England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT


IN THE MATTER OF MF GLOBAL UK LIMITED (in special administration)
AND IN THE MATTER OF THE INVESTMENT BANK SPECIAL ADMINISTRATION REGULATIONS 2011

		Royal Courts of Justice Rolls Building London, EC4A 1NL
		31 March 2015

Mr Justice David Richards:

Introduction

1. The issue on this application is whether a service company, which employed all the staff within a group and seconded most of them to the principal operating company in the group, is entitled to an indemnity from that company against a liability under section 75 of the Pensions Act 1995 (section 75 debt) arising as a result of both companies becoming insolvent and going into administration. It is common ground that there was no express agreement between them.
2. The service company is MF Global UK Services Limited (Services) and the principal operating company is MF Global UK Limited (MFG UK). Both are wholly-owned subsidiaries of MF Global Holdings Europe Limited (Holdings Europe), the holding company of the UK-based companies in the MF Global group. It was in turn a wholly-owned subsidiary of MF Global Holdings Limited, a company incorporated in Delaware and the ultimate holding company of the MF Global group.
3. Companies in the MF Global group carried on business as broker-dealers in financial markets throughout the world. The group's principal operations were in London and New York. On 31 October 2011, the main group companies in the group entered formal insolvency proceedings in England and the United States. MFG UK went into special administration under the Investment Bank Special Administration Regulations 2011 and Services went into administration under schedule B1 to the Insolvency Act 1986.
4. The issue arises on an application made by the administrators of MFG UK for determination of the following question:

"Is MFG UK obliged to indemnify Services in respect of the liability Services had to the MF Global UK Pension Fund (the "scheme") pursuant to section 75 of the Pensions Act 1995 ("section 75") as at 15 October 2013."

5. The respondent to the application is named as Services. The three administrators of MFG UK, all partners in KPMG, are also administrators of Services. Mr Blair Nimmo, also a partner in KPMG, was appointed as an additional administrator of Services on 16 December 2011. He has had conduct of this application on behalf of Services, and has retained independent solicitors and counsel.

Section 75 Pensions Act 1995

6. So far as relevant to the present application, section 75 applies in relation to a defined benefit occupational pension scheme. Such a scheme provides pension benefits not by reference to the contributions made to the scheme but by reference to a defined benefit, such as a percentage of final salary.
7. In certain circumstances, section 75 imposes a debt on an employer to the trustees of the pension scheme. In broad terms, the amount of the debt is the deficiency in the scheme as at a particular date, calculated and certified by the scheme's actuary on the basis that the scheme's liabilities are equal to the aggregate cost of buying annuity contracts to secure all members' benefits in full. This buy-out basis of valuation is different from, and generally produces a higher figure than, the basis of valuation used in the context of an ongoing pension scheme.
8. There are two broad categories of case in which this debt may arise, one affecting the scheme and the other affecting the employer. The first is where the scheme is being wound up and no "relevant event" has occurred in relation to the employer during the winding-up of the scheme. If at any time during the winding up, the value of the assets of the scheme is less than the amount at that time of its liabilities, the trustees or managers of the scheme may designate that time for the purposes of giving rise to the statutory debt, which will be an amount equal to the difference. The overall effect is that, provided an insolvency event does not occur in relation to the employer, the trustees of a scheme in winding-up have the flexibility to select a date to calculate the deficit and create the section 75 debt. In practice trustees will usually wait until the end of the winding-up process, so that the debt will match as closely as possible the actual deficit in the scheme which needs to be secured by the purchase of annuities.
9. The second category of case, which is directly in point on the present application, is where "a relevant event" occurs in relation to the employer. A relevant event may be either an insolvency event (as defined), the passing of a resolution for a members' voluntary winding-up of the employer, or the occurrence of particular circumstances under section 129 of the Pensions Act 2004. An insolvency event is defined to include all formal insolvency proceedings under English law, including administration and liquidation. Section 129 applies to organisations and entities to which the provisions of the Insolvency Act 1986 do not apply. In these cases the debt arising under section 75 is the difference between the value of the assets of the scheme immediately before the relevant event and the amount at that time of its liabilities. In such cases, the trustees enjoy no flexibility to select the date for calculation of the deficit.

