Commercial Awareness Update – W/C 1st April 2024

INSOLVENCY FOCUS: TAKING A PENSION TO PAY A JUDGMENT CREDITOR; IS IT TIME TO PUT THE ‘BRAKES’ ON?

MANOLETE V WHITE [2023]

Manolete refers to judgment enforcement against an occupational pension and answers the question of whether a court may compel a judgment debtor to draw down their pension benefits to satisfy a judgment debt.

The claimant in the case took assignment of claims against the respondent director of the company following the discovery of his making payments before liquidation for personal benefit in breach of his fiduciary duties. These included the purchase of luxury cars, property purchases and the use of a helicopter.

Case Summary

Administration proceedings against the respondent resulted in a total judgment favouring the claimant of £996,014.22. The order was not satisfied, and the Manolete judgment is the result of an application by the claimant for an order under s.37 of the Senior Courts Act 1981 to instruct:

Sale of the leasehold property and drawdown of the resulting sum to satisfy the judgment debt;

An order allowing instruction for the Respondent’s pension to be drawn down such that a third-party debt order could be executed against it in satisfaction of the judgment debt.

Relevance

The judgment follows recent legal developments from cases in the area of pensions and their supposed inalienability in statute by validating recent doctrine.

This doctrine suggests that despite the inability of a pension to be subject to a third-party debt order, the courts may order a judgment debtor to be forced to take up their entitlement to their pension and subsequently be subject to an injunction by way of a third-party order such that judgment creditors or trustees in bankruptcy can use the funds to satisfy judgments.

This was directed in the first of the relevant cases, Blight [2012], based on what the judge termed “a strong principle and policy of justice to the effect that debtors should not be allowed to hide their assets in pension funds”.

Thoughts

The order was perhaps ‘theoretically’ the right order to make, but it has potentially serious negative implications for all pensions and the judicial overruling of statutory protections.

The statutory intent in s.91 of the Pensions Act is clear: occupational pensions are to be protected. Indeed, funds being squirrelled into protected investment vehicles to usurp creditors should not be protected by the law. Still, the validation of the Blight doctrine represented by Manolete might be dangerous.

The Blight public policy test confirmed by Manolete fails to differentiate between fraudulently created pension pots and those resulting from a lifetime of work and associated savings.

The court in Manolete might have better-constructed precedent within the auspices of s.5 (c)(iii) or recommended amendment within s.5(d) or (e) to achieve the same ends without damaging the overall statute.

The concept posited in the Manolete ratio of ‘fraudsters not being allowed to prosper’ is an inordinately broad brush approach considering the variety of circumstances in which pensions are created, the precedent that the judgment sets for future creditors, and judicial reasoning to beat statute because, at that moment, it feels to the court as if it is the right thing to do.

The decision has opened floodgates for courts to allocate management control of private parties’ finances to third parties in any instance where a judgment creditor makes a ‘strong enough case that to do so is appropriate’ in terms of public policy.

Summary

The precedent set in Manolete crystallises both fraudulently obtained and legitimately earned pensions in a potentially dangerous manner. In Brake [2022], the occupational pension of a husband was garnished for around £70,000 for his wife’s maladministration of a business where he was a named co-owner.

In Tassaruf [2011], an in personam judgment of circa $30 million was made against an administrative manager of a bank failing, in part, because of his involvement in fraudulent loan transactions. The amalgamation of the fact patterns of these two cases into one undefined mixture of circumstances neglects to adequately account for the potential damage that such a decision might have on public policy regarding the inalienability of pensions.

The veracity of the reasoning in Manolete, albeit for the right reasons, has the potential to result in arbitrary rulings against those who are otherwise legitimately trying to ameliorate previous fiduciary mismanagement or, as was the case in Brake, bring an unconnected party into a melee and take away their pension without adequate cause to do so.

• By Natalie Campbell

ALL THE HYPE ABOUT SHEIN

Shein, a fast fashion company that was founded in China, is known for its cheap offerings and a wide range of trendy fashion choices to consumers. It has easily appealed to Gen Z and fiercely challenges the likes of Zara and H&M.

Although founded in China, the company does not have offerings in the Chinese market and has its headquarters relocated to Singapore. Having been doing well in recent years, Shein is foreseeably tapping into the public market to raise capital.

However, its IPO journey is not without hurdles.

The company has to overcome the hurdle of getting clearance from Chinese securities and cyberdata watchdogs. Despite not being obligated to do so, Shein chooses to as a ‘courtesy’ since it still relies on a vast network of suppliers in China.

The process, however, seems to be dragging on.

Is the US Shein’s first choice for its IPO and London its second?

Shein confidentially filed a preliminary prospectus with the SEC in November last year. However, there is great uncertainty around whether the SEC will approve Shein’s listing, given the ongoing US-China tensions.

Recently, TikTok’s CEO has faced tough scrutiny in Congress over the company’s connection with China and a bill on banning TikTok is being considered in the Senate. It is unlikely that Shein, which raises a similar concern over its Chinese affiliation, will be looked upon favourably in the US and subsequently gain approval from the SEC.

The SEC demands more disclosure from Shein about the risks of doing business in China, including the Chinese government’s intervention or control and possible breaches of the Uyghur Forced Labour Protection Act.

This goes against Beijing’s ban on banks from making comments that ‘disparage’ the country. Shein finds itself in a delicate position to satisfy the two rival countries with conflicting interests.

With the US being an unlikely option, London emerges as Shein’s potential destination to float.

In January 2024, the UK chancellor met Shein’s CEO for discussions over the company’s potential listing in London instead of New York. Nevertheless, Shein’s IPO journey in London is not smooth sailing either, as some of the UK’s biggest retailers are alleging Shein’s exploitation of tax loopholes to pay lower customs bills.

London still seems to be a more viable option for Shein’s floating with more certainty as compared to the uncertain US regulatory environment.

If Shein opts to list in London, it will help to restore the city’s credibility as a global financial hub after a challenging 2023 that undermined the LSE’s appeal when a series of companies either delisting from the LSE (e.g. TUI Group) or choosing to list in the States (e.g. Arm Holdings Plc).

A sustainable long-term model?

While Shein’s success is evident, there are underlying issues that can undermine the company’s long-term prospects. Shein has been facing several IP lawsuits for selling knock-off products, with the latest claim brought by Uniqlo against Shein’s copying of its banana-shaped bag. This potentially puts downward pressure on Shein’s valuation at IPO as investors are more wary of litigation risk.

Shein has also been accused of using forced labour, further giving doubts to investors. One may wonder if Shein should float as early as possible to have a decent valuation before more underlying issues come to light.

Nevertheless, Shein’s IPO would generate work for capital market lawyers after a dull year. Companies may require the help of lawyers in undertaking the necessary legal due diligence required to initiate the preparation and drafting of a prospectus and its accompaniments.

Furthermore, lawyers are still needed post-IPO, as a means of ensuring that companies comply with disclosure requirements and any other relevant regulations.

• By Trinh Nguyen