High Court holds that liability for series of FOS complaints did not transfer by way of Part VII FSMA business transfer scheme
29 July 2015
In this case report, we consider the decision of the High Court in PA(GI) Ltd v GICL 2013 Ltd & anr  EWHC 1556 (Ch) (5 June 2015).
The court considered whether liability for a series of Financial Ombudsman Service (FOS) complaints had been transferred by way of an insurance business transfer scheme under Part VII of the Financial Services and Markets Act 2000 (FSMA). The court held that liability for these FOS complaints had not been transferred, in part due to the lack of clarity around this point in the documentation that gave effect to the insurance business transfer scheme.
The claimant, PA(GI), sold payment protection insurance (PPI) policies (PPI policies) through third party agents from 1990 until 2004. One such third party agent was the clothing retailer, Next Plc, which sold the PPI policies in connection with its store card accounts. The arrangements between the claimant and Next were documented by way of a series of master policies, each of which allowed Next to bring its store card customers within the scope of its agreement with the claimant.
Since 2012, customers of Next have referred complaints to the Financial Ombudsman Service (FOS), alleging that PPI policies sold to them in connection with their Next store card accounts were missold to them (FOS complaints).
The impact of a business transfer scheme on liability for the FOS complaints
In 2006, the claimant transferred to the first defendant, Groupama, the non-life component of its PPI business by way of an insurance business transfer scheme under Part VII of the Financial Services and Markets Act 2000 (FSMA) (2006 scheme). The 2006 scheme was sanctioned by an order given by Mann J dated 17 May 2006 and became effective on 31 May of that same year.
In the context of handling the FOS complaints, in 2014 the claimant contended that any potential misselling liabilities arising from the sale of the PPI policies by Next had been transferred from it to the first defendant as a result of the order issued in connection with 2006 scheme. The claimant alleged that this meant that the FOS should treat the first defendant, and not it, as the respondent to the FOS complaints. The FOS disagreed with this analysis and decided that, notwithstanding the 2006 scheme and the order, the claimant was still liable for the liabilities arising from the FOS complaints.
The claimant issued an application to the High Court to challenge the FOS' decision that, notwithstanding the 2006 scheme and the terms of the order, it was still liable for the liabilities arising from the FOS complaints.
The issue to be determined by the High Court: was liability relating to the alleged misselling of PPI transferred by the 2006 scheme?
The issue before Andrews J sitting in the Chancery Division of the High Court was whether liability for the alleged misselling of the PPI policies had transferred from the claimant to the first defendant under the terms of the 2006 scheme. This issue turned on a point of construction of the definition of the term "Transferred Liabilities", which was contained in the terms of the 2006 scheme as well as in the order.
The order stated that:
On and with effect from the Effective Date, the Transferred Liabilities shall, by virtue of this order and without any further act or instrument be transferred to and become liabilities of the Transferee and in each case shall cease to be liabilities of the Transferor."
The terms of the 2006 scheme were set out in the order and provided that:
""Transferred Liabilities" means all liabilities of the Transferor (other than the Residual Liabilities and any liabilities under or relating to the Excluded Policies) under or attaching to the Transferred Policies and the Transferred Reinsurances…… but excluding, for the avoidance of doubt, the Excluded Liabilities and the Life Component Liabilities."
Overall, Andrews J held that the term "Transferred Liabilities" used in the terms of the 2006 scheme and the order did not include any liability for alleged misselling of PPI. This decision meant that liability for any alleged misselling of PPI remained with the claimant, which would therefore be responsible for any claims arising from them, including the FOS complaints.
Andrews J considered the following points, which led to her overall decision that the claimant retained liability for the alleged misselling of PPI:
The nature of a Part VII FSMA business transfer scheme
Andrews J noted the concerns that a court will consider when deciding whether or not to sanction a business transfer scheme under Part VII of FSMA (as summarised in Re Prudential Annuities Ltd and Prudential Assurance Ltd  EWHC 4770 (Ch) (13 November 2014)), including that a court must decide whether a proposed business transfer scheme is "fair" and, in the context of insurance business transfer schemes, the reasonable expectations of policyholders as to the ability of the relevant insurer to meet their obligations in respect of insurance policies.
In Andrews J's view, an intention to transfer liabilities for misselling would be an unusual feature of a Part VII business transfer scheme and one that she would expect to be expressly disclosed when applying for a transfer under a Part VII scheme to be approved by a court due to the potential material impact it may have. Andrews J added that she would also expect the scheme report prepared by an independent expert (which is submitted alongside an application for a transfer under a Part VII scheme) to have considered such liabilities. However, neither the 2006 scheme nor the order or any of the contemporaneous materials put before Mann J in 2006 referred to any potential liabilities for the alleged historic misselling of the PPI policies that were to be transferred to the first defendant.
The natural meaning of the words used in the order and the terms of the 2006 scheme
Andrews J considered the natural interpretation of the language used by the parties in the order and the terms of the 2006 scheme in relation to the "Transferred Liabilities".
