England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		2nd November 2004

Mr Justice Patten :

Introduction

1. This is an application by the trustees of a retirement benefit scheme known as the T&N Retirement Benefits Scheme (1989) ("the Scheme"), which was established under a definitive trust deed made between T&N Limited, the Third Defendant ("T&N"), and the Second Claimant. The First Claimant was appointed as independent trustee of the Scheme pursuant to s.22 of the Pensions Act 1995 ("the 1995 Act") on 11^th October 2001. Although under s.25(2) of the 1995 Act the First Claimant is entitled to exercise all the powers of the trustees of the Scheme alone, both Claimants ("the Trustees") have acted in concert in seeking the direction of the Court and there is no need to distinguish between their positions.
2. The principal relief sought on this application in its amended form are directions from the Court in relation to two matters:

i) whether the Trustees should be permitted to vote either for or against a plan ("the Plan") for the rearrangement of the assets and liabilities of the Federal Mogul Group of companies ("FMG"), of which T&N is the principal English subsidiary; and

ii) in the event that the Trustees are given permission to vote against the Plan, whether they should be permitted to invite the Occupational Pensions Regulatory Authority ("OPRA") pursuant to s.11(1)(c) of the 1995 Act to consider making a direction that the Scheme be wound up.

3. Because the proponents of the Plan have produced revised proposals for the Trustees to consider, the Trustees have requested (with the consent of the other parties) that I deal at this stage only with the first issue of how the Trustees should be permitted to vote in respect of the Plan in its already published form. This judgment deals therefore only with that question.

The Origin of the Plan

4. The Plan has been circulated amongst the creditors of FMG pursuant to an order of the Hon. Judge Lyons made in the US Bankruptcy Court for the District of Delaware ("the US Court") on 4^th June 2004. Under the terms of the Plan creditors are required to register their votes for or against it by 3^rd November. This deadline has now been extended to 17^th November for certain creditors, including the Trustees. The Plan has been promulgated as part of proceedings under Chapter 11 of the US Bankruptcy Code, occasioned by the scale of claims made against FMG for asbestos-related conditions alleged to have been caused by the products which T&N and some of its subsidiaries or its associated companies manufactured or used. The vast majority of these claims in the United States are product liability claims. By contrast most of the UK claims are made by employees. T&N was incorporated in 1920 as Turner & Newall Limited. For many years it produced various types of building material and car components using asbestos. In more recent years its core business has been the manufacture of car components. It became a listed company and has a number of UK subsidiaries. In March 1998 it was acquired by FMG, whose ultimate parent is Federal-Mogul Corporation Inc ("FMC") based in Michigan, USA. FMG manufactures automotive and vehicle parts on a global basis and has about 45,000 employees worldwide, of whom about 3,500 are based in the UK. The principal UK company in the group is now T&N.
5. Although FMG remains confident about the strength of its business, it risked being overwhelmed by the ever-increasing tide of asbestos litigation, derived mainly from the earlier business of T&N. According to the Plan, some 79% of the claims against FMG relate to T&N. In order to preserve the group as a going concern it filed for Chapter 11 relief on 1^st October 2001, and on the same day administrators were appointed in respect of the English subsidiary companies. In total some 133 English companies were involved. There is also one Scottish subsidiary. In Chapter 11 proceedings (unlike administration) the existing management of the company remains in control under what is described as the "debtor in possession" procedure and has the exclusive right, for a limited period, to promote a reorganisation of the company based on a compromise with the creditors of their claims. In order to reconcile the two differing regimes in the US and here, a Court-approved protocol has been entered into between the US and UK Debtor Management and the English Administrators, under which T&N and the other English subsidiaries continue to be managed by their directors.
6. The Plan is designed to allow the company to emerge from bankruptcy free of the claims of its creditors. The protocol agreed between the Administrators of the English companies and the management of the debtor companies, which was approved by the High Court on 1^st October 2001, confers on the US management the primary responsibility for developing, confirming and implementing the integrated reorganisation plan. In the Chapter 11 proceedings an Official Committee of Unsecured Creditors was appointed. This was largely (if not exclusively) made up of representatives of US Noteholders who are due some $2.2bn from FMC. This liability is guaranteed by various US subsidiaries and one English subsidiary, F-M UK Holding Limited. There is also an Official Committee of Asbestos Claimants, made up of eight US representative claimants and one UK claimant.
7. The background to the development of the Plan is set out in some detail in the judgment of David Richards J [2004] EWHC 2361 (Ch) delivered on 21^st October 2004 during the course of the hearing of the Trustees' application. This judgment was given on an application by the Administrators of the English companies for directions as to whether they should take steps (whether by schemes of arrangement or CVAs) to implement the Plan if confirmed by the US Court. The timing of the Administrators' application was designed to allow Judge Lyons to be provided with the judgment of David Richards J prior to the confirmation hearing and to be given an indication of some of the difficulties which might attend the implementation of the Plan in this country in its present form. The Trustees were party to that application and the judgment outlines many of the submissions which have been put to me by Mr Simmonds QC in relation to the Trustees' attitude to the Plan as it stands. David Richards J was, however, primarily concerned to give directions to the Administrators and, as part of that process, to consider whether they could properly seek to implement the terms of the Plan, having regard to the interests of the creditors of the English companies and their duties under the relevant English legislation.
8. In order to shorten this judgment I gratefully adopt the summary of the development of the Plan set out in paragraphs 41 to 48 of that judgment. It is enough for my purposes to note that the essence of the Plan was an agreement (referred to as the Central Deal) reached between the Official Committee of Unsecured Creditors and the Official Committee of Asbestos Claimants, under which what is described as the Asbestos Trust would, on implementation of the Plan, receive 50.1% of the common stock of the reorganised FMC, with the remaining 49.9% being transferred to the US Noteholders in settlement of their claims. FMC and its subsidiaries will thereby emerge from this reorganisation free of the asbestos claims, and the compromise of all existing and future asbestos claims will be enforced by the making of a wide-ranging injunction under s.524(g) of the US Bankruptcy Code, which was enacted specifically for the purpose of dealing with this type of claim.
9. The proponents of the Plan recognise that this injunction is unlikely to be given extra-territorial effect by the English Court (at least in relation to UK claims), and David Richards J has confirmed as much in paragraph 136 of his judgment. Implementation of the Plan in this country will therefore depend upon the approval of a scheme of arrangement under s.425 of the Companies Act 1985 or an effective CVA under the Insolvency Act binding the UK Asbestos Claimants and other creditors. In structural terms, however, the Central Deal means that the claims of creditors other than Asbestos Claimants have to be met by the payment of a dividend, and the Trustees' basic position is that they have been advised, and consider, that the terms currently available to them fail properly to recognise the obligations of T&N and the other participating employers to the Scheme and will produce significantly less in money terms than would be available if the Administrators were to pursue a controlled realisation of the assets of T&N and the other companies in administration, free from the restrictions imposed by the Plan. That view is shared by the Administrators of T&N, who were represented in order to assist the Court on this application. However, another major concern for them, which was the subject of their own application to David Richards J, relates to the alleged unfairness of the Plan as between the classes of creditors which, in the view of the Administrators, would make any scheme or voluntary arrangement unfair or unfairly prejudicial. Those arguments are dealt with by the learned Judge in his judgment and there is nothing which I wish to add to his treatment of those issues.

