Supreme Court of Ireland Decisions

1. The primary issue in these proceedings, and the only issue in the appeal to this Court, is whether BWG Limited (under its then name of Brooks Watson Group Limited and hereinafter referred to as “the Vendors”) disclosed to UPM Kymmne Corporation (formerly Rauma Repola OY and hereinafter referred to as “the Purchasers”) certain deficiencies in the pension funds of Brooks Thomas Limited, Brooks Haughton Limited and Brooks Hanley Limited (which were subsidiary companies of the Vendors and are hereinafter referred to as “the Companies”).

2. The issue arises in this way. By an agreement in writing dated the 21st day of December, 1981, made by the Vendors of the one part and the Purchasers of the other part (and therein so described) the Vendors agreed to sell and the Purchasers agreed to purchase the entire issued share capital of and in the Companies for a sum of £675,474 and to secure the discharge by or on behalf of the Companies of sums totalling not more than £2,275,000 and certain other short term loans. The take-over agreement contained in Clause 4A thereof the provision following:-

3. The warranties contained in Part 1 of the Second Schedule are set out in 34 paragraphs and numerous subparagraphs thereof. The warranty crucial to the present case is that contained in paragraph 25 which is in the following terms:-

4. The Disclosure Letter had been defined in the preliminary section of the take-over agreement in the following terms:-

5. Furthermore, Part 1 of the Second Schedule contains a specific warranty in relation to the Disclosure Letter in the following terms:-

6. In the Disclosure Letter dated the 8th September, 1981 and annexed to the agreement the solicitors on behalf of the Vendors refer expressly to paragraph 25 of Part 1 of the Second Schedule to the agreement and state as follows:-

7. Appendix 4, to which reference is made in the Disclosure Letter, comprises three letters (the IPT Letters) from Irish Pensions Trust Limited to the secretary of the Vendors, one dated the 27th August, 1981 and two dated the 3rd September, 1981.

8. Several years after the sale and purchase of the shares had been completed - and at a stage when the shares in the Vendors were themselves the subject matter of a take-over bid - the solicitors on behalf of the Purchasers wrote to the Vendors complaining that the pension funds maintained by each of the three companies was under funded at the date on which the sale had been completed and that accordingly the Vendors were in breach of the warranty herein before referred to. It was the contention of the Vendors in the correspondence and in the subsequent proceedings that the Vendors were obliged to make good to the Purchasers the amount - estimated at £2.2 million - which would have been required to make good the alleged deficiency on the pension schemes maintained by the Companies. In those circumstances three issues arose, namely:-

9. The warranty contained in the take-over agreement has already been quoted but the crucial words thereof were as follows:-

10. The Vendors readily concede that in fact sums would have and did become payable by the Companies to secure benefits in respect of services provided prior to completion. What the Vendors contend is that this situation had been made known to the Purchasers by the IPT Letters which were annexed to the Letter of Disclosure. As the contents of the those letters, but most particularly the letter dated 27th August, 1981 (the August Letter), were central to the argument addressed to this Court and the focus of much of the evidence in the High Court it may be helpful to attach a photostat copy of that letter to this judgment.

11. Obviously this three page letter gives much helpful and relevant information with regard to the pensions maintained by the Companies. It sets out the number of employees of each of the three companies for the years 1979-1981; total pensionable salaries payable to those employees during each of those years and the funding rate for the year 1981 as a percentage of those salaries. It is apparent that Brooks Thomas Limited was the most substantial of the three Companies. It had over 200 hundred employees whose salaries during the relevant period were in the order of £1.25 million per annum. Brooks Haughton Limited had 50 employees or less with pensionable salaries in the order of £250,000. Brooks Hanley Limited had less than 25 employees and pensionable salaries of some £100,000.

