| Key points: Whilst the United Kingdom has left the EU, the case is notable for the following reasons: Firstly, the legislation requiring EU pension schemes to be tax approved by HMRC to be excluded from English bankruptcy estates is contrary to EU law, which may provide a defence to bankrupts if it relates to a period before the end of the Brexit transition arrangements. Secondly, whilst the trustee in bankruptcy in this case cannot raise justification as a new point to defend the breach, trustees in bankruptcy in future cases could do so (although the judge thought it was far from certain that argument would succeed Thirdly, and much more generally, parties should raise all their arguments in court pleadings, and follow up in skeleton arguments and submissions at the court hearing. The court may have power to allow very late arguments, but is unlikely to do so. Wedlake Bell LLP represented the pension trustees of the Scheme. |
Introduction
There has been a further judgment in the Wilson & Maloney v McNamara litigation. The High Court had referred to the Court of Justice of the European Union (CJEU) during the Brexit transition period the question of whether the exclusion under English law of pension rights from the bankruptcy estate, which depended on the pension scheme being tax approved in the UK, contravened EU law. The CJEU ruled that the English tax approval requirement did breach the EU freedom of establishment unless that breach could be justified, and justification was a matter for the English Court to decide.
But the English Court ruled that as justification had not been argued by the Trustee in Bankruptcy at the main hearing in the English Court, it could not now be raised as a defence for the breach of EU Law.
The Court also made various observations about the relationship between the CJEU and the English Courts, and the extent to which parties can bring new arguments between a hearing and final judgment, which will be of wider application in general litigation.
Background
The background was that Mr McNamara, an Irish citizen and property developer, had petitioned for his bankruptcy in England. His change of COMI (centre of main interests) to England had been approved by the High Court, allowing English insolvency proceedings.
The trustees in bankruptcy issued proceedings, claiming for the bankruptcy any rights Mr McNamara may have had in an occupational pension scheme (“Scheme“) governed by Irish law and approved by the Irish Revenue Commissioners. The position under English law appeared to be governed by section 11 Welfare Reform and Pensions Act 1999 (“WRPA“). This states that pension policies will not be excluded from the bankruptcy estate unless they have been registered with the UK tax authorities under section 153 of the Finance Act 2004. The Scheme was not registered with the UK tax authorities. Indeed, it would be rare for an overseas pension scheme to be tax approved in the UK.
Mr McNamara applied for a declaration that his rights in the Scheme were excluded from the bankruptcy. He argued that section 11 WRPA infringed EU law because the different treatment of pension schemes which were (1) registered with HMRC under the Finance Act 2004 or alternatively (2) tax approved in other EU Member States amounted to unequal treatment and/or a restriction on the free movement and freedom of establishment in the EU. If that was correct, the usual remedy would be to “read down” section 11 of the WRPA to avoid any such discrimination or breach of EU law.
The High Court in England heard that application as a preliminary issue. It was not argued either in skeleton arguments or submissions in Court that if the WRPA was discriminatory, that discrimination could be justified objectively so as not to breach EU law.
Mr Justice Nugee (as he then was) decided, without being asked by any of the parties, to make a reference to the Court of Justice of the European Union (“CJEU“) to decide, but expressed a provisional view that the English provisions were discriminatory. English nationals were likely to have registered their pension schemes with HMRC for the tax advantages, and thus their pensions would be protected in the event of bankruptcy, whereas other EU nationals are likely not to have registered their pension in England, and would lose their pension on bankruptcy. In that respect, English law discriminated against EU members’ enjoyment of a social advantage. Nugee J thought the remedy was that section 11 WRPA should be “written down” under the well-established Marleasing principle, so that tax approved pensions elsewhere in the EU would also fall outside the bankruptcy estate. The reference to the CJEU was made before the end of the Brexit transition period.
EU Ruling
The CJEU gave judgment and agreed that section 11 WPRA was a restriction on the fundamental freedom of establishment. But it added that this restriction could nonetheless be valid if it was objectively justified and proportionate to the aim pursued. The CJEU’s judgment made clear that any such justification was for the referring court to ascertain. The notion that a breach of EU law could be valid if justifiable had been raised only fleetingly in written submissions to the CJEU (there was no formal hearing in Brussels, only written observations).
The trustees in bankruptcy went back to the High Court in London. They noted the CJEU had ruled that s11 WRPA was a restriction of the freedom of establishment unless it was justified, which was for the High Court in London to determine, and they argued it was not open to the Court to dispose of the matter without deciding the justification question.
Lord Justice Nugee (he had been appointed to the Court of Appeal but agreed to continue to hear this case) ruled that:
- The CJEU’s judgment is binding as to the interpretation of EU law. The relationship between the CJEU and the High Court is “co-operative rather than hierarchical in nature” and a reference is “not in any sense an appeal.” Save for ruling on points of EU law, the CJEU has no power to tell the High Court what to do. It is for the High Court to determine which questions are in issue, or may be brought in as issues.
- Justification had not been raised as an issue at the time of the main hearing at the High Court (in which the reference to the CJEU was made). Civil litigation in England is adversarial, not inquisitorial (like the French system), which means that the Courts are to settle issues raised by the parties, not consider issues on its own accord. (We recently circulated an alert on Satyam v Burton, where a successful appeal was brought on the basis the judge had erred in ruling on an issue not actually pleaded by either party).
- Neither party had asked for the discrimination issue to be referred to Europe, so the hearing in the High Court was the hearing, and but for the judge’s decision to refer to the CJEU, or any appeal, the final hearing. Therefore the trustees in bankruptcy need the court’s permission to raise the new issue of justification. They were effectively seeking to raise a new point between the final hearing and judgment being entered.
- The Court has jurisdiction to re-open a case, even as late as after judgment has been handed down but before the order is drawn up and perfected, but is not obliged to do so. And it is not a procedure to be encouraged. The fact that a reference to the European Court takes almost two years doesn’t change that.
- It is well established that justification can be raised as a defence in EU law. This is not a case where the law has developed unexpectedly between the hearing and judgment. The facts didn’t justify re-opening the case after the hearing had ended.
- Therefore justification could not be argued in the High Court despite the CJEU ruling, and the High Court ruled that all Mr McNamara’s rights in the Scheme are excluded from the bankruptcy estate.
Robert Paterson, Partner, Wedlake Bell Insolvency & Restructuring Team. Robert advises on all aspects of restructuring and insolvency including cross-border insolvencies. Robert is a solicitor and licensed insolvency practitioner.