The Application

10. Before I come in more detail to the issues which confront the Trustees, I need to say a little about the nature of the jurisdiction which I am being asked to exercise. Clause 8(1) of the Definitive Deed empowers the Trustees to

"take any action or make any arrangements generally in connection with the administration or management of the Scheme which [they] think fit".

There is no express power to compromise claims and disputes, although that power is of course contained in s.15 of the Trustee Act 1925. It is, however, common ground (and obviously correct) that clause 8(1) is widely drawn and does extend to enabling the Trustees to support the Plan if they are otherwise satisfied that it would be in the interests of the members of the Scheme as a whole that they should do so. In that sense a vote in favour of the Plan would be intra vires, as conversely would a vote against it, were they to form a different view of its merits.

11. Having considered the matters which I am about to come to, the Trustees are minded to vote against the Plan, or at least not to support it, but they do not wish by this application to surrender their discretion to the Court. Instead they wish to obtain what amounts to a confirmation from the Court that in so exercising the discretion vested in them under the Scheme, they will be acting properly and permissibly. On an application of this kind it is not the function of the Court to determine whether the proposed exercise of the discretion is one which the Judge would himself perform in that particular way, were the decision his own. My only task is to satisfy myself that in reaching a decision about whether or not to support the Plan, the Trustees have taken all relevant matters into account, not had regard to anything irrelevant or impermissible, and have reached a conclusion which, on the material before them, a reasonable body of trustees, faced with the same decision, could reasonably come to: see Edge v. Pensions Ombudsman [1998] Ch 512 at page 534C-D. Subject to satisfying the Court on those matters, it will be for the Trustees to make the decision. It is difficult to see how the Court is ever likely to be in a better position than them to determine what is in the best interests of the beneficiaries they serve.
12. The limits of the Court's role also have an impact on the form of relief sought. Although paragraphs 1 and 2 of the prayer in the Claim Form seek orders in the alternative, giving permission to the Trustees to vote either against or for the Plan, the Trustees in fact now only seek permission to vote against it, or at least not to support the Plan. I have to decide whether that is a course of action which is properly open to them as things stand.
13. In order to ensure that both sides of the argument have been fully canvassed, two representative Defendants have been joined to the proceedings. The First Defendant is a member of the Scheme with a deferred entitlement to a pension. Mr Ham QC on her behalf has supported the view of the Trustees that the Plan is less generous to the Scheme members as a whole than a controlled realisation of T&N's assets is likely to be. The Second Defendant is a member in receipt of a pension. Mr Tidmarsh QC, who appears on his behalf, has argued in favour of the Trustees supporting the Plan, at least in regard to what has become known as the Alternative Treatment. I will come to the detail of this a little later.

The Pension Scheme

14. The Scheme was established in its current form as a result of the reorganisation of a number of pension schemes relating to T&N and the AE Group, which T&N acquired in 1987. The current Definitive Deed and Rules are dated 3^rd June 1996. They have some subsequent minor amendments to them, but nothing really turns on these for the purposes of this application.
15. The Scheme is a defined benefit occupational pension scheme which provides benefits calculated by reference to a proportion of final salary. It is a contributory scheme, with the balance of cost being made up by the participating employers. Until 16^th July 2004 these comprised T&N as the principal employer, a joint venture company (which is not affected by the Plan and with which I am therefore not concerned) and fifteen other subsidiary companies. Of these subsidiaries, thirteen have now given notice under clause 5(1) of the Scheme Rules withdrawing from the Scheme, following an application which the Administrators made to David Richards J. The remaining two participating subsidiaries (Federal-Mogul Technology Limited and TBA Belting Limited) ceased to participate in the Scheme when they ceased to have any employees who are active members. Two other English companies in administration (Federal-Mogul Sunderland Limited and Federal-Mogul Bridgwater Limited) ceased to participate at an earlier stage, but of these only the latter is dealt with in the Plan. It ceased to participate in the Scheme on 9^th April 2004.
16. The Scheme has some 37,200 members, of whom only about 100 remain (post 16^th July 2004) as employees of a participating employer and therefore as active members. About 20,400 members are in receipt of pensions and the remaining 16,700 have a deferred entitlement, having ceased pensionable employment under the Scheme, but not having yet become entitled to a pension in payment. Under the Rules of the Scheme dated 3^rd June 1996 the pension payable amounted to either 1/60 or 1/80 of Final Pensionable Earnings as defined (depending on age and date of admission to the Scheme) multiplied by the period of pensionable employment. Since 1^st December 2002 (by amendment) there has been a single rate of accrual of 1/80 of Final Pensionable Earnings. Members pay contributions to the fund at the rate of 4.5% of gross earnings, and under Rule 8(1) each employer is required to pay contributions from time to time at a rate agreed by T&N with the Trustees after consultation with the Scheme's actuary. Rule 24(8A) provides for annual increases in pensions for some pensioners in payment at a minimum rate of 3% with effect from 1^st January in each year.
17. The Trustees have no power under the Definitive Deed and Rules to wind up the Scheme. Their only recourse in the event that they consider that steps should be taken to wind up is to refer the matter to OPRA under s.11 of the 1995 Act. However, the Scheme can and will be terminated if T&N as the Principal Employer gives notice under clause 31(1)(a) of the Definitive Deed, terminating its liability to pay contributions to the fund, or is itself wound up. In that event (unless the Trustees decide to continue the Scheme as a closed fund) the assets (after payment of expenses and any benefits already due and payable at the date of termination) will be realised and applied to purchase annuities to secure benefits in accordance with the order of priority set out in clause 31(2). These provisions will take effect subject to s.73(3) of the 1995 Act, which requires the assets to be applied to satisfy, in this order:

i) the liabilities of pensions in payment in full (but excluding any increases);

ii) the liability for deferred pensions;

iii) any liability for increases to pensions in payment; and

iv) any liability for increases in deferred pensions.