Part 3 of the Pensions Act 2004

10. Part 3 of the Pensions Act 2004 contains provisions designed to identify and make good deficits in pension schemes which are not being wound up. Section 222(1) provides that every scheme is subject to the statutory funding objective, which is a requirement that the scheme must have sufficient and appropriate assets to cover the amount required, on an actuarial calculation, to make provision for the scheme's liabilities. Section 223(1) requires the trustees of a scheme to prepare a statement of funding principles, being their policy for securing that the statutory funding objective is met. Section 224 requires the trustees to obtain actuarial valuations and reports. If, having obtained an actuarial valuation, it appears to the trustees that the statutory funding objective has not been met, section 226 requires that they must prepare a recovery plan, setting out the steps to be taken to meet the statutory objective. Section 227 requires the trustees to prepare a schedule of contributions, showing the rates of contributions payable towards the scheme by or on behalf of the employer and the active members of the scheme and the dates on or before which such contributions are to be paid. Section 229 requires the trustees to obtain the agreement of the employer to the recovery plan and the schedule of contributions. Section 231 empowers the Pensions Regulator, among other things, to impose a schedule of contributions in circumstances where the trustees have been unable to reach agreement with the employer. By virtue of section 228, the contributions specified in the schedule are treated as a debt due from the employer to the trustees.

Background facts

11. The brokerage business carried on by the MF Global group was previously a division within the group headed by Man Group plc. Holdings Europe and MFG UK were companies in that division. All the staff required by the relevant division of Man Group for the purposes of its business in the UK were employed and supplied by a service company, Man Group Services Limited. In July 2007 the worldwide brokerage business was separated from the Man Group by means of an initial public offering (IPO) of a majority interest in MF Global Limited. Its shares were listed on the New York Stock Exchange. The employment of the relevant staff in the UK was transferred from Man Group Services Limited to Services, a newly formed company established for this purpose.
12. A total of 36 transferred staff had been members of the Man Group's defined benefit pension scheme. As part of the arrangements for the creation of the MF Global group, Services established a new defined benefit pension scheme (the scheme) to which those employees transferred, together with the liabilities in respect of them and a portion of the assets of the Man Group's scheme. It was established by an interim trust deed dated 6 July 2007 and the principal employer under the scheme was Services. Immediately following the transfer of those employees, the scheme was closed to new members. As at 30 October 2011, when MFG UK and Services went into administration, the scheme had a total of 35 members: 25 active members, 6 deferred members and 4 pensioner members.
13. The entry of Services into administration triggered section 75 of the Pensions Act 1995. The deficit calculated in accordance with it amounted to £35,232,000, which was therefore the section 75 debt. The trustees were advised that a sum of £29 million, together with the assets in the scheme, was sufficient to enable them to secure the members' benefits. On that basis, the administrators of Services and MFG UK entered into a settlement agreement with the trustees and with the Pension Protection Fund on 15 October 2013. A sum of £29 million was paid by MFG UK on behalf of itself and Services to the trustees in full and final settlement of the section 75 debt. By a separate agreement made on the same day, MFG UK and Services agreed arrangements for the funding of the sum paid to the trustees and agreed to use their reasonable endeavours to reach a settlement of Services' claim for an indemnity against UK in relation to the section 75 debt. It was agreed that if no settlement was achieved within six months, the parties would apply to the court for determination of the issue. No settlement was reached and the present application was therefore made.

Employment arrangements within the MF Global group

14. Following the IPO, all the staff in the UK were employed by Services and they were seconded by Services to the operating companies in the UK. The great majority of the staff, including all the members of the scheme, were seconded to MFG UK.
15. It does not appear that there was any express agreement between MFG UK and Services as to the provision of the staff.
16. An agreement in writing was, however, made on 28 June 2007, in anticipation of the IPO, between Services and Holdings Europe (under its previous name ED&F Man Group Limited).
17. Recital (5) to this agreement (the Services Agreement) provided:

"This Agreement is to formally record the terms upon which the Service Provider will provide staff to the Service Recipients with effect on and from the Staff Transfer Date."

The Service Recipients were defined as the companies in the UK within the MF Global group to whom the services of staff would be provided. The Staff Transfer Date was 1 July 2007.

18. Clause 2 under the heading "Supply of Staff" provided:

"2.1 With effect on and from the Staff Transfer Date (being 1 July 2007) the Service Provider will supply to each Service Recipient such personnel as each will require, as notified to the Service Provider by the relevant nominee or nominees of each such Service Recipient from time to time and each such employee shall be designated a "Secondee" for the purposes of this Agreement.

