We are increasingly asked by overseas clients whether, if they acquire a business or a company in Ireland which operates a DB Scheme in Ireland, they could be liable to the DB Scheme even though the acquirer may not participate in that scheme. UK clients are particularly concerned by this issue given their experiences with the UK pensions regulatory framework.
Generally speaking, an entity is only liable to a scheme under Irish law if it is a party to the scheme as the principal or a participating employer. There are, however, ways in which a non-participating entity (such as the parent of a subsidiary which sponsors a scheme) could potentially be liable in respect of the scheme such as where:
- The parent has voluntarily assumed a liability to the scheme, for example, under a guarantee of the subsidiary’s contribution obligations.
- The parent consolidates its subsidiary’s accounts into its own. To consolidate accounts in this way, the Irish Companies Acts require the parent to give an irrevocable guarantee (known as a “section 17 guarantee”) of the subsidiary’s liabilities in respect of the whole of the financial year to which the accounts relate. Whether this guarantee could be relied on by the scheme’s trustees in respect of the subsidiary’s liabilities is untested in the Courts. Notwithstanding this uncertainty, the existence of a guarantee may give the trustees of the scheme a legal basis for making a claim against the parent.
- There has been some level of wrongdoing (e.g. where the subsidiary is being used as a mechanism to avoid legal obligations) and/or where the justice of the case requires that the parent and a subsidiary be regarded as a single economic entity. In these sorts of situations, the Courts may be prepared to disregard the subsidiary as separate legal personality and find that the parent is liable for the subsidiary’s obligations, including its obligations to the scheme.
- Provisions of the Irish Companies Acts relating to contribution orders, fraudulent preference, fraudulent disposition of property, and the like, make the parent liable for the obligations of, or require the parent to return property to, the subsidiary. These provisions only apply where there is an insolvent wind-up of the subsidiary. These provisions may have a look back period and lead to the payment of inter-company loans or dividends to the parent being reversed.
- The directors of a subsidiary which has gone into liquidation have failed to fulfil their duties under Irish company law where the parent is one of those directors or is a shadow director. The parent, in such a situation, may be liable for all or part of the liabilities of the subsidiary.
In the absence of some wrongdoing on the part of the subsidiary and the parent, and assuming that the subsidiary is operated genuinely independently of the parent and that the subsidiary’s accounts are filed separately from those of the parent, it is highly unlikely currently that a parent entity could involuntarily become liable in respect of the subsidiary’s DB Scheme.
However, this may soon change. Ireland is under an obligation to change its legislative framework for pension scheme funding in light of the recent Waterford Crystal decision of the Court of Justice of the European Union. The State’s response to the decision is awaited and is unknown at this point in time. It is possible, but by no means assured, that the State will introduce the same sort of regulatory powers that the UK Pensions Regulator has to impose liabilities in respect of a subsidiary’s DB Scheme on other group companies. Currently, the Irish Pensions Regulator does not have such powers. If it is given such powers, it could cause significant alarm for overseas private equity and other acquirers of Irish businesses.