If the Trustees opt to continue the Scheme as a closed fund (under clause 34(3)) it will continue, but with no further members, no further contributions being payable and with no accrual of further benefits.

The Claims of the Trustees

18. The liabilities of a pension scheme can be valued on one of three alternative bases. These are commonly referred to as:

i) the ongoing basis;

ii) the minimum funding requirement ("MFR") basis; and

iii) the buy-out basis.

The first is self-explanatory and assumes that the employer remains a going concern, able to fund contributions to the scheme from time to time in respect of both past and future service. It has no relevance to the present case. Both of the other two bases of valuation can be imposed by statute. The MFR basis derives from s.56 of the 1995 Act and, as its name suggests, was intended to provide a minimum funding benchmark in respect of final salary schemes. It is designed to apply in the case of ongoing schemes. Trustees of such schemes have a duty under ss.56-61 of the Act to ensure that the funding level of the scheme is at least 100% of MFR and if it falls below this (but remains above 90% MFR), to put in place arrangements which will restore it to that level over a period of ten years. If the MFR level falls below 90%, steps must be taken to bring the MFR funding up to that level within three years.

19. The actuarial basis of calculation for an MFR valuation is prescribed by regulations made under s.56 of the 1995 Act, and I need not go into that for the purposes of this judgment. It is enough to record that it is obviously less onerous to employers than the buy-out basis of valuation, which assumes that contributions cease at the date of valuation and depends on the cost of annuities. If the Scheme is wound up, then the participating employers are required under s.75 of the 1995 Act to fund any shortfall in the assets required to meet the liabilities under the Scheme. The buy-out basis of calculation will apply to determine this, if the participating employers are not at that time in liquidation. If, however (as in this case) participating employers withdraw from the Scheme but leave at least one other employer and the Scheme in place as a continuing Scheme, then under regulation 4 of the Occupational Pension Schemes (Deficiency on Winding Up etc) Regulations 1996 ("the Deficiency Regulations") the employers who withdraw are only liable to pay to the Scheme whatever sum is required to fund their share of the Scheme liabilities at 100% of the Scheme's MFR valuation.
20. The Trustees therefore have the following claims against T&N and the other participating employers:

i) a claim under s.75 of the 1995 Act and the Deficiency Regulations against the participating employers who have withdrawn from the Scheme for their appropriate portion of the Scheme liabilities, calculated on an MFR basis;

ii) a claim against T&N for additional contributions to the Scheme under s.56 of the 1995 Act up to the MFR level of funding until the Scheme is in winding-up;

iii) a contingent claim against T&N for the balance of the buy-out deficit on a winding-up of the Scheme. This arises under clause 32(10) of the Definitive Deed, which imposes on T&N, in the event of a winding-up of the Scheme, a longstop liability to pay on demand whatever is required on a buy-out basis to provide the benefits specified in clause 31; and

iv) a statutory claim against T&N under s.75 contingent on the winding-up of the Scheme.

21. As I mentioned earlier, the Trustees have no power themselves to wind up the Scheme, but a winding-up will occur if T&N gives notice of termination under clause 31(1)(a), is itself wound up, or if OPRA exercises its powers under s.11 of the 1995 Act. If, however, the Scheme is terminated by the liquidation of T&N (thereby triggering a winding-up of the Scheme under clause 31(1)(b)), then under regulation 3 of the Deficiency Regulations the liability of T&N under s.75 would be calculated on an MFR basis. The statutory contributions imposed by s.56 and s.75 will therefore never exceed the concurrent liability of T&N under clause 32(10) of the Scheme, but so far as the statutory liabilities require to be compromised under the terms of the Plan, there is the obvious issue of whether the actual or contingent statutory obligations under s.56 and s.75 can be waived or modified as part of a contractual compromise of liability.

The Quantum of the Claims

22. The actuaries advising the Trustees (Mercer Human Resource Consulting Limited) have valued the Scheme as at 31^st March 2004 on a closed fund, MFR and buy-out basis. Their conclusions (set out in a letter of 16^th September 2004) are that on a closed fund basis the Scheme is in deficit in the sum of £662m; that on an MFR basis the deficit is £97m ($172m); and that on a buy-out basis the deficit is £917m ($1,623m). (The Plan documents assume T&N's Scheme liabilities on a buy-out basis to be £875m ($1,549m) as at 30^th September 2003.) In relation to the MFR deficit of £97m, Mercer have calculated the share attributable to the participating employers who withdrew from the Scheme as approximately £83m (85.5%) ($142m).