Liability for misselling cannot arise "under" the PPI policies
Andrews J held that it was plain that liability for misselling could not arise "under" the PPI policies. Citing Sprung v Royal Insurance (UK) Ltd  CLC 70 (14 June 1996) as an authority for this proposition, she noted that the insurer's primary liability under an insurance policy is its liability to pay claims in the event of an insured loss.
Liability for misselling cannot "attach to" the PPI policies
Andrews J turned to consider whether any potential liability for misselling fell within the scope of the expression "all liabilities of the Transferor… attaching to the Transferred Policies", which had been used in the terms of the 2006 scheme.
The claimant submitted that potential liability for misselling did fall within the scope of this expression because the entry of the assured into a contract of insurance was an essential ingredient of any claim for misselling. The claimant continued to argue that each of the FOS complaints had arisen from the fact that each complainant had been sold a PPI policy that they did not want, or on terms that were unsuitable for them. However, Andrews J considered the claimant's interpretation of the phrase "all liabilities of the Transferor… attaching to the Transferred Policies" to be an unnatural one. Instead she held that liabilities for misselling did not "attach to" the PPI policies that were transferred under the 2006 scheme under the natural construction of the language used. "Liability attaching to" a contract, she said, would be understood as a reference to a liability that is directly connected with, or emanates from, the contract itself, arising after that contract has come into existence. It would not, she stated, readily be understood as referring to a liability for an actionable wrong which preceded or gave rise to the contract.
Andrews J observed that, objectively, the parties to the 2006 scheme must have intended that the first defendant would take over responsibility for all contractual insurance liabilities, whether they arose directly under the Master Policy with Next or as a result of the attachment of further individual risks to that policy whenever customers bought goods on credit using their store card accounts. Viewed in that context, Andrews J considered that the phrase "liabilities attaching to the Transferred Policies" appeared to be a reference to the contractual liabilities to those customers.
In addition, Andrews J noted that the draftsman of the 2006 scheme terms used the wider expression "liabilities relating to" in the very same definition of "Transferred Liabilities" as was the subject of debate in this case, to exclude "liabilities under or relating to the Excluded Policies" from the 2006 scheme. It is generally to be assumed, Andrews J said, when construing a contract that where a draftsman uses two different expressions in the same clause, he intends them to mean something different. Consequently, she stated, "attaching to" was intended to mean something different to "relating to" and therefore the claimant's argument that these two phrases should be treated as having the same meaning was incorrect.
The natural meaning of the words used in the order and the terms of the 2006 scheme in context and the commercial impact of this interpretation
Having considered the natural meaning of the language used in the order and the terms of the 2006 scheme and concluded that it did not include the transfer of liability for the alleged misselling of PPI, Andrews J went on to consider this interpretation in the context of the facts of this case and the commercial impact of adopting this interpretation.
Andrews J held that her proposed interpretation of the language used in the order and the terms of the 2006 scheme made sense in the context of the 2006 scheme because such schemes are chiefly concerned with the transfer of contractual benefits and liabilities.
From a commercial perspective, Andrews J remarked that if the first defendant took over the PPI misselling liabilities, it risked having to pay out millions of pounds as a result of the claimant's wrongdoing. In addition, Andrews J thought it was unlikely that the first defendant would have agreed to take on these liabilities and, even if it had, she would have expected a reference to this to be included in the documentation for the 2006 scheme.
The claimant disagreed with Andrews J's views and tried to advance a variety of arguments in opposition to them, including that the "tenor" of various associated documents (such as its complaints handling procedures, terms and conditions and information provided to those who had taken out PPI policies at the time of the 2006 scheme). However, Andrews J was not convinced by any of these arguments.
In 2006, it may not have been foreseeable that the claimant would be the respondent in a number of complaints made to the FOS about PPI. As a result, it is perhaps understandable that this specific point was not addressed in the documentation used for the 2006 scheme. However, the High Court's judgment and analysis of the documentation used for the 2006 scheme emphasises the importance of firms making it clear what liabilities will and will not transfer as part of a business transfer scheme undertaken pursuant to Part VII of FSMA. As a result, firms should consider specifying what, if any, liability for future claims, complaints, regulatory investigations and/or sanctions will transfer as part of a business transfer scheme in its terms, even if no such liabilities are in contemplation at the time of the business transfer scheme.
Thorough due diligence on the transferring business should be conducted to identify actual and potential liabilities and ensure these are taken into account by the parties in their negotiations, the agreed allocation is properly reflected in the scheme documents and the transfer is effective.
Firms should also bear in mind that such terms will be considered by both an independent expert and the court and so must be seen to be "fair" in the circumstances to all parties affected, including policyholders, employees and other interested persons.
PA(GI) Ltd v GICL 2013 Ltd and another  EWHC 1556 (Ch) (5 June 2015) This article first appeared on Practical Law and is published with the permission of the publishers.
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