Element Six pension trustees acted ‘in good faith’

By Tim Healy

MORE than 100 members of the  pension scheme of industrial diamond manufacturers, Element Six have lost a Commercial Court action against their trustees over the winding up of the fund.

Mr Justice Peter Charleton this week  ruled the trustees of the pension scheme of the Shannon comnpany had acted reasonably and in the interests of the scheme members as a whole when they agreed in November 20011 to accept an offer to wind up the fund on the basis of a contribution of €37.1m from the company.

The members sued the six trustees claiming breach of trust and conflict of interest in accepting the offer and said they should instead have demanded the company make a €129.2m contribution to make up the deficit in the scheme.   The claims were denied.

The trustees, comprising three management nominees and three worker nominees,  accepted the €37m offer in a 3-3 vote in which the management nominee exercised his casting vote.

The commercial division of the High Court heard Element Six, part of a multi-national conglomerate including DeBeers diamonds,  employs 359 in Shannon where work is done finishing raw industrial diamonds although diamond manufacturing had been carried out there until that work was moved to South Africa in 2001.  There are around 800 in the pension scheme.

Mr Justice Charleton, who heard the case over 14 days,  said steps were taken in 2008 to address a €100m deficit  which had emerged in the scheme by the company agreeing to pay €10.75m per year into the fund.

But within two years the deficit returned and the company sought to wind up the scheme.  In  2009, a rationalisation plan had also been implemented involving 300 redundancies save the plant from closure.

Negotiations took place between management and the trustees over the continuing €10.75m annual contribution and, the judge said, without authority from Element Six’s parent company in Luxembourg, the Irish branch “began to stonewall” and adopted an attitude far from conducive to a solution to the problem.

At a meeting in October 2011, the company offered €35m (later €37m) to wind up the scheme saying it was unsustainable.   It also warned if it was not accepted, the plant would be shut down with the loss of the 359 jobs.

The trustees obtained expert financial and legal advice as to what would happen with the scheme if the company itself was liquidated and on November 25, 2011, they met and made their decision to accept the €37m offer to wind up.  It was a traumatic decision which led to people avoid each other to the extent of shunning church services for dead colleagues and their families “which is a most unnatural situation in Ireland”, the judge said.

The judge noted profit levels of the entire Element Six group over the three previous years had not exceeded €35m.   If the company were to be wound up as insolvent, the liquidated assets would not cover, on any calculation, the €107m that had been promised in 2009 for ten years to fund the deficit in the pension scheme, the judge said.

The company’s experts had put the maximum amount realisable for the pension scheme, on an insolvent liquidation of the firm, at €38.4m, where the scheme would be a preferential creditor, or as low as €10.4m as an unsecured creditor.   The trustees’ expert had put those figures at €42.5m or €18.2m respectively.

There had been allegations of syphoning off of large sums of money into other Element Six group companies. The judge said he could not decide whether the company wrongfully depleted assets as this had not been properly debated before the court, was not central to this dispute and was a matter for another case.

However, the court had heard evidence as to what chance a liquidator might have of recovering certain of the monies paid to other companies and had been told there was perhaps a 50/50 chance of recovering €10m for the benefit of the liquidation.

The judge found the trustees had no conflict of interest or duty and there was no evidence they acted in any way other than for the ultimate good of the beneficiaries of the scheme as a whole.

The trustees did their best and arrived at their decision to accept the offer on a fair appraisal of
the situation as they saw it and after all reasonable enquiries, he said.

The judge however said the court must regrettably record that it was clear from the evidence that local management in Shannon had organised “additional stresses” on the trustees in making their decision.

This attitude adopted at local level by two male executives, and not ostensibly authorised by Element Six’s parent board in Luxembourg, was “one lacking in any emotional intelligence and was completely geared towards monetary success at the expense of any humanity in approach”.

The judge said:  “That is not always what business is about. The attitude was always: there is no more money and this is our final offer”.

This was not true, the judge said, as the minutes of a meeting of the Luxembourg parent board indicated an offer of EURO 40m (rather than EURO 37m) was authorised and this might have even been stretched by another ten per cent.

“The local negotiators falsely adopted an attitude that in law not contribution demand could by served by the defendant trustees when they knew this was untenable”, he said.

Overall, the judge said, this was a textbook example of how not to approach the delicate negotiation of an exit from a defined benefit scheme.

The correct matrix for making a difficult decision like this “should be one of both sides attempting to solve a shared and very difficult problem”, he said.  Experience had show that an honest approach was
almost a sure guarantee against later being brought to court, he said.