The Plan

23. As I have already indicated, the core provisions of the Plan are designed to swap asbestos claims and liabilities for an equity stake in FMC. Dividends will be applied by the Asbestos Trust in settlement of the asbestos claims. The Central Deal was agreed relatively early in the restructuring process between October 2001 and January 2002. The 50.1% of equity to be held on behalf of the Asbestos Claimants is the minimum stake which would entitle FMC to the benefit of a s.524(g) injunction.
24. The 49.9% of equity which is to be taken by the US Noteholders is described by Mr Culverhouse of Alexander Forbes Trustee Services Ltd, the First Claimant, in his evidence for the Trustees, as a stunning result when compared with the position of the other unsecured creditors. This has formed the subject of adverse criticism by the Administrators during the hearing before David Richards J, but, like that Judge, I prefer to express no view about it at this stage. Most of the argument before me has been directed to whether the Trustees will do better for their members by remaining outside the Plan and seeking to recover in English insolvency proceedings involving T&N and the other participating employers following a controlled realisation of their assets. The Administrators' challenge to the overall fairness of the Plan is, however, relevant to a consideration of the provision which is offered to the Trustees under the Plan, because some of the options will not be available to the Trustees if the Administrators succeed in persuading the High Court that the Plan should not be implemented here through a scheme of arrangement or a CVA.
25. The Plan is contained in a Disclosure Statement which summarises the effect of the Plan on the various classes of creditors. This has to be read in conjunction with the Plan itself, which is appended as an exhibit to the Disclosure Statement and contains the detailed definitions and provisions which are intended to govern the terms of payment. The Disclosure Statement is important because, as its introduction states, it is intended to assist creditors in making an informed judgement as to whether or not to accept the Plan. The Disclosure Statement recognises in terms that there will have to be agreement with the English and Scottish Administrators on a scheme of arrangement or voluntary arrangement, in order to implement the Plan in relation to the UK companies. Failing this, the Plan Proponents will work towards an agreement with the Administrators under which FMC will retain the businesses which are valuable to it and will jointly market those which are not. If this cannot be achieved, FMC intends to bid for the businesses which it regards as valuable on the basis that any business or asset transferred to it will be given the protection of the s.524(g) injunction. That protection will not, however, be available to any other purchaser of such businesses, and these provisions of the Plan are obviously designed to discourage the Administrators from a realisation process which is not agreed with FMC. One of the issues raised by Mr Tidmarsh is the extent to which the prospect of some form of successor liability attaching to the purchaser of a T&N business under a non-consensual process of realisation is likely to have a significant depressing effect on the value of T&N's assets. The Plan Proponents are clear in the Disclosure Statement that they do not believe that a non-consensual process by the Administrators would be in the best interests of the UK pension creditors.
26. The Disclosure Statement contains a summary of the classification and treatment of claims. The proposal for UK unsecured claims (Class H) is that each claim-holder will receive a cash payment in an amount equal to the greater of what is referred to as the Allowed Amount of such claim, multiplied by one of three alternative ratios:

i) the T&N Distribution Ratio 1 (if consensual marketing is not performed) or Ratio 2 (if consensual marketing is performed);

ii) the Company Specific Distribution Ratio; or

iii) the Small Company Specific Distribution Ratio.

27. The T&N Distribution Ratios are defined in the Disclosure Statement and the Plan as follows:

"T&N Distribution Ratio 1

means a ratio, the numerator of which shall be 79% of the value of the Reorganised Federal-Mogul Class B Common Stock as determined at the Confirmation Hearing and the denominator of which shall be the tort system value (as reflected in the Asbestos Personal Injury Trust Distribution Procedures) of all Asbestos Personal Injury Claims against T&N Limited.

T&N Distribution Ratio 2

means a ratio, the numerator of which shall be the value of T&N Limited's assets as determined at the Confirmation Hearing either in accordance with the Consensual Marketing Procedures or as otherwise determined by the Court and the denominator of which shall be the sum of (i) the tort system value (as reflected in the Asbestos Personal Injury Trust Distribution Procedures) of all Asbestos Personal Injury Claims against T&N Limited and (ii) the Allowed Amount of all other claims against T&N Limited including, without limitation, Affiliate Claims against T&N Limited."

The value of the FMC Class B Common Stock is estimated by the Plan Proponents to be US $1bn, so that the numerator under Ratio 1 will be $790m. This represents the proportion of stock in the Asbestos Trust which equates to T&N's share of the asbestos claims against FMG. As already mentioned, the 50.1/49.9 split with the US Noteholders is in itself controversial, having regard to the relative weakness of the position of the Noteholders on a liquidation, but the Trustees, I think, accept that if the share of the common stock attributable to the Asbestos Trust represents a fair allocation of assets to that class of creditors, there is some logical force in applying the same rate of dividend to the claims of the Trustees and the other unsecured creditors. What, however, they do not accept is that Ratio 1 achieves this. This is in large measure due to the proposed denominator. Mr Tidmarsh emphasised as part of his submissions in favour of the Plan that at recent hearings in the US Court it seems to have been accepted that the amount of asbestos claims against T&N will fall to be valued as part of the Confirmation Hearing Procedures. However, the definition of T&N Distribution Ratio 1 refers to the value of claims being determined by reference to the Trust Distribution Procedures ("TDP") which are annexed to the Plan. These include schedules of values for different claims by reference to the type of illness suffered. Each category of claim is given a scheduled, average and maximum value and purports to be based on historical US settlement values and having regard to whether the claimant's exposure to T&N asbestos-containing products was more or less than 90%.

28. Those values are the product of agreement between the Asbestos Claimants and the Noteholders in the US proceedings, but they have had a significant impact on the assessment on the total value of likely claims. The US Counsel (Caplin & Drysdale) acting for the Asbestos Claimants retained Dr Mark Peterson, a statistician, to advise them on the asbestos liability of FMG. In October 2002 he made a preliminary assessment of T&N's US asbestos liabilities in the sum of US $6.585bn. This figure was later revised downwards to US $5.728bn. However, later in 2004 he prepared a further revision to his estimate, using the TDP settlement values for the US claims. This produced a claims value of US $10.497bn. The US actuary (Mr Michael Angelina of Tillinghast) who advises the Trustees says in his report that he regards the TDP values as too high and inconsistent with T&N's US historical pay-outs. His assessment of T&N's UK liabilities is £216.7m, which is broadly in line with Dr Peterson's estimate of £252m. In the Disclosure Statement, however, an estimated percentage recovery for the Class H claims, using T&N Distribution Ratio 1, is given as 7.2%, which as a matter of arithmetic assumes that Dr Peterson's figures are used as the denominator.
29. T&N Distribution Ratio 1 applies if what are described as Consensual Marketing Procedures are not performed with respect to the UK debtor company. In the Disclosure Statement and the Plan these are defined as meaning:

"the process by which Federal-Mogul Corporation, by agreement with the Administrators, shall retain those businesses and/or assets of the UK Debtors that are valuable to Federal-Mogul Corporation and its customers and by which those businesses and/or assets of the UK Debtors that are not valuable to Federal-Mogul Corporation and its customers may be marketed and sold to third-party purchasers as more fully described in Section 8.16.1 of the Plan."