2.2 For the avoidance of doubt, the Secondees shall with effect on and from the Staff Transfer Date be and remain employees of the Service Provider but the Service Provider shall procure that during the course of any assignment under this Agreement the Secondees shall report to and act upon the instructions of such person or persons as may be nominated by the relevant Service Recipients from time to time.

2.3 The Service Provider shall procure that each Secondee shall work at the premises of the relevant Service Recipient to which he or she is supplied and elsewhere and for such periods as may be specified by the relevant Service Recipient."

19. Under the heading "Payment of staff and reimbursement of payroll costs", provision was made for the sums to be paid by the Service Recipients:

"3.1 The Service Provider shall with effect on and from the Staff Transfer Date remain the employer for each Secondee but Parent shall procure that all Payroll Costs for all Secondees shall be met on behalf of the Service Provider by the Service Recipients to be apportioned on such basis as Parent shall determine from time to time.

3.2 In this clause "Payroll Costs" shall mean the aggregate costs in relation to each of the Secondees in the period of any assignment under this Agreement of all salary, bonus, and contractual and discretionary cash and non-cash benefits including, but not limited to, medical insurance, pension contributions, employee insurance benefits, company cars or car allowance, statutory and contractual leave entitlements, staff restaurant costs, relocation allowances, payments made on termination of employment and any tax and national insurance contributions thereon and any third party and/or employer's liability insurance cover which the Service Provider or the relevant Man Financial operating company may reasonably or lawfully require in respect of the employment and/or use of the Secondees."

20. Clause 5.1 provided that Services:

"shall discharge and perform all obligations and discharge all liabilities which may be imposed on it by law or otherwise in its capacity as employer of each Secondee ..."

21. Services did not carry on any trading activity as such, and the costs that it re-charged to MF Global companies in the UK were its only income. These costs were re-charged on a pound for pound basis and no mark-up was applied. The accounts of MFG UK and Services show that the following staff costs were paid by MFG UK to Services on a regular basis:

i) basic wages and salaries;

ii) share-based payments;

iii) social security costs;

iv) contributions to the defined benefit pension scheme; and

v) contributions to the defined contribution pension schemes.

22. As regards the scheme, MFG UK paid to Services sums equal to the employer's contributions paid by Services to the scheme. These continued until June 2009 at the same rate as applied immediately before the IPO. An actuarial valuation of the scheme pursuant to section 224 of the Pensions Act 2004 was carried out as at 31 December 2007 and was completed in June 2009. It disclosed a funding deficit of £6,775,000. The trustees and Services as the employer agreed a recovery plan in accordance with the Pensions Act 2004. In respect of future service benefits, Services agreed to pay contributions of 44% of pensionable salaries from June 2009 onwards, which were funded by MFG UK. In addition, Services agreed to make the following contributions to the Scheme in respect of past service benefits:

i) £1 million on 30 June 2009;

ii) four quarterly payments of £385,000 from 30 September 2009;

iii) four quarterly payments of £512,000 from 30 September 2010; and

iv) four quarterly payments of £680,000 from 30 September 2011.

23. All the payments under (i) to (iii) were paid in full to the trustees directly by MFG UK, as was the first of the four quarterly payments of £680,000. These contributions related to deferred and pensioner members as well as active members.

The issues

24. Two issues arise. First, was there any contract between Services and MFG UK in connection with the secondment of staff and the reimbursement of Services' outgoings in respect of the seconded staff? Secondly, if there was a contract between them, did its terms require MFG UK to indemnify Services against any section 75 debt?
25. Mr Hitchcock QC for MFG UK submits that both questions should be answered in the negative. As to the first, he submits that the only contract made by Services was the Services Agreement. He accepts that MFG UK did not make payments to Services and the pension scheme trustees gratuitously but he submits that it did so pursuant to an implied contract with Holdings. Holdings thereby fulfilled its obligation to Services under clause 3.1 of the Services Agreement to procure that MFG UK as a Service Recipient met all Payroll Costs for the seconded staff.
26. As to the second question, Mr Hitchcock submits that if there was a contract between Services and MFG UK, its terms were no more extensive than the Services Agreement which, on its proper construction, imposed no obligation on MFG UK in respect of a section 75 debt. By contrast, the Services Agreement did extend both to the regular future services contributions to the scheme and to the past service contributions agreed with the trustees.
27. Mr Bompas QC for Services submits that the evidence as a whole demonstrates that by their conduct Services and MFG UK entered into a contract for the provision of staff on terms that MFG UK would be responsible for all the costs incurred by Services in respect of the staff, including any section 75 debt. On its proper construction, the Services Agreement covered any section 75 debt but in any event the circumstances and conduct of Services and MFG UK established that any section 75 debt was covered by the contract between them.

