UK: Supreme Court Ruling: Pension Financial Support Directions Rank As Ordinary Debts

Last Updated: 1 August 2013
Article by Jennifer Bell

Summary and implications

The Supreme Court handed down its judgment in the Lehman and Nortel pension appeal cases on 24 July 2013.

  • The decision is important in confirming where a statutory liability to provide financial support to a pension scheme pursuant to a Financial Support Direction (FSD) or a Contribution Notice (CN) will rank on that company's insolvency.
  • Prior to the Supreme Court's decision an FSD/CN liability that arose after an insolvency event could be treated as an "expense" of the insolvency (and therefore paid out in priority to the administrator's own expenses and both floating charge and unsecured creditors).
  • The Supreme Court has now overruled that position and decided that the liability (even where the FSD was issued after the insolvency of the company) will rank alongside the company's other unsecured general creditors.

Impact of the judgment

The decision of the Supreme Court is important in clarifying the status of debts due under FSDs/CNs issued after an insolvency event.

As the law stood following the Court of Appeal decision, there could be a big difference in practice between an FSD/CN issued prior to an insolvency event (treated as provable along with all other unsecured creditors) and one issued after the insolvency event (given the preferential status as an "expense").

Whilst the decision removes the prospect of such liabilities having preferential status, it is important to recognise that the application also asked the Supreme Court to decide whether the liability should rank below unsecured creditors (which in practice would likely make it worthless). In deciding that all such liabilities (regardless as to when they arose) should be provable alongside other unsecured creditors, the Supreme Court has taken the middle ground.

As a result of the judgment, in future, FSDs and CNs may well not be recovered in full in an insolvency situation. However, it removes any anomaly arising by reference to whether the FSD/CN was issued prior to

or after the insolvency event which could give rise to very different outcomes with no obvious justification.

The decision is likely to be welcomed by insolvency practitioners who will no longer have the risk of subsequent FSD/CN debts ranking as an "expense" which could wipe out the assets available to pay the typical expenses associated with rescuing a company in administration or realising maximum returns for creditors.

Background to the case

By way of brief background to the Supreme Court decision:

  • various UK companies within the Lehman Brothers and Nortel groups of companies went into administration;
  • these groups each contained a final salary pension scheme that was in substantial deficit;
  • after relevant companies within the Lehman and Nortel groups had gone into administration, the Pensions Regulator decided to issue FSDs against six companies in the Lehman group and 25 companies in the Nortel Group; and
  • administrators of the relevant Lehman and Nortel entities then challenged the Pension Regulator's ability to issue the FSDs in the circumstances and the cases were heard together before the High Court, the Court of Appeal and most recently the Supreme Court.

Ranking of statutory liabilities after Lehman and Nortel

The central issue before the Supreme Court was the status of the statutory liabilities arising under FSDs/CNs and where they ranked for payment (if at all) in the context of the insolvency process.

  • As regards the section 75 debt on the employer, the Pensions Act 1995 treats this debt as arising immediately prior to the employer's insolvency and the debt is provable against the employer as an unsecured ordinary debt.
  • As regards an FSD/CN issued before an insolvency event, this was also treated as provable as an unsecured ordinary debt.
  • Both the High Court and the Court of Appeal had found that where the FSD/CN is issued after the insolvency has commenced, the liability was an "expense" of the administration or liquidation. The practical effect being that the "expense" is given priority under the insolvency rules and is to be paid out before payment of professional fees and before any distribution to the company's floating charge holders or general unsecured creditors. The Supreme Court overturned this approach. It unanimously decided that any liability arising under and FSD/CN issued after the insolvency has occurred was provable in the context of an administration or liquidation along with all other unsecured creditors.

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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