It is confirmed in paragraph 8.16.1 of the Plan that Consensual Marketing Procedures only become relevant if the UK Administrators fail to agree to promote parallel schemes of arrangement or voluntary arrangements in order to implement the Plan in the UK, so that the reference to Consensual Marketing Procedures not being performed is a somewhat delphic reference to positive steps being taken in England and Scotland by the Administrators to support the Plan. If, however, there is no co-operation from the Administrators (and Consensual Marketing Procedures are therefore performed), then Ratio 2 applies. Here the numerator is the value of T&N's assets and the denominator is the value of the asbestos claims plus all other claims against the company, including claims by affiliates. This will therefore add to the denominator the value of the Trustees' own claims. The estimated percentage recovery is stated in the Disclosure Statement to be between 3.8 and 6%.

30. Of the other two definitions, I need only mention the Company Specific Distribution Ratio. This means:

"with respect to a UK Debtor, a ratio, the numerator of which shall be: (i) the value of the referenced UK Debtor's assets as estimated on Exhibit L of the Disclosure Statement if the Consensual Marketing Procedures are not performed for the referenced UK Debtor or (ii) the Market Value of the referenced UK Debtor's assets if the Consensual Marketing Procedures are performed for the referenced UK Debtor, and the denominator of which shall be the tort system value (as reflected in the Asbestos Personal Injury Trust Distribution Procedures) of all Asbestos Personal Injury Claims against the referenced UK Debtor and the Allowed Amount of all other Claims against the referenced UK Debtor".

It therefore follows the scheme of the T&N Distribution Ratios by making the numerator either the values specified in Exhibit L or market value, depending on whether Consensual Marketing Values are performed, and adopts a similar denominator to that in Ratio 2.

31. Unlike other unsecured creditors of T&N, the Trustees are given a prior choice of treatment which they can elect for in preference to what has been referred to as the Alternative Treatment provided in relation to Class H claims. This is the so-called Let it Run option, which is set out in Class I in the summary of treatment contained in the Disclosure Statement. Under the terms of Let it Run the Scheme will continue, but T&N's obligations to fund benefits will be limited until April 30^th 2012 to the annual maintenance cost attributable to active service by current employees within the Scheme. There will be no liability (as at present under ss.56-61 of the 1995 Act) to top up the Scheme in respect of past service benefits. T&N will have the right to terminate the Scheme on and after April 30^th 2012, and if there is such a termination, the Trustees will receive a cash payment equal to the Allowed Amount of their claims against T&N and all other participating employers, calculated as of 1^st October 2001, multiplied by T&N Distribution Ratio 1 plus interest. For the reasons already explained this is estimated by the Disclosure Statement summary in relation to Class I claims to be the equivalent of 7.2% of the buy-out shortfall.
32. Let it Run only applies if all three of the following conditions are satisfied: i.e.

i) the Trustees vote in favour of all of the Plans relating to T&N and the other participating employers;

ii) the Trustees give an irrevocable undertaking at least 14 days before the Confirmation Hearing to vote to approve any voluntary arrangement for T&N and the other participating employers; and

iii) the Consensual Marketing Procedures are not performed: i.e. the Administrators take the necessary steps to implement the Plan.

If any of these conditions are not fulfilled, then the claims of the Trustees against T&N and the other participating employers are to be treated as Class H claims and will be satisfied by the dividend payments which I have outlined above. The provisions relating to Let it Run are given effect to in clause 3.6.4 of the Plan (Class 6I) and clause 3.6.3 (Class H) in relation to T&N, and in similar provisions in clause 3.8.2ff in relation to the other participating employers. These provisions mirror those of clauses 3.6.3 and 3.6.4 in the treatment they provide.

The Trustees' Objections to the Plan

(A) Let it Run

33. Because of the Alternative Treatment available to the Trustees the provisions of Let it Run have to be compared not only with what would be available on a controlled realisation by the Administrators, but also with what is available under the Plan, if the Trustees opt to bring their claims under Class H. Mr Simmonds on behalf of the Trustees submitted that Let it Run has four main defects:

i) as a philosophy or strategy it is misconceived;

ii) it operates unfairly between members of the Scheme;

iii) there is uncertainty as to when the 7.2% payment will be made; and

iv) the dividend is in any event inadequate.

34. The first point relates to the absence of any provision under Let it Run for the deficit attributable to past service benefits to be reduced by further contributions from T&N during the continuation of the Scheme. The Plan Proponents have indicated in correspondence that the correction of the under-funding relating to past service will have to come from market performance. None of the parties represented before me considered that this was even remotely feasible, not least because the Trustees have now reduced the equity content of their investments to about 20% of the fund. Mercer have advised the Trustees that even on the basis of an equity/bond allocation of 40%/60% the shortfall could only be made up in its entirety if there were to be an additional annual rate of return of 7.3% above the yield available on long-dated gilts. Even to make up a lesser portion of the deficit would require unrealistic rates of return in any foreseeable market. The Trustees would therefore be required to continue to operate the Scheme in circumstances where there was no realistic prospect of the deficit in funding ever being significantly remedied.
35. This would have a number of consequences. The Scheme would continue to run in effect as a closed fund, with the result that pensions would be paid as they fell due at a rate of 100p in the £, together with increases as they fell due under the Scheme. The number of pensions in payment will increase in time, but with no further contributions being made to reduce the deficit in funding in respect of past service, the payment of current pensions in full will over time lead to an inability on the part of the Trustees to fund the future pensions of active or newly-deferred members. This phenomenon of priority drift (as it is called) will continue throughout the period of Let it Run and is likely to worsen as time goes on. Mercer has advised the Trustees that the Scheme will require payments of £29m ($51m) per annum in respect of past service under-funding in order to counter this. In their latest estimate Mercer say that this annual funding requirement has now increased to between £30m-£35m per annum ($53m-$62m).
36. It is therefore difficult to see any obvious answer to Mr Simmonds' second criticism, that Let it Run operates unfairly as between members of the Scheme. This has a number of potential consequences for this part of the Plan. The Trustees have a fiduciary duty to act bona fide in the best interests of the members of the Scheme as a whole. Some inequalities in treatment are inevitable, but they must not pursue a course of action which clearly favours one class of members over another. It seems to me that the Trustees would be open to attack, were they now to seek to implement Let it Run in the face of the actuarial and investment advice they have received. I would certainly not be prepared to approve any such action in the light of the evidence currently filed. Nor am I persuaded that it would be right for them effectively to waive their right to seek a winding-up of the Scheme through OPRA in circumstances where the size of the deficit and the problems of continued under-funding may make that the only proper course to take. There is also the technical point which was raised before David Richards J as to whether it is legally possible to compromise in advance the statutory liabilities which may accrue under ss.56-61 and s.75 of the 1995 Act: see Bradstock Group Pension Scheme Trustees Ltd v. Bradstock Group Plc [2002] PLR 327. David Richards J expressed his agreement with the passage in the judgment of Mr Charles Aldous QC (sitting as a Deputy High Court Judge) where he said that:

