UK: Nortel/Lehman Case In Court Of Appeal

Last Updated: 21 December 2011
Article by Mark Howard, Peter Hodgins and Jack Wheeler

On 14 October 2011 the Court of Appeal upheld the decision of the High Court in the appeal brought by the administrators of companies in the Nortel and Lehman Groups. The case concerns the fi nancial support directions (FSDs) the Pensions Regulator issued against various Nortel and Lehman companies in 2010.

The Regulator can issue an FSD where an employer in a defi ned benefi t scheme is "insuffi ciently resourced" or a "service company". The FSD can require another group company to provide financial support to the scheme. If the employer fails to do this, the Regulator can issue a contribution notice which requires the employer to make a monetary contribution to the scheme.

High Court decision

The High Court found in December 2010, that where an FSD was issued by the Pensions Regulator against a company which had suffered an insolvency event, the cost of complying with it would rank as an expense of the company's administration or liquidation. Such expenses would have "super priority" and must therefore be paid before any distributions to fl oating charge holders, unsecured creditors and even the administrators/liquidators' own fees. The FSD was not a "provable debt" (which would rank equally with other unsecured creditors) nor was it just not payable at all (which the court described as the "black hole").

Court of Appeal decision

The Court of Appeal has upheld the High Court's decision.

Lord Justice Lloyd fi rst considered whether the liability was a provable debt and considered the relevant insolvency legislation and some case law applicable to it. He reached the same conclusion as the judge in the High Court that he could not decide that it was a provable debt.

The Court then considered whether the liability was an expense of the administration. The judge again considered the Re Toshoku case and other insolvency cases as well as the relevant pensions legislation. He wished that the Pensions Act 2004 did, as section 75 of the Pensions Act 1995 did, say something about the application of the FSD regime in insolvency but said "we have to ascertain the position as best we can from what the Act does say". It was common ground that the 2004 Act does apply to target companies which are in the insolvency process as there was nothing in the legislation to exclude such companies from the class of potential target companies on which a contribution notice or an FSD could be served.

The Court thought that if the obligation imposed by an FSD (and if the FSD is not complied with, the liability created by a contribution notice) is not a provable debt ... "it seems to me, therefore, that Parliament thereby imposed a fi nancial liability on a company in an insolvency process which constitutes a necessary disbursement of the liquidator or administrator". In other words he agreed that the liability was an expense of the administration or liquidation.

He acknowledged that the conclusion does lead to some curious consequences. "It is odd to fi nd that while the section 75 debt is provable in the insolvency of the employer, the contribution notice liability is payable with much higher priority as an expense in the insolvency." However, he thought it would be a good deal more odd that a liability under a contribution notice had a lower priority than that of the section 75 debt and was relegated to the "black hole" especially if that meant that "a potential target company could avoid the effect of the FSD regime by putting itself, or being put, into administration before any decisive step could be taken by the Pensions Regulator to impose any liability under this regime".

Clyde & Co comment

It is not a surprise that the Court of Appeal has upheld the High Court decision. It therefore now seems inevitable that this case will go to the Supreme Court, especially given that the case of Re Toshoku which played a prominent part in both the High Court and Court of Appeal cases is itself a House of Lords decision.

What this matter really needs is for Parliament to intervene and clarify the position. It surely did not intend that the FSD should have the superpriority that it has been given from these cases especially as an FSD issued before the insolvency event ranks alongside other unsecured creditors as does an ordinary section 75 debt.

There has been much comment about the decision threatening UK rescue culture and it has even been suggested it may affect bank lending to groups with defi ned benefi ts pension schemes. However, after the High Court decision, the Regulator indicated it would be careful about the use of FSDs post insolvency given the super-priority, stressing it is required to act reasonably in using its powers. It has repeated this after the Court of Appeal decision, saying: "We recognise the importance of the UK having an effective restructuring and rescue process and have no intention of frustrating its proper workings ... The Regulator fully appreciates the need to have an effective rescue culture." It is unclear at this stage what the long-term effect will be as we await the next instalment.

From a pensions point of view, if this decision is overturned by the Supreme Court or by Parliament, it may follow that the Regulator feels it is freer to issue more FSDs than it is currently doing so.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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