The evidence

28. Before turning to their submissions in more detail, I will summarise the evidence as it relates to the period between July 2007 and October 2011 on which either or both parties rely.
29. Beyond entering into the Services Agreement in June 2007, there is no evidence of Holdings taking any part in the secondment of staff by Services to MFG UK. It is fair to say that the terms of the Services Agreement do not provide for Holdings to take any active part in the secondment of staff apart, under Clause 3.1, from procuring that UK and other group companies meet the payroll costs for the staff seconded to them and determining the basis of apportionment between them. But there is no evidence of Holdings taking either of those steps. There is, for example, no evidence of any contract between Holdings and MFG UK or any instructions by Holdings to MFG UK or any communication of any sort between them on any of these matters. In practice, what happened is that all the staff working for MFG UK had their contracts of employment with Services and MFG UK paid for all their employment costs, generally by making the payments to Services.
30. The employment arrangements were described in the annual accounts of MFG UK and Services. Accounts were prepared and audited for MFG UK for the years ended 31 March 2008 to 2011 and for Services for years ended 31 March 2008 to 2010. The descriptions contained in the accounts were similar in each year.
31. The 2008 accounts of MFG UK include the following statement (in note 7):

"As part of the IPO, MF Global UK Services Limited, a fellow group company became the employing company of those employees who provide services to the Company. The costs relating to their employments have been recharged to the Company. The headcount and staff cost figures reflect the people providing service but who are employed by MF Global UK Services Limited."

32. As regards the pension scheme, note 28 included the following:

"Following the MF Global Group's reorganisation, MF Global UK Services Limited a fellow group company became the employing company of those employees who provide services to the Company. MF Global UK Services Limited operates a money purchase defined contribution scheme and a defined benefit scheme. The pension schemes benefit certain employees providing service to the Company but who are employed by MF Global UK Services Limited. The assets, liabilities and actuarial gains and losses of the defined benefit scheme have been reflected in the financial statements of MF Global UK Services Limited in accordance with Financial Reporting Standard 17, "Retirement Benefits". The costs relating to their pension contributions have been recharged to the company."

33. The note goes on to state that "disclosures relating to the defined benefit scheme run by MF Global UK Services Limited are presented below" and there follow three pages of information concerning the financial position of the scheme. Counsel were not in a position to state the reason for the inclusion of this detailed information in MFG UK's accounts but it suggests that the performance of the scheme could have a material effect on the financial position of MFG UK.
34. In the accounts for Services, turnover is described in note 1:

"Turnover represents payroll related costs recharged to fellow Group companies in the UK. Fellow group companies are re-charged at cost and no mark-up is applied."

35. Note 1 also stated that contributions to the defined benefit scheme made on behalf of Group companies' employees were recharged by Services to the relevant Group companies. Note 16 provided more detailed information in relation to the scheme. It referred to the actuarial valuation completed immediately after the IPO, resulting in a pension fund deficit of £1,779,000, which had not been recharged to other Group companies. Detailed financial information concerning the scheme, similar to that set out in the accounts of UK, was included in the notes. The notes to the accounts for the year to 31 March 2008 and for the successive years also stated that UK was "the company that bears the cost of the participants of this [defined benefit] scheme"
36. By contrast, the accounts of Holdings gave no indication that it played any part in the employment arrangements of staff within the Group. For example, they contained no statement of any actual or contingent liability on its part in respect of its obligations under the Services Agreement to procure the Group companies to meet the payroll costs of staff seconded to them. Specifically, they contained no indication of any liability in respect of the pension scheme and there was no mention of the scheme, still less the detailed information disclosed in the accounts of MFG UK and Services.
37. Before finalising their audit of the accounts of Services for the year to 31 March 2008, the auditors were concerned to understand how the deficit in the pension fund, which was a potential liability of Services, would be funded. In order to provide reassurance to the auditors, the directors of Services prepared a memorandum in February 2009. Its purpose is stated as being "to document the considerations that MFG UK Services directors took to consider the pension deficit for the new scheme as at 31 March 2008." The memorandum refers to the deficit of £1,779,000 as at 30 June 2007 and continued:

"UK Services directors took on the liability and they will claw back the liability over time by paying more contributions to the fund as needed, per the calculations. These increased contributions will be reimbursed by MF Global UK Limited."