"It was rightly accepted that it was not possible to contract out of the trustees' and employer's obligations to comply with the MFR regulations nor in advance to contract out of the provisions of s 75. Whilst the scheme is ongoing trustees cannot waive the need for compliance nor negotiate a more lenient schedule of contributions than the regulations prescribe, nor equally can they, in my judgment, contract out of the effect of s 75 in advance of the section coming into play. However, there is a clear distinction between this and trustees compromising or settling a debt which has arisen under s 75 in the best way they reasonably can for the benefit of their scheme members."

For my own part I prefer to express no conclusion about this matter. I accept that the obligation for continued funding under ss.56-61 may not be able to be compromised in advance. To do so would be to allow the employer to contract out of a statutory obligation. But the position under s.75 may be more difficult. I do not entirely follow why public policy should be seen as a bar to an agreement in advance not to enforce the provisions of s.75 and yet be no barrier to the compromise of such claims once they have arisen. But these issues can be left for another day. I prefer to base my view of Let it Run on the more fundamental objection of unfairness and prejudice.

37. The next point concerns the complete lack of certainty in relation to the payment from T&N. As already mentioned, the dividend is payable not before 2012, and only if T&N then elects to terminate the Scheme. In the meantime the payment remains unsecured and there is no way of knowing whether T&N will be able to discharge the obligation in seven years' time, even if it then chooses not to continue with this Scheme. It seems to me that these are all proper and real concerns for the Trustees to take into account.
38. The other objection to Let it Run which concerns the Trustees relates to the size of the prospective dividend. It is calculated at 7.2% in the Disclosure Statement, based on the assumption that the Peterson estimate of asbestos liabilities will form the denominator in T&N Distribution Ratio 1. As I have mentioned, Mr Culverhouse says in his witness statement that the Trustees can see a case for parity of treatment between themselves and the other classes of creditors, but he does not of course accept that the Plan does treat each class of creditors in a fair and even-handed way. There are a number of oddities about the Let it Run provisions. The first is that the future payment which is provided for under clause 3.6.4(b) of the Plan is calculated as the same percentage of the claims (i.e. T&N Distribution Ratio 1) as would be available under the Alternative Treatment under clause 3.6.3 in the event that Consensual Marketing Procedures have not been performed. This is the same condition as applies to Let it Run: see clause 3.6.4(b). If the Administrators do not support the Plan though schemes of arrangement or voluntary arrangements in the UK, neither Let it Run nor an immediate payment under Ratio 1 will be available. But if the Plan is implemented, it is difficult to see what possible benefit exists for the Trustees in agreeing to postpone their entitlement to the dividend until 2012, when they can have it at once under clause 3.6.3. It is possible that these conditions will be amended, but as things stand Let it Run offers no advantages over the Alternative Treatment.
39. The second point to make is that the Ratio 1 figure of 7.2% applies under Let it Run not only to T&N's liability to the Scheme, but also to that of the participating employers under s.75 of the 1995 Act. This seems to be in contrast with the position under the Alternative Treatment (i.e. Class H), where the application of the Company Specific Distribution Ratio limits the denominator to asbestos and other claims against that company alone. This is of some importance to the Trustees, because the advice to them has been (to use Mr Culverhouse's words) that many of the participating employers who have left the Scheme are relatively asset-rich, asbestos-light by comparison with T&N. Exhibit L to the Disclosure Statement indicates that nine of the participating employers will produce a higher rate of recovery under the Company Specific Ratio than under T&N Distribution Ratio 2. Exhibit L appears to have underestimated the total MFR funding deficit (now estimated at £97m ($172m)), of which the claims against the participating employers account for approximately 85.5%. Grant Thornton, who have analysed for the Trustees the amount of the revised s.75 claim which could be recovered from the participating employers, estimate that a total recovery could be achieved in the range of £52m-£64m ($92m-$113m). This would be in addition to the claims against T&N.
40. Looked at in this way, the Trustees are plainly entitled to take the view that Let it Run is not the option which they should select, even if they were to choose to operate within the Plan rather than to rely upon a dividend from the controlled realisation under English insolvency procedures. Mr Tidmarsh accepted that Let it Run seems to have no advantages for the Trustees over the Alternative Treatment and he does not suggest that the Trustees should pursue it. His opposition was to the immediate outright rejection of a dividend under the Plan. He accepted that the real decision for the Trustees was to choose between the Alternative Treatment offered under clause 3.6.3 (and the parallel provisions dealing with the participating employers) and taking the chance of obtaining a higher rate of return from a controlled realisation by the Administrators outside the Plan. He did not try to persuade me to give the Trustees the opposite direction to the one which they are now seeking. His opposition was limited to highlighting a number of points which he says have yet to be properly considered before a final decision can be made. If the Court directs the Trustees specifically to consider these matters before deciding whether or not to support the Plan, then he is content to leave it to the Trustees to decide at that time how they should act.
41. All of Mr Tidmarsh's points relate to the comparative returns available either from or outside the Plan. But before I come to consider these issues, it is worth noting that the real choice which confronts the Trustees may be much narrower. Even if one ignores Let it Run as a preferred option, the payment of an immediate dividend calculated by applying T&N Distribution Ratio 1 will only be available if the Administrators seek to implement the Plan. At present this seems unlikely. The Trustees' likely choice, therefore, is between a dividend from T&N calculated on the basis of T&N Distribution Ratio 2 (and, in the case of the participating employers, under the Company Specific Distribution Ratio) and a dividend from a controlled realisation of those companies' assets.

