UK: High Court Pensions Ruling Favours Pensions Regulator

Last Updated: 14 December 2010

Originally published 10 December 2010

Keywords: Financial Support Directions, pensions, contribution notice, liquidation costs

The High Court has this morning decided that the costs of complying with Financial Support Directions ("FSDs") issued to certain Nortel and Lehman companies by the Pensions Regulator ("TPR") earlier this year qualify as "super priority" administration expenses, payable in priority to unsecured creditors, floating charge holder and the administrator's own costs.

The Question

The Court was asked to determine, where an FSD or a Contribution Notice ("CN") is issued after the date on which a company goes into administration or liquidation, whether the costs of complying with the FSD or the payment of the CN debt will rank in the administration or liquidation as:

  • a provable unsecured debt;
  • an expense of the administration or liquidation; or
  • neither of those.

The Answer

The Court's answer, in short, was that the costs of complying with an FSD (or a CN where one is subsequently issued) will fall as an expense of the administration or liquidation and take super priority over the administrator's own fees, floating charge holders and unsecured creditors.

However, if the administration was commenced before 5 April 2010 (when the Insolvency Rules 1986 were amended), and an FSD is issued to a company in administration but the CN is not issued until after the company has moved into liquidation, the CN debt will be an unsecured debt in the liquidation and not a liquidation expense.

The Reasoning

The Court's reasoning was that the legislation dealing with the FSD regime had not been drafted with insolvency regimes in mind and it was not possible to fit the two regimes together neatly because of difficulties of timing. On the basis of previous authority, the Court held that the debt was not provable in the administration. It therefore came down to the choice between giving the pension debts super priority or for them not to be paid at all. The Court decided that Parliament must have intended for them to be paid and therefore they must have super priority.

The Court acknowledged the inherent potential unfairness to unsecured creditors as a result but noted that TPR's obligation to use reasonableness during the FSD process will hopefully mean that such unfairness will not arise: the sum demanded in a CN should be reasonable and based on the assets of the company in administration and the number of creditors.

Comment

Today's result is a good result for pension scheme trustees and TPR but in practice it may cause difficulties for employers in obtaining funding as the pension debt will be payable in priority to bank debt secured by a floating charge. An unhappy and unintended consequence could therefore be that more employers are pushed into insolvency. It is likely that this case will be appealed and indeed, the Court expressed hope that a higher Court or Parliament would review the position. This saga is definitely not concluded yet.

Here is a link to the full text of the judgement: http://www.bailii.org/ew/cases/EWHC/Ch/2010/3010.html

In addition, here is a link to a statement that has been issued by the Pensions Regulator: http://www.thepensionsregulator.gov.uk/press/pn10-26.aspx

Learn more about our Restructuring, Bankruptcy & Insolvency practice.

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Mayer Brown is a global legal services organization comprising legal practices that are separate entities ("Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP, a limited liability partnership established in the United States; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales; and JSM, a Hong Kong partnership, and its associated entities in Asia. The Mayer Brown Practices are known as Mayer Brown JSM in Asia.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

Copyright 2010. Mayer Brown LLP, Mayer Brown International LLP, and/or JSM. All rights reserved.

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