Summary and implications
The UK Pensions Regulator (the Regulator) has the power to require any group company, based anywhere in the world, with a UK subsidiary who sponsors a defined benefits pension plan to pay money into that plan in certain circumstances. These orders are known as Financial Support Directions (FSDs).
Following its filing Chapter 11 bankruptcy, the Regulator exercised its power against 25 Nortel group companies worldwide and pursued legal action in Canada to require those companies to provide financial support to the UK plan. Lehman found itself in a similar situation, with financial support being sought by the Regulator from the US parent and five other companies.
The administrators of the two groups joined up to fight against the validity of those orders, with the battle ending up being heard by the UK's Supreme Court earlier this year. A key issue under consideration was the lower courts' decisions that an order from the Regulator to pay money into an underfunded UK pension plan issued after an insolvency event has preferential status as an "expense" of the insolvency, and is therefore paid out in priority to the administrator's own expenses and both floating charge holders and unsecured creditors. If this is the case the plan would be given "super-creditor" status in the insolvency, at the expense of all other creditors.
However, we have now heard from the Supreme Court and it has reversed the decision of the Court of Appeal on this point. Its definitive judgment is that the liability (even where the FSD was issued after the insolvency of the plan sponsor) will rank alongside the company's other unsecured creditors. And as a result of the judgment, in future, an FSD debt may well not be recovered in full in an insolvency situation. But at least insolvency practitioners will no longer have the risk of subsequent FSD 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.
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