12. The August letter dealt with the “staff pension fund” of each of the three companies. The purpose of the letter - as explained in the opening paragraph thereof - was to report on the results of the triennial valuation of the pension funds as of the 1st January, 1981. The report explained that the funding rate was that “recommended” following the previous valuation in July, 1979. It is clear that the recommendation of funding rates was the task of the pension advisors although the final paragraph of the letter demonstrated that the Companies had an input in determining what funding rates would be employed in fact. The pension advisors referred to the fact that a funding rate of 12.25% of pensionable salary had been recommended for Brooks Thomas Limited with effect from January, 1979, but that the Vendors had decided to achieve that rate over a five year period by a “stage” increase of 1% per year up to January, 1984. On that date, as the report pointed out “the recommended funding rate” would be in force. Whilst the advisors explained in their report that, subject to certain conditions, there was nothing unusual about introducing the recommended funding rate over a five year period it does appear, first, that there was a dramatic rise in the funding rate and secondly that, by definition, during the period of the introduction of the full recommended rate a lesser figure was being contributed. The 1981 report advised a further increase in the funding rate for Brooks Thomas Ltd from 12.25% (which had not yet been attained) to 13.54% in the following terms:-

13. It then goes on expressly to recommend the higher rate.

14. In my view those terms clearly relate the funding rate to the value of the fund as a means of discharging the obligations which it was designed to meet. No doubt the Vendors or any other employer could for some period, as the Vendors did, make annual contributions which were less than those recommended by the experts. Alternatively employers might, in theory at least, make excessive annual contributions to the fund. This theoretical possibility was dismissed by the trial Judge having regard to the evidence given of the financial circumstances of the Companies in the years preceding the take-over. That evidence revived memories of the depressing economic conditions which existed in Ireland, and elsewhere, throughout the 70s and early 80s. Those conditions presented particular difficulties in the building industry in which the Companies were engaged. It was common case that they were in desperate financial circumstances. Furthermore, the financial problems of the Companies were well known to the Purchasers. The Purchasers are, and were, a very substantial company engaged in the supply of timber and forest products in Finland and elsewhere. They had had very substantial dealings with the Companies and had, apparently, considerable sympathy with their problems. Such was their relationship, that the Companies or the Vendors borrowed substantially from the Purchasers and ultimately it was the Vendors who approached the Purchasers and invited them to take-over the Companies. Both parties sought to facilitate this arrangement. The Vendors readily agreed that the Purchasers could retain as their financial advisors, in relation to the take-over, the firm of accountants who acted as auditors to the Companies. The take-over was structured in such a way that the agreement for sale was approved in principle in September, 1981, and finally implemented in pursuance of a “put and take option” in December of that year so as to enable the Vendors to secure a sufficient number of redundancies to make the take-over a viable proposition. It is inconceivable that the Companies had overfunded the pension schemes or that the Purchasers might have believed that this was so.

15. In my view it is clear beyond debate that the principal pension scheme had been and was being at the time of the take-over very significantly under funded with the inescapable consequence that the assets comprised in the fund would be less than the amount considered by the advisors necessary and appropriate to discharge the obligations which might be expected to fall thereon. This proposition was conceded by Mr Botterill (Day 6 Q.165) and accepted by the learned trial Judge. On the other hand that information did little to quantify the extent of the shortfall. The Vendors say that this information is set out explicitly elsewhere in the report.

16. The August Letter is divided - as the photostat copy demonstrates - into four paragraphs designated with the capital letters ABC and D. Paragraphs A and B deal essentially with the funding rates already mentioned. Paragraph C sets out the numerous assumptions on which the valuations as of the 1st January, 1978, and 1st January, 1981, were based. The selection of those assumptions, no doubt, required considerable expertise and their application might involve sophisticated actuarial calculations but their exposition in the letter is a helpful reminder that a fund was being established, and its valuation made, by reference to its capacity to discharge obligations which might be ascertained with a high degree of probability but well short of certainty. Little purpose would be served in expressing the value of a pension fund in financial terms - however large: the vital information is the relationship between the existing assets as a fraction (or multiple) of liabilities which might be said to have accrued. It is this reality which gives importance to the brief statement with which paragraph D concludes, namely:-