38. The memorandum was copied to four named individuals, of whom one (Stephen Cochrane) was a director of both MFG UK and Services and another (Kemper Cagney) was a director of MFG UK but not at that time a director of Services. It was also copied to Steve Craig who held the position of European Financial Controller. I do not accept the submission made by Mr Hitchcock in relation to this document that it was a purely internal memorandum within Services. It is copied to executives outside Services, including Mr Cagney who was a director only of UK, and it evidences an arrangement that contributions to the scheme would be recharged to MFG UK.
39. The actuarial valuation of the scheme as at 31 December 2007 which was finalised in June 2009 and the agreement to the schedule of recovery plan contributions beginning with the one off contribution of £1 million in June 2009 gave rise to some email correspondence. An email sent on 24 June 2009 sought the agreement of Thomas Connelly in New York to the making of the payment of £1 million "based on the fact that you have approved the Actuarial Valuation by email and Kemper has signed on behalf of the Company and the Chairman of the Trustees and the Actuary have also signed." Given that Kemper Cagney was at this time a director of MFG UK but not of Services it is a reasonable inference that the reference to "the Company" is a reference to MFG UK. These payments were, as previously noted, made directly by MFG UK to the trustees. The email exchanges end with an email from an executive in the accounts department stating:

"Under our current accounting policies, this one off charge of £1 m will be recognised as an expense in UK Ltd and income in Services which holds the pension liability and has therefore currently got negative net assets.

The auditors only signed Services stats as a going concern last year, on the basis that these payments over time would bring services back to a net asset status."

40. There are in evidence minutes of meetings of the trustees of the scheme together with emails relating to topics discussed at those meetings. Two topics of relevance to the present issue arose regularly. First, the trustees were required to consider whether they were satisfied with the employer's covenant. Secondly, consideration was given to providing a "parent company guarantee" to the trustees in order to reduce the levy payable to the Pension Protection Fund.
41. As regards the first, the actuarial valuation as at 31 December 2007 contained a section headed "Employer Covenant". This explained:

"In setting the valuation method and assumptions, the Trustees are required to form a view on the covenant of the Employer. According to the Regulator's guidance, the Trustees are required "… to form an objective assessment of the employer's financial position and prospects as well as his willingness to continue to fund the Scheme's benefits"."

This section of the valuation ended with the actuary stating that he understood that the trustees were satisfied with the strength of the employer's covenant.

42. The minutes of a meeting of the trustees on 15 July 2009 record under the heading "Employer Covenant Review" that Mr Cochrane "had conducted negotiations with the Employer with regard to the ongoing funding rate which had gone well and the required level of funding had been secured. The Employer continues to support the Scheme on the basis of fully funding it for the future." The minutes of a meeting of the trustees on 24 June 2010 record that the trustees remained comfortable with the employer covenant. The minutes of a meeting of the trustees on 17 March 2011 record:

"With regard to the Employer Covenant, [Mr Cochrane] confirmed that the Company remained strong and that a new strategy was being put in place to enable the Company to become an Investment Bank."

It is clear that in this passage the reference to "the Company" is a reference to MFG UK, not Services.