(B) The Alternative Treatment

42. The Alternative Treatment offers the Trustees as unsecured creditors of T&N an expected return of 7.2%, assuming that T&N Distribution Ratio 1 applies and that the Peterson claim values are adopted in relation to the denominator. Where the Company Specific Distribution Ratio applies, the value of the debtor company's business and assets will be restricted to the range of values set out in Exhibit L to the Disclosure Statement. The Administrators have proceeded to obtain advice about the valuation of T&N and the participating employers on a controlled realisation basis, which has been checked by Grant Thornton on behalf of the Trustees. According to the Plan Proponents the Ratio 1 dividend (calculated at 7.2%) offers £63m ($112m). A subsequent offer of £73m ($130m) was made and then withdrawn. Mr Culverhouse in his second witness statement produces a table showing the expected dividend recovery under a controlled realisation, using the various values which have been promoted on each side as the basis of the numerator and denominator. Under T&N Distribution Ratio 1 the numerator is of course 79% of the estimated value of the Class B common stock of FMC post-reorganisation. This produces a numerator of $790m on a stock value of US $1bn. 79% represents the proportion of FMG's asbestos liabilities which, according to the Plan Proponents, are attributable to T&N. This falls to be compared with the various estimates of T&N's value, which range from the Plan Proponents' present estimate of £0.27bn ($0.48bn) to the Administrators' estimate of £0.63bn ($1.11bn) on a controlled realisation. Grant Thornton have calculated that even if one takes Dr Peterson's most recent estimate of the claims values of $10.95bn (£6.1bn), the dividend is unlikely to be worse on a controlled realisation than $148m and could be as much as $221m if the Administrators' prediction of sale values proves to be correct.
43. The evidence of Mr Culverhouse is that the valuation of T&N and the other UK subsidiaries has been a matter of considerable dispute between the Administrators and the Plan Proponents. In the light of this the Trustees instructed Grant Thornton to analyse and critically review the assessments of value carried out by those advising the Plan Proponents (Alix Partners and Jefferies & Co) and the Administrators (Close Brothers Corporate Finance and @VISORY partners) to enable the Trustees to form a view about the merits of their conclusions. Grant Thornton were not asked to carry out their own valuation. Their analysis takes into account the fact that dividends would be recoverable not only from T&N but also from the participating employers in respect of the s.75 claims. A computer model was prepared, to test what are described as the sensitivities arising from changes in the values of either the asbestos or the Trustees' claims and their impact on potential dividends payable by the participating employers and T&N on a liquidation. It was noticed as part of this exercise that changes in the amount of unsecured claims against T&N (in particular the asbestos claims) had a greater impact on dividend than changes in the value of T&N's assets.
44. One thing that emerges from the Grant Thornton report is that the Administrators' advisers have already altered their own estimates of recoveries from realisations in the light of criticisms made by the Plan Proponents. The key factor in the valuation of the assets of T&N and the other UK subsidiaries has been the impact on value of non-co-operation by FMG towards any third-party purchaser of a T&N or subsidiary business and the possibility of successor liability for asbestos-related conditions attaching to the assets and their purchasers.
45. The Administrators have taken legal advice from Sherman & Sterling about successor liability and are confident that the scope for such claims is limited. This is in contrast to the Plan Proponents, who remain adamant that it will apply. Both views are noted and taken into account by Grant Thornton as part of their analysis.
46. Possible non-co-operation by FMG following a sale of the business assets of UK subsidiaries is also considered in the Grant Thornton report. They note that both Close Brothers and @VISORY have assumed a degree of co-operation and a consensual approach to a controlled realisation, but that the Plan Proponents have indicated that co-operation cannot be assumed following any sale process, or perhaps even before. One example of this touched on in the report is what is referred to as the European Friction Business. This is conducted by F-M Friction Products in England and other group companies in Spain and the Czech Republic. The business has research facilities in Germany, where many of the customers are based. Close Brothers have assumed that the Friction Business will be sold as a whole, but the Plan Proponents have indicated that even if the sale process is consensual, all facilities remaining within FMG thereafter would be withdrawn from the purchaser and that there would be aggressive competition with any successor business.
47. Grant Thornton have concluded that notwithstanding these factors, the valuation assumptions made by Close Brothers appear to be reasonable. They have made adjustments to the Administrators' figures to reflect the downside sensitivities which they have identified as material to a controlled realisation, and this has resulted in the Administrators' estimated return of $1.118bn being reduced to $993m. They have not, however, made any specific adjustments to reflect the potential problems of successor liability or non-co-operation. Their conclusions on the valuation work of Close Brothers and @VISORY are summarised in the following paragraphs in their report:

"We are satisfied that the work carried out by Close Brothers and @VISORY partners has been carefully considered and is diligently based. It is clear from the conversations we have had with them that they understand both the businesses they have valued and the markets in which they operate. The approach they have adopted appears to be reasonable other than as noted above. However, there are inevitable uncertainties surrounding any realisation of the T&N assets by the Administrators. This is heightened in circumstances where there are parties whose co-operation cannot be assumed and, in this particular case, reorganised Federal-Mogul (as controlled by the Plan Proponents). The Plan Proponents have indicated that, whilst they will co-operate in an Administrators' realisation, they may adopt "spoiling" tactics which may hinder the process and reduce the value of the assets. Federal-Mogul may end up getting back approximately 75% of any sale via dividend payments from T&N Limited and many of the actions they could consider to reduce the value of the T&N business would damage their own ongoing business. A rational third party is unlikely to do this. However, in order to assess a downside valuation to reflect the inherent uncertainties, we have prepared a downside sensitivity.

Overall, our assessment is that the approach adopted by the Administrators and their advisers is far more robust and their arguments more sustainable than that adopted by the Plan Proponents. It is, for example, worth noting that the Administrators anticipate having approximately $274 million of cash under their control by the end of 2004. Ignoring the further cash income which will be generated by way of ongoing interest obligations under the loan notes this implies that the Plan Proponents attribute a value of only $214 million to businesses that generate approximately half of all Federal-Mogul's Group trading profits. We concur with the Administrators' description of this proposition as nonsensical."

