A High Court judge has refused to sanction a €500 million reduction in Aer Lingus group's capital reserves to pay dividends to shareholders unless the company makes provision for potential legal claims resulting from the €930 million deficit in the pension schemes.
The shortfalls in the general and pilots' pension schemes would seem to constitute a contingent future claim against Aer Lingus, Mr Justice Roderick Murphy said.
In those circumstances, court approval of the resolution to reduce the capital reserves was subject to a condition that Aer Lingus provide for potential claimants arising from the penson funds deficit, he found.
The proposed reduction in the capital reserves from almost €860 million to about €360 million was "substantially below" the level of the shotfall in the pension funds, he noted.
While the Aer Lingus group was entitled to seek a reduction in capital, the court had to address the matter on the basis of Section 73 of the Companies Act relating to the entitlements of creditors, he said.
The trustees of the pension schemes owed duties to the Aer Lingus pensioners and are contingent creditors of Aer Lingus in the circumstances of a shortfall in funding of the schemes, he ruled.
The judge also noted the trustees had engaged with Aer Lingus with a view to resolving the pension fund issues and had expressed concern, if the company got approval for the share capital reduction before a final agreement was reached on pensions issues, such approval was likely to impact significantly on the talks.
He was delivering his reserved judgment on the application for approval for the share capital reduction. The judge has adjourned the matter to September 3rd to allow the various parties, including the pension scheme trustees, consider his judgment. James Doherty, for the trustees, said "a lot depends" on what happens between now and September 3rd.
In its application, Aer Lingus Group plc, as holding company of the Aer Lingus companies, had claimed it has no "legal" obligation to address the pension funds deficits and also said Ryanair, a 30 per cent shareholder, had threatened legal action if the Aer Lingus board moved to reduce the deficit without the approval of shareholders.
The Minister for Finance had received legal advice the pensioners could make a reasonable legal case the company has an obligation to reduce the pension fund deficit while the company took the view such a case would not succeed, the court was also told.
The Retired Aviation Staff Association, representing some 4,7000 serving and retired Aer Lingus staff, had opposed the application because of a a €748 million deficit in their pension scheme. The pilots union, Ialpa, also opposed the application due to the €182 million deficit in the pilots pension scheme.
Aer Lingus had said, if approved, the €500 million will be moved from non-distributable to distributable reserves out of which future dividends may be paid to shareholders. A 3 cent per share dividend, some €15 million, is to be paid to shareholders this month from existing distributable reserves while, subject to the performance of the operating company Aer Lingus Ltd, similar dividends will be made over the next two years.
The court was told Aer Lingus Ltd, as participating employer in the two pension schemes, pays a fixed contribution to those schemes and had paid those contributions to date. It was alleged it was the responsibility of the trustees to address the deficit, whether by reducing benefits or other means.
While Aer Lingus Ltd might choose to make a voluntary contribution towards reducing the deficit, it had no legal obligation to do so, it was argued.
Today, Mr Justice Murphy noted the rules of the pension trust deed provided that neither the members nor the employer were obligaed to contribute any more than they had agreed to do under the terms of the rules of the schemes.
However, the increase in funding to Aer Lingus Ld by the holding company as a result of an IPO (initial public offering) in 2006, and the negotiations between the trustees and employee and employer groups had resulted in payments for the benefit of the holding company, Aer Lingus Ltd, their shareholders and present and past employees, he noted.
Of more importance was a note regarding defined contribution pension schemes in the consolidated financial statements of the company's annual report for 2011, he said. That note stated it was possible that the group's claim of having no responsibility for the deficit in the scheme could be subject to legal challenge by various potential claimants, the judge said.
It was proper that an annual report should disclose the possibility of future potential claims and refer to the costs of any challenge which, if successful, could result in significant loss to the company, he said. The use of the word "claimants" in the context of a potential challenge was also significant.
In the circumstances and given the relevant provisions of the Companies Act, the trustees as potential contingent creditors were entitled to object to the proposed capital reserves reduction, he ruled.