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Recently, the Court of Appeal upheld the High Court's
decision in the Nortel Networks and Lehman Brothers disputes. The
judgment confirms that liabilities under Financial Support
Directions (FSDs) and Contribution Notices (CNs), which are issued
by the Pensions Regulator, will rank ahead of almost all other
claims when a company becomes insolvent. The discussions in
the case focused on whether FSDs and CNs are classed as
'provable debts', expenses of the insolvency or, indeed,
neither.
It is common for defined benefit pension schemes to hold
insufficient funds or other assets to meet their liabilities in
full (principally to pay benefits). If that happens and the
sponsoring employer becomes insolvent, the scheme liabilities and
assets may be taken on by the Pension Protection Fund (PPF), for
the purpose of 'topping up' benefits to the level that the
PPF can pay.
The Pensions Regulator has various powers that it can exercise
in order to ensure the efficiency of the PPF and to minimise claims
upon it. The Regulator can impose CNs or FSDs on companies,
in certain circumstances. Respectively, they require the
recipient to contribute to the scheme or to put in place financial
arrangements in order to assist an employer that has an obligation
to contribute to the scheme.
In the Nortel/Lehman Brothers cases, the questions were whether
FSDs and CNs are classed as provable debts and where they rank
against other liabilities in a distribution of an insolvent
company's assets. The High Court and, now, the Court of
Appeal have confirmed that, to be a provable debt, an FSD or CN
would have to have been issued before the
insolvency took place. In these cases, the FSDs and CNs were issued
after each relevant company became insolvent and,
therefore, are not provable debts. However, the Court echoed views
expressed in a previous House of Lords case and has confirmed that
FSDs and CNs are to be viewed as statutory debts and that, as such,
they rank as expenses of the insolvency process. This means that
they have 'super priority' over, and should be paid in
preference to, most other claims.
The effect of this decision is that the ability of creditors to
recover funds from some insolvent companies will be reduced
(possibly entirely) in favour of claims made by the Pensions
Regulator. The Court of Appeal's decision was not unexpected,
but it is clear that many have concerns about the effect of the
judgment. It is anticipated that there will be a further appeal to
the Supreme Court.
The material contained in this article is of the nature of
general comment only and does not give advice on any particular
matter. Recipients should not act on the basis of the information
in this e-update without taking appropriate professional advice
upon their own particular circumstances.
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