48. Mr Tidmarsh submits that Grant Thornton's failure to reduce the Administrators' estimate of recoveries based on the possibility of successor liability and non-co-operation indicates that the Trustees have not given proper or adequate consideration to those possibilities. There is likely to be considerable hostility to any third-party purchaser of a valuable FMG business, who will thereafter become a competitor. Equally, the Administrators, he says, have underestimated the risks of successor liability attaching to such businesses in the hands of the purchaser. One can obviously take different views about these matters, but it is clear from their report that Grant Thornton were alive to these issues, but decided to make no allowance for them in the form of reducing the estimate for recoveries. That is a matter for their professional judgement. Mr Tidmarsh does not suggest that their view is necessarily wrong, and the professional advisers instructed by the First and Second Defendants (Robson Rhodes and KPMG) make no real criticism of Grant Thornton's methodology or the quality of their analysis. Indeed Robson Rhodes in their report of 6^th October 2004 describe the work done by Grant Thornton as thorough and soundly based. Mr Ham submitted that, in the light of this evidence, the Trustees are entitled to rely and act upon this advice. I agree. I do not accept that they are required to reconsider, in conjunction with Grant Thornton, issues such as successor liability and non-co-operation which Grant Thornton have already taken into account in their report and recommendations.
49. As already indicated, Grant Thornton's analysis also takes into account the position of the other participating employers against whom the Trustees have s.75 claims. They estimate the value of these claims as ranging from £51.8m to £63.8m, depending on the value attributable to those companies. If one takes the Administrators' controlled realisation values, there are sufficient assets in many of these companies to pay 100% of the relevant s.75 claims. Even if one takes the Plan Proponents' values for Friction Products and Sintered Products, which are lower, a full dividend could be payable. Grant Thornton have assumed that it is unlikely that US asbestos claims will be brought against the participating employers, but have made some allowance for possible UK claims. At present that appears to be the position and there is nothing to indicate to the Trustees that it is likely to change.
50. Based on these assumptions, Grant Thornton calculated an indicative dividend based on the possible variables in the value of T&N and the participating employers and in the amount of the asbestos claims. As I mentioned earlier, this produces, on a worst-case scenario, a dividend of $148m, which includes the recoveries from the participating employers under s.75, but assumes total asbestos liabilities of US $10.95bn and the lowest controlled realisation figures for corporate assets of $488m. This is the source of the figures in Mr Culverhouse's evidence. It amounts to a dividend of 9.5% compared to the 7.2% ($112m) indicated under the Disclosure Statement for T&N Distribution Ratio 1. The likely dividend increases to $206m if Grant Thornton's adjusted figure for assets of $993m is adopted.
51. If the value of the asbestos claims is reduced in amount, then there will be a significant increase in the amount of the dividend. Even if one takes the highest claims estimate put forward by the Trustees' actuary of $5.69bn and takes the lowest asset value of $488m, the dividend rises to $280m. As I have already explained, the Peterson estimate applied by the Disclosure Statement has been inflated to $10.95bn by the application of TDP values to the US claims. Mr Angelina considers these to be unscientific and excessive. He cites as an example mesothelioma claims, which had an average settlement value in the US during the period 1998-2001 of $67,133. The TDP specifies an average value for such claims of $250,000.
52. The Trustees are unwilling to accept the TDP values as reliable. As I mentioned earlier, they were the result of negotiation and agreement between the Asbestos Claimants and the US Noteholders, and Mr Culverhouse voices a suspicion that they are not unconnected to the negotiations about the Central Deal. As a result of these concerns Mr Angelina was instructed and he has advised that a more realistic estimate of the liability of T&N for US claims lies within a range from $2.1bn (£1.1bn) to $5.5bn (£3.11 bn). It is clear from Mr Culverhouse's witness statement that the Trustees have given careful consideration to this advice and that there is a real and serious argument that the claims against T&N have been considerably overvalued. Mr Tidmarsh has to accept this possibility, but his response to it is that the claims can be properly valued as part of the confirmation process in the US Court. There are, however, a number of difficulties about that. The first is that the definition of T&N Distribution Ratio 1 makes specific reference to the TDP procedures. If this is intended to incorporate the TDP values, then it will not be open to the Trustees or any other creditor to dispute the figure for the denominator. Even if that is not the effect of the definition of Ratio 1, it remains the fact that the Plan Proponents clearly do envisage that the TDP values will be used, and it is of course very much in their interests to achieve this. If the Trustees vote in favour of the Plan, they will be committing themselves to a process under which there can be no guarantee as to whether or not the TDP values will be applied and a significant possibility that they might be.
53. Against this, under an English liquidation US Asbestos Claimants would be required to justify the level of any claim. The High Court is likely, I suspect, to take a stricter view of the level of damages which should be awarded and to place a lower value on the totality of claims. The Trustees are, I think, justified in their assumption that they are likely to achieve a lower figure than the $10.95bn Peterson estimate, and if the views of Mr Angelina are accepted, the estimate will be halved.
54. There remains of course the possibility that the US Claimants would commence proceedings in the US against T&N and progress their claims to judgment. They could then seek to prove in any English liquidation on the basis of the judgments obtained in the US proceedings. Whether the Liquidator would be entitled to go behind the judgments of the US Courts in deciding whether to admit the claims is likely to depend on whether T&N and the other UK companies participated in the US proceedings. However, the Tillinghast estimates of recovery are based on historic levels of awards, and even if there were time for the necessary proceedings to be litigated out in the US, the Trustees are still entitled, I think, to take the view that the measure of recovery will be lower than provided for in the TDP.

Conclusions

55. The Trustees accept that the decision which faces them is a complex and difficult one. All, however, that I have to decide is whether a decision not to support the Plan and to seek to recover outside it is one which they are reasonably entitled to make on the material before them. I am so satisfied. There are obvious unknowns. In addition to the points which Mr Tidmarsh has made in relation to the valuation assumptions, there are other more general and less predictable issues to consider. The new Pensions Bill, when enacted, may alter the priorities to be applied to the Scheme on a winding-up in place of the provisions of s.73. This may improve the position of the active and deferred members. Similarly, the creation of the Pension Protection Fund may offer additional relief, if Parliament approves regulations which do not exclude schemes with employers whose insolvency predates the coming into force of the Act. At present, however, these are imponderables, and I do not consider that the Trustees are required in effect to gamble on the final form which the legislation may take. They have reached a decision not to support the Plan, and that is a position which they are, in my judgment, entitled to take on a proper consideration of the relevant material before them. I will therefore give directions to that effect.
56. It seems to me preferable that the Court should formulate the directions in the more general terms of the Trustees being permitted not to accept or support the Plan and that they should be given a wide discretion as to the manner in which they give effect to that. I therefore propose to make an order in those terms. I will hear further argument, if necessary, on the form of the order to be made. I am grateful to all Counsel for their assistance in this matter.