43. The actuarial valuation of the scheme as at 31 May 2010, prepared in 2011, which identified the need to make further contributions in addition to the existing recovery plan contributions, gave rise to email correspondence as to whether these additional payments would be made. There was email correspondence between, amongst others, Mr Craig and Mr Cagney as to "whether we will fund the proposed additional funding of £900k once the committed deficit reduction payments end in 2012." Mr Cagney's view was that there was no choice but to fund it but he was concerned to know "are there any accounting implications for MFG UK or just cash funding". The tenor of this correspondence is whether MFG UK will meet the additional funding and, if so, the accounting implications for it.
44. The discussions as to whether a "parent company guarantee" would be provided to the trustees continued rather inconclusively between 2008 and 2011. The only reason for providing such a guarantee was to secure a reduction in the levy payable by the scheme to the Pension Protection Fund. Although often referred to as a parent company guarantee both specifically in this case and more generally, in fact a guarantee given by any group company directly to the trustees can be taken into account for these purposes. Guarantees are required to be in a standard form and the liability of the guarantor may be capped in one of five ways, two of which are by reference to potential section 75 debts.
45. This issue was raised at a meeting of the trustees of the scheme on 14 August 2008 when it was noted that "it would be necessary to look carefully at the scoring of the employer with regard to the levy as the Principal Employer was a service company with no assets." The minute continued that Dun & Bradstreet scores for Services and UK would be obtained so that an early appeal can be made regarding the employer assessed for levy purposes, if necessary. At the meeting on 4 December 2008, the trustees agreed to await receipt of the first PPF invoice so that "it could be determined whether it was appropriate to implement a parental company guarantee involving MF Global UK Limited". The same minute refers to a "further discussion with regard to whether a parental guarantee should be put in place by the UK company." The minutes of a meeting of the trustees held on 15 July 2009 recorded that as the PPF levy had been so low no further action had been taken to improve the scoring for PPF levy purposes.
46. There was a renewed discussion of a guarantee in March 2010. The scheme actuaries gave some explanation as to the guarantee that would be required:

"The parent company guarantee can come from either the UK or US parent company, but ultimately, it should be the company which would be willing to foot the bill in the event of the failure of the sponsoring employer (the UK Service Company).

The guarantee would ideally ultimately cover the balance of funding required to secure members' benefits in full under buy-out policies were the scheme to be wound up."

47. There can be no doubt that the only company that would "foot the bill" in the event of failure was MFG UK. The reference to the guarantee ideally covering the funding required in the event of a winding-up of the scheme is a reference to the options for the standard form guarantee to extend to section 75 debts. In fact no guarantee was put in place in 2010 but it remained a live issue in 2011 and the minutes of a meeting of the trustees held on 7 July 2011 record that:

"[Mr Craig] confirmed that he had obtained confirmation from the Company that they are happy to provide a Parent Company Guarantee. This conclusion is currently being checked by the US legal team to ensure that it does not raise any disclosure issues in terms of the US accounts."

48. I am satisfied that the reference to "the Company" is to MFG UK. The minutes of an earlier meeting, in December 2010, had recorded that there was resistance on the part of the legal department of the US company to providing a parent company guarantee. The reference in the minute of the meeting on 7 July 2011 to checking with the US legal team does not in my judgment indicate that it was intended that the US company should provide a guarantee but that the provision of the guarantee within the group might raise disclosure issues in the accounts of the US holding company.
49. As a regulated firm, MFG UK was required to provide to the Financial Services Authority a number of reports and similar documents. A board meeting was held on 27 September 2011 to review and approve the documents due for delivery by 30 September 2011. One document was the Internal Adequacy Assessment Process report, which, with appendices, ran to almost 300 pages. MFG UK is referred to in the document as "the firm". In the section of the report dealing with Risk there is a sub-section 7.4 dealing with pension risk. It refers to the deficit on the scheme and states that:

"The firm therefore considers it reasonable to set aside $7.7 m ($6.3 m less £1.5 m = £4.8 m) of internal capital versus the risk of deficiencies in the scheme."

50. Mr Cochrane has provided a witness statement on which he was not cross- examined. He was a director of Services from 1 May 2007 until 12 June 2009 and a director of MFG UK from 13 August 1996 until 28 April 2009. As to the decision-making process within the UK group he states:

"The directors of UK viewed the entire operations of the MF Global group in the United Kingdom as one business even though it was made up of a number of different companies. Decisions relating to the MF Global business in the United Kingdom were made by the directors of UK and where necessary, approved by the boards of any relevant group company."

51. The directors of Services did not hold regular meetings and its activity of providing employees and pension services to other companies in the group "did not tend to require regular decision-making by the directors."
52. In relation to the scheme, he states:

"The decisions related to the Pension Scheme, including the funding and contributions towards the Pension Scheme, were made by the directors of UK. From the establishment of the Pension Scheme and thereafter, it was my intention and understanding as a director of both UK and Services, that UK would reimburse Services for any and all of the costs and funding requirements in respect of the Pension Scheme as it was not possible for Services to fund the pension scheme without support from UK …"

53. There is no reason to doubt that Mr Cochrane correctly describes how he viewed the position. In the absence of any evidence from any other directors, it is a reasonable inference that they too viewed the position in the same way.

