL Pension Trustees II Ltd.

The Court of Appeal decision, which was handed down in June 2024, confirmed that the lack of s.37 actuarial confirmation (required for amendments impacting member benefits in contracted-out schemes) will render the amendment invalid/void, regardless of whether s.37 actuarial confirmation would have been granted had it been sought at the time. As a result, there was widespread concern in the industry that many contracted-out final salary schemes, where amendments would be invalid/void due to a lack of s.37 confirmation, may need to meet additional benefits arising as a result of invalid/void amendments where those amendments otherwise sought to reduce benefits.

In response to the decision, ACA, APL and SPP formed a working group and have been in regular contact with the Department for Work and Pensions (DWP) with the aim of assisting the regulator to understand the potentially negative impact faced by DB schemes and the broader pensions market. The recent statement from the working group urges the DWP to make regulations that enable the validation retrospectively of any amendment that is held to be void solely because either a written s.37 actuarial confirmation was not received before the amendment was made, or where such a confirmation cannot now be located.

The working group's statement reflects the continued concern felt by the pensions sector and the urgent need for clarity on how the decision will impact the sector. As the Virgin Media decision has not been appealed at the moment, as noted, in the absence of a s.37 confirmation prior to the effective date of an amendment, the amendment is invalid/void.  We understand that there is a further case listed for March – Verity Trustees – which is going to consider some of the unanswered questions from Virgin Media including whether certain amendments required a s.37 actuarial confirmation, what qualifies as a s.37 actuarial confirmation and whether there is any room to argue that in the absence of a s.37 actuarial confirmation it is possible to rely on the presumption of regularity to effectively find that there is such a confirmation.

Pensions dashboards: TPR updates initial guidance

On 17 December 2024, TPR published an updated version of its 'Pensions dashboards: initial guidance' document, to include some changes to the way employers and schemes should attempt to manage the dashboards process. 

Pensions dashboards will provide individuals with free access to their pension information in one online location whenever they choose, which will allow savers to track down lost or forgotten pensions. TPR is responsible for enforcing industry compliance with the new dashboard-related obligations which fall on trustees of occupational pension schemes. The first version of TPR's initial guidance was based on the draft Pensions Dashboard Regulations 2022 and has been regularly updated to bring it in line with regulatory developments and to address industry feedback. The recent changes to the guidance include:

• The insertion of references to the appropriate sections of the General Code (relevant to trustees);

• Further information on how schemes with multiple sections and different administrators for some of those sections should work together to agree on the most suitable approach for the scheme in situations where there are data discrepancies, or if a member is a successful match for one section but only a "possible match" for another; and

• That potential members will now be verified by the GOV.UK One Login before they can issue a "find request" to provide schemes with confidence that members are who they say they are. One Login will also check any provided UK address exists and has an association with the saver, through credit records.

PTL Insurers will want to keep an eye on the introduction of the pensions dashboard and where responsibility sits for any issues that arise from the dashboard – including incorrect data and lost personal data – and whether this causes issues for trustees and with that, PTL insurers.

To read the updated guidance, please click here.