The High Court has handed down an important judgment in joint
proceedings brought by the Lehman Brothers and Nortel
administrators relating to the Pensions Regulator's power to
issue "financial support directions" (FSDs) against
companies after they have entered into insolvency.
Reminder: what is an FSD ?
If a company responsible for funding a pension deficit is either
a "service company" or "insufficiently
resourced" (as defined in the legislation), the Regulator can,
if it believes it to be reasonable, issue an FSD (effectively a
guarantee of any amount up to the buy-out deficit in a
scheme).
Background: the Nortel and Lehman claims
In January 2009, Nortel Networks Corporation and several
subsidiaries were placed into administration procedures, including
in the UK, Canada and the US. The Regulator's Determinations
Panel heard the case and in July 2010 the Regulator determined to
issue an FSD against 25 companies in the worldwide Nortel
group.
In September this year, the Determinations Panel then upheld the
issue of FSDs against six Lehman Brothers group companies. In its
reasoning, the Panel said that the existence of insolvency
proceedings did not go against the reasonableness of imposing an
FSD. In this particular case, said the Panel, the complexity and
multi-jurisdictional nature of the group meant that "if
anything it is more reasonable to impose an FSD on an insolvent
target."
The administrators in each case disagreed, bringing this joint
challenge to the High Court.
The decision
The judge faced the unenviable decision as to whether, in
principle, monies payable pursuant to an FSD issued after the
commencement of administration:
- fell to be treated as an "expense" in the administration (this would have far-reaching consequences as it would mean that the FSD had "super priority" and ranked above other, unsecured creditors in the insolvency process);
- were an unsecured provable (recoverable) claim in an insolvency (i.e. falling to be considered "pari passu" with other unsecured creditors); or
- were not in fact recoverable at all, meaning that companies might be able to avoid the reach of the Regulator's power by entering administration.
The stakes were therefore high for all parties. In the end, not
without great reluctance, the judge decided that the first option
was the right answer on the law as it stands. However, it is clear
that he regarded this outcome as unsatisfactory.
Unsurprisingly, in a press statement, the Regulator has welcomed
the outcome. However, the potential wider impact for restructurings
and refinancings could be very significant. The likely size of
pension scheme deficits means that many unsecured creditors could
find themselves thrown down the pecking order in the event that the
Regulator intervenes in future insolvency proceedings. The
resulting uncertainty is unlikely to be welcomed by anyone involved
with pension schemes.
Next steps
We understand that the administrators had applied for a stay of the FSD proceedings pending the court hearing. It is expected that an appeal may be made, possibly directly to the Supreme Court, meaning that this decision could yet prove only the latest battle in this intriguing trench war between insolvency practitioners and the Regulator. However, there must be a real possibility of the government deciding to change the relevant legislation so that "super priority" is not given to FSDs in insolvencies.
This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq
Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.
The original publication date for this article was 13/12/2010.