Consideration of the issues

54. In the absence of an express agreement between MFG UK and Services, Services bases its claim for an indemnity on an implied contract. In considering whether an implied contract exists, May LJ said in The Elli 2 [1985] Lloyd's LR 107 at 115:

"As the question whether or not any such contract is to be implied is one of fact, its answer must depend upon the circumstances of each particular case – and the different sets of facts which arise for consideration in these cases are legion. However, I also agree that no such contract should be implied on the facts of any given case unless it is necessary to do so: necessary, that is to say, in order to give business reality to a transaction and to create enforceable obligations between parties who are dealing with one another in circumstances in which one would expect that business reality and those enforceable obligations to exist."

55. In Blackpool and Fylde Aero Club Ltd v Blackpool Borough Council [1990] 1 WLR 1195, Bingham LJ said at 1202:

"I readily accept that contracts are not to be lightly implied. Having examined what the parties said and did, the court must be able to conclude with confidence both that the parties intended to create contractual relations and that the agreement was to the effect contended for. It must also, in most cases, be able to answer the question … : "what was the mechanism for offer and acceptance?""

56. In the present case, it is not in dispute that, in reimbursing Services for the employment costs of seconded staff and in paying deficit reduction contributions to the trustees of the scheme directly, MFG UK was fulfilling contractual obligations. The administrators of MFG UK accept, correctly in my view, that it is not sustainable that it was making those payments gratuitously or otherwise than in fulfilment of a contract. There is therefore no doubt that MFG UK, in undertaking these obligations, intended to enter into legal relations. The only question is: with whom? Mr Hitchcock submits that, in view of the existence of the Services agreement, the inference must be that UK entered into a contract with Holdings that it would, in consideration of Holdings procuring the secondment of staff by Services, pay to Services the payroll costs as defined in the Services Agreement. But, as Mr Bompas demonstrated, there is no evidence at all of any involvement by Holdings in these arrangements after it entered into the Services Agreement. All relevant dealings were directly between MFG UK and Services.
57. Taking the evidence as a whole, it is in my judgment overwhelmingly likely that MFG UK and Services intended to enter into legal relations between each other, governing the provision of and payment for seconded staff. There was no need for the intervention of Holdings between them and, apart from the Services Agreement itself, there is no evidence of any intervention by Holdings. The making of a contract between MFG UK and Services would, in any event, be a means by which Holdings could fulfil its contractual obligation under clause 3.1 of the Services Agreement of procuring MFG UK to pay the payroll costs.
58. Mr Hitchcock submitted that the existence of a contract had to be tested against the traditional principles of offer and acceptance. It has been observed in the authorities that the identification of an offer and an acceptance can be difficult, sometimes impossible, in the case of contracts inferred from conduct. But on these particular facts, there is no difficulty in applying that analysis. Services can be taken to have offered to second staff to MFG UK on terms that MFG UK would be responsible for the costs associated with the seconded staff. This appears to me a far more plausible analysis of the arrangements than the alternative for which Mr Hitchcock contends, namely that Holdings agreed to procure that Services would second staff to MFG UK on terms that MFG UK would agree with Holdings to pay the associated costs to Services.
59. On the basis that an agreement existed between MFG UK and Services, the critical issue is whether the terms of such agreement required UK to indemnify Services against the section 75 debt. Mr Hitchcock submitted that, if there were a contract between MFG UK and Services, it was on the terms of the Services Agreement. He submitted that the terms of the Services Agreement did not extend to requiring MFG UK to accept responsibility for a section 75 debt. Mr Bompas submitted that, properly construed, the Services Agreement did extend to a section 75 debt but, in any event, the terms of the contract to be inferred between MFG UK and Services required MFG UK to indemnify Services against all liabilities associated with the costs of the seconded staff. Since all the members of the scheme were seconded to MFG UK, it followed that MFG UK was responsible for all the liabilities of Services as principal employer under the scheme.
60. As an important part of the context against which the Services agreement must be construed, or the terms of any agreement between MFG UK and Services determined, Mr Bompas relied on the way in which the MF Global Group in the UK was organised. It was clear from the start that Services would simply be reimbursed without any mark-up for its liabilities as an employer by the companies to which staff were seconded. It had no ability to meet any liabilities except through the amounts recharged to the Service Recipients. The balance sheets in the annual accounts for the years 2008 to 2010 show that Services had no net assets, but in each year had a small deficit. If the administrators of MFG UK are right in their construction of the Services Agreement, it follows that Services would be unable to meet any section 75 debt and, if a section 75 debt were to arise, would automatically be rendered insolvent.
61. There is no evidence or other reason to assume that in establishing this structure, the directors of the MF Global companies were intending to create a situation in which one of the group companies would be left with a liability that it could not meet. There is a fundamental difference between the commercial risk that a debtor will be unable to pay its debts, thereby rendering the creditor itself insolvent, and the incurring of a contingent liability which, in no circumstances, will the company (in this case, Services) be able to meet. If the submissions on behalf of the administrators of MFG UK are correct, this case would fall into the latter category. It is no answer to rely on the provision of the Pensions Act 2004, whereby the Pensions Regulator can impose on other group companies a requirement to provide financial support to a pension scheme in the event that the employer is unable to meet a section 75 debt. This does nothing to prevent the insolvency of Services in the event of a section 75 debt arising.
62. I agree with Mr Bompas that it is legitimate to construe the Services Agreement and determine the terms of any inferred contract against this background. It should be noted that a section 75 debt can arise in circumstances other than the insolvency of the principal employer. If the scheme itself is wound up, and other arrangements are not made, a section 75 debt will arise at a time of the trustees' choosing. In the case of the scheme, with its small number of relatively senior members, it was at all times foreseeable that in due course the scheme would be wound up. On the case put forward by the administrators of MFG UK, Services could then be left with a liability but without recourse to MFG UK or Holdings and without therefore any means of meeting the liability.
63. In submitting that the definition of payroll costs in clause 3 of the Services Agreement did not extend to a section 75 debt, Mr Hitchcock placed great reliance on the use of the phrase "pension contributions" in clause 3.2. He submitted that pension contributions were to be contrasted with a section 75 debt. He submitted that the phrase was wide enough to include both future service contributions and past service deficit contributions. All such payments, including one-off payments such as that of £1 million made in June 2009, are properly described as contributions and are indeed described as such in the pensions legislation. By contrast, a section 75 debt is not described in the legislation as a contribution. This, as it seems to me, is an overly fine distinction in this context. If the legislative use of the word contributions was restricted to payments which the employer agreed to make, there would be a basis for the distinction. That is not however the case. I have earlier referred to the relevant sections of the Pensions Act 2004 containing the provisions for the determination of contributions to meet a deficit in a scheme. The legislation envisages that the trustees and the principal employer will negotiate a schedule of contributions to repair such deficit, but in default of agreement and as a last resort the regulator can impose on the principal employer an obligation to pay contributions for this purpose. These imposed contributions would, Mr Hitchcock accepts, fall within the category of "pension contributions" in clause 3.2 of the Services Agreement.
64. In any event, in my judgment, the fallacy in Mr Hitchcock's construction of clause 3.2 lies in concentrating solely on the phrase "pension contributions". That phrase is used in a list of examples of the broad definition of payroll costs, being:

"The aggregate costs in relation to each of the Secondees in the period of any assignment under this Agreement of all salary, bonus, and contractual and discretionary cash and non-cash benefits..."

65. Mr Hitchcock rightly emphasised that pensions are a form of deferred remuneration and therefore naturally fall within the phrase "all salary, bonus, and contractual and discretionary cash and non-cash benefits". The issue is therefore whether a section 75 debt constitutes a cost in relation to the pensions of seconded staff. It seems to me plain that it does. Given that Mr Hitchcock accepts that past service contributions imposed on a principal employer by the regulator would constitute such costs, I can see no principled basis on which it can be said that a section 75 debt would not constitute such a cost. This construction of clause 3 appears to me to be correct even without recourse to the background features referred to above but consideration of those features strengthens this conclusion.
66. In these circumstances, it is unnecessary to consider whether, if clause 3 of the Services Agreement did not extend to a section 75 debt, the contract created by conduct between MFG UK and Services nonetheless did so. There is no evidence of any discussion or consideration of the terms of the Services Agreement in the dealings between MFG UK and Services. In the absence of any consideration of the type of costs for which MFG UK would be responsible, I would conclude that the contract between MFG UK and Services must have been on the basis that MFG UK would indemnify Services against all its costs as employer of the seconded staff.
67. For these reasons, I shall declare that MFG UK is obliged to indemnify Services in respect of its section 75 debt.