According to a recent judgment in the English High Court, Financial Support Directions ("FSDs") issued by the Pensions Regulator ("the Regulator") against companies in administration are to be treated as expenses of the administration. This means that they are to rank ahead of preferential and unsecured creditors and, indeed, perhaps ahead of the remuneration of the administrators themselves.
The Regulator is charged with looking after the interests of pension scheme members and safeguarding the Pension Protection Fund and has power under the Pensions Act 2004 to issue FSDs against companies that are - or that have been in the previous two years - associated with employers with an insufficiently-resourced defined benefit pension scheme. The effect of an FSD is that the recipient becomes liable to provide financial support to the pension scheme.
In the current case, the administrators of two high-profile groups of companies (Nortel and Lehman Brothers) sought to clarify the status of FSDs issued by the Regulator after the companies had entered into administration.
The administrators argued that, in order to be provable in an administration, a claim must exist at the time the company enters into administration. As the FSDs were not in place at the point of administration, there could be no provable claim.
The Regulator (and the trustees of the relevant schemes) argued that an FSD issued against a company in administration should be considered either as an expense of the administration, or, alternatively, as an unsecured provable claim.
The judge noted that he was faced with a "legislative mess". The pension legislation is silent as to the status of FSDs in insolvencies. The judge therefore had to analyse the effect of the Insolvency Rules and the case law on expenses of administrations. He concluded that FSDs issued after the commencement of administration fell to be considered as expenses of the administration. However, FSDs issued prior to administration should be regarded merely as unsecured debts.
Obviously this decision will be welcomed by the Regulator, but it is equally obvious that this 'super-prioritisation' of FSDs in administrations could be extremely damaging to the rescue culture.
There are two real concerns here:- (i) unsecured and preferential creditors get wiped out; and (ii) the remuneration of the administrators may be threatened. These effects could seriously damage the rescue culture.
This did not go unnoticed by Justice Briggs, who expressed a hope that a higher court, or indeed Parliament, would be able to address this inadequacy. An appeal is expected; however, it is likely to be some time before this issue is finally settled.
The full text of the judgment is available here.
Disclaimer
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