UK: Key Points Arising Out Of The Nortel/Lehmans Pensions Decision

Last Updated: 31 December 2010
Article by Martin Brown and David McIntosh

The High Court has delivered its much anticipated judgment in the joint directions application made by the administrators of Lehman Brothers and Nortel, involving the Pensions Regulator.  

The main question put to the High Court was whether the costs of complying with a Financial Support Direction (FSD) issued by the Pensions Regulator on a company after the commencement of its administration is payable as an expense of the administration or provable only as an unsecured claim in the administration. 

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 Pensions Regulator can, if it believes it to be reasonable, issue an FSD (effectively a requirement to provide financial support of any amount up to the buy-out deficit in a scheme) against any connected or associated party.

The High Court's decision

As has now been widely reported, the court decided, with some reluctance, that on a proper analysis of the relevant competing pensions and insolvency legislation, the liabilities under an FSD issued during the course of an administration rank as an expense of the administration. 

Not surprisingly, the decision was welcomed by the Pensions Regulator but it raises considerable concerns for lenders to and other stakeholders in financially distressed businesses as well as for insolvency practitioners.  Any proposed financial restructuring of a group that has a defined benefit pension scheme, which has a substantial deficit (of which most do), where an administration is contemplated as part of the restructuring, could be affected. 

The key points are:

  • Watch this space - This High Court's decision will not be the last word on the matter.  It was clear that Mr Justice Briggs felt compelled, by current statute and case law, to arrive at a conclusion that he recognised was likely to be 'an impediment to the achievement of the objectives of the rescue culture' and unfair to unsecured creditors.  Permission to appeal to the Court of Appeal has been granted so a further hearing of the issues looks likely.  However, Parliament may see fit to rectify the outcome sooner. 
  • Fixed Charge Holders Breathe Easy - This judgment has no impact on the rights of fixed charge holders.  This is because administration expenses (which now include any liability under an FSD) can only be met from assets realised by an administrator that are subject to a floating charge or are otherwise unsecured.  
  • Floating Charge Holders At Risk  - Floating charge holders, on the other hand, are at risk of feeling the full brunt of this decision (unless and until it is overturned or corrected by legislation).  Floating charge holders have become used to calculating the 'leakage' from their floating charge according to the amount of an administrator's forecast remuneration and the expenses the administrator expects to incur (such as rent and legal fees), any preferential creditors (capped at £800 per employee) and the prescribed part (capped at £600,000).  This decision, however, introduces the prospect of the administration expenses bloating to such an extent that there may be no return to a floating charge holder.
  • Timing Is Key  – The case only concerned FSDs issued to a company after the appointment of an administrator. By analogy the same result would apply to an FSD issued during the course of a liquidation: it would be treated as a liquidation expense.  However, if the FSD was issued to the company prior to the appointment of an administrator, any amounts due under it would be an unsecured claim and therefore be a provable debt in any administration (or subsequent liquidation) distribution, but not an expense of the administration (or liquidation).
  • Jump to the head of the queue  – The insolvency legislation establishes an order of priority for the payment of "administration expenses".   Amounts due under an FSD issued after the administration commences are now to be regarded as an "expense properly incurred by the administrator in performing his functions in the administration of a company".   And because of that, the FSD liability leaps to the front of the queue, ahead of even the administrators' own remuneration unless the court orders otherwise (please see below).
  • Mr Administrator, no cash for you – The requirement to meet an FSD liability as a first priority expense of an administration may mean that there are insufficient assets to meet all of the "expenses of the administration", including the administrators' own remuneration.  This is particularly likely if the FSD liability is a significant sum, relative to the amount of floating charge realisations.  As a result, administrators may be forced to seek orders from the court (which it is empowered to make) for the re-ordering of the priorities so that the administrator is paid for discharging his/her statutory role.  It remains to be seen how willing the courts will be to grant such an order.  And that being the case, insolvency practitioners will want to consider the position, with advice, before accepting an appointment over a group in which there sits a pensions deficit.
  • Overnight Sensation? – The case itself bears witness to the fact that the Pensions Regulator does not generally issue an FSD in a short space of time.  Indeed, there are a number of complicated and detailed steps that must be followed before an FSD can be issued.  And the decision to do so can be appealed.  On that basis, whilst the Pensions Regulator might be considering other cases where an FSD might be appropriate, it is not likely that we will see large numbers of them landing on administrators' desks in the immediate future.  Indeed, there have only been FSDs issued in three cases so far.
  • One size does not fit all – Whilst the judgment as it stands has wide ranging implications, it is arguable that the facts of the particular administrations lent themselves particularly to the imposition of an FSD.  Of course, it will not be appropriate or reasonable in every case for an FSD to be issued.  It should be kept in mind that "reasonableness" above all else is one of the statutory conditions to the issue of an FSD by the Pensions Regulator.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to

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 22/12/2010.

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