17. Counsel for the Vendors contended, and the witnesses on their behalf asserted, that this represented a clear and unequivocal disclosure of the extent to which the pension schemes were under funded. Mr Breffni Byrne, an experienced accountant, but not an actuary or a pensions expert, had explained the manner in which pension scheme results were presented (Day 8 Q.227 - 231) in the following terms:-

18. With his attention directed to paragraph D on the third page of the Report the following interchange took place:-

19. As to the extent of the shortfall Mr Byrne said:-

20. Apart from saying that the under funding was “fairly obvious” Mr Byrne had said as follows:-

21. The actuary who gave evidence on behalf of the Vendors, Mr McNamee, was equally emphatic as to the information conveyed by the Report and the clarity with which it was expressed. He said (Day 7 A 139):-

22. The actuaries who gave evidence on behalf of the Purchasers, Mr Botterill and Mr Delaney disagreed vehemently. Mr Botterill expressed the view that the IPT Letters did not contain adequate information on which to advise a client as to the existence of a deficit or surplus in the funds (Day 5 Q 280). Mr Delaney agreed and urged (Day 7 Q 305) that if it was intended to say that there was an under funding that would have been a simple and correct thing to say that the funds were “under funded”.

23. The grounds on which the Purchasers challenge the adequacy of the disclosure made by the Vendors may be summarised as follows:-

24. All three arguments involve to a greater or lesser extent the analysis of the expression which precedes the results attributed in percentage terms to each of the three Companies. That expression is as follows:-

25. That sentence was described by the Appellants as being ambiguous, confusing and indeed nonsensical. Put simply it was argued that the formula “t/n” would provide a fraction which if multiplied by Pensionable Salary (or indeed the “pension”, as the Respondents conceded that it should be,) would result in a monetary sum and not a percentage as the results would appear to indicate. The Appellants complaint in this regard was substantially conceded. There is no direct nexus between the formula quoted and the result set out. It was explained that the formula was merely one ingredient, albeit a significant one, in the procedures used in calculating the tabulated results.

26. Whilst I would readily accept that different terminology could have been used or that the estimated liabilities could have been contrasted with the actual valuation of the funds in addition to expressing one as a fraction or percentage of the other. Indeed the Report might have been laid out in such a way as would have highlighted the shortfall in the funds. In particular I agree that the inclusion of the incomplete or defective formula by which the results were introduced was regrettable and might have given rise to a query as to what the formula meant. However, the actual results set out, particularly in the context of the letter as a whole and the trading circumstances of the three Companies, should not have left any doubt whatsoever as to the status of the funds. In her judgment the learned trial Judge reached the following conclusion:-

27. The learned High Court Judge was at pains to explain the significance of the controversial formula. She was satisfied on the evidence that the reference to that formula - properly understood - expressed a preference for one of two options in determining potential liability under the pension scheme. To that extent the information was of value and significance to the informed observer but the vital point, as I see it, is the clear finding by the learned High Court Judge, with which I respectively agree, as to the meaning of the percentages set out opposite each of the three Companies in the August letter. That finding is not subject to the qualification that the Purchasers would have required expert advice in the appreciation thereof nor is it suggested, in that regard, that this information merely put the Purchasers on inquiry. The Purchasers were being unequivocally advised that, notwithstanding the express terms of the warranty, the funds were deficient to meet the liabilities which might be said to have accrued thereon at the date of the valuation and at the same time the Report was recommending further increases in the funding which would be necessary over the term of the fund to ensure its viability. On that basis the Letter of Disclosure and the documents referred to therein fully discharged the obligations of the Vendors irrespective of the standard by which those obligations fall to be judged.

28. Accordingly I would dismiss the appeal.