So you think your pension pot is safe if your limited company liquidates? Think again

One of the great myths about operating through a personal service company is that your personal assets will be ring-fenced from any creditors owed money by your PSC.

In reality, writes Nick Hood, senior consultant for Opus Business Advisory Group, there are all sorts of ways in which you can face a personal liability for your PSC’s debts.

But an occupational pension scheme within the PSC; surely not?

In the line of fire…

Well, if you’ve been criminal and defrauded your own PSC, or even if you’ve just left your limited company’s debts unpaid, your pension pot is well and truly in the line of fire, in wake of the High Court’s decision in Manolete Partners v. White.

First, a bit of background on the case. Interestingly, unlike the ‘Mr White’ of popular culture, immortalised in the 1992 film ‘Reservoir Dogs’, a character who audiences slightly sympathised with, this case’s protagonist Mr Ian Russell White, the respondent, probably won’t attract much empathy, despite trying (my company was my “life’s work”).

Mr Ian Russell White had been the controlling director and shareholder of a lifting equipment services company since its incorporation in 2002, right up until it went into administration in 2016, ahead of its liquidation in 2017.

Offences, owing £1million, and obtaining an enforceable judgment

The company had been substantially successful until it failed. But Mr White (not dissimilar to his on-screen namesake!) was found to have committed various offences, including misfeasance and breach of fiduciary duty.

The bottom line for Mr Ian Russell White due to his wrongdoing as a director is that the High Court decided that he owed almost £1million -- a sum straight out of many a 90s heist flick!

But in the case, Manolete (who provide the funding for court cases and who had bought the liquidator’s right to recover the debt), obtained an enforceable judgment, and it went after the money in Mr White's limited company pension pot.

Manolete’s line of attack was simple. Manolete asked the court to force Mr White to draw down his benefits from the pension scheme, so the money could be used to repay the £1m it was owed.

Logic, the strikingly straightforward kind  

With not much in the way of defence from Mr White, the court agreed, again on the basis of some strikingly straightforward logic. And it went a bit like this, ‘If Mr White had breached his fiduciary duty to the company, surely it was manifestly unfair for him to retain the pension -- wholly made up of funds provided by the company -- unless he repaid the £1m debt?’

The double-whammy for Mr White was that not only did he lose his pension pot, but the drawdown also triggered personal tax liabilities on the funds taken out to settle the debt, over and above the 25% tax free drawdown-allowance.

A tale of cunning plans, executed with real flair

For any contractor out there with their hand up in objection, yelling out that benefits under an occupational pension scheme cannot be paid to anyone except the pensioner, Manolete and its lawyers had an answer for that one too. So, quite in contrast to Quentin Tarantino’s crime drama of a botched stick-up, Manolete Partners v White will be read by some as a tale of cunning plans, executed with considerable flair (on Manolete’s part).

In fact, the obtained-court order only compelled Mr White to give written notice to the pension scheme trustees that all of his remaining pension fund should be paid into a designated bank account in his name -- an account he was prevented from accessing, and from which the funds could be extracted to settle all or part of the £1m debt by Manolete in due course.

So Mr White did receive his pension funds as the law requires. But all he could do with those funds was pay off the debt. That surely gave Mr White a dreadful sinking feeling at the point of realisation -- which Reservoir Dogs’ own Mr White has as the film’s finale.  

What’s the upshot of Manolete Partners v White?

The judgment in Manolete Partners v White has extended the rights of creditors to access pension pots to occupational schemes, which were not covered by an earlier landmark decision. It’s a classic example of how our judicial system and its enforcers -- our worthy judges -- continually work with basic, often outdated laws to adapt them to constantly changing commercial circumstances.

For contractors, the takeaway is never to assume that your pension pot will survive the failure of your PSC, if you choose to leave the scene of commercial failure with its debts unpaid, whichever way they may have been incurred. Indeed, there was fraud in this particular case, but the legal principles behind the judgment will apply even where there isn’t fraud. The core issue is whether the PSC director is using the pension scheme to shelter value and so to prevent its creditors being paid. So, if the case’s Mr White were ever to go into production about his escapades, the film poster almost writes itself -- by nodding to the film which the on-screen Mr White featured in while serving as a warning to others: ‘A nice try, but not successful and with lots of potential unpleasantness.’