Ground-breaking Judicial Decision in Favour of 33,000 UK Pensioners Confirmed by US and Canadian Judges
07 July 2015
Judges in the U.S. and Canada have just confirmed the decision they issued in May this year in favour of 33,000 ex-Nortel pensioners who were left stranded with a huge deficit in their pension scheme when the telecoms giant entered bankruptcy in 2009.
The effect of the May decision, after six bitter years of litigation, had meant that the UK pensioners could share on an equal footing with Nortel creditors worldwide the US$7bn residual Nortel assets currently sitting in an escrow account in New York.
The ground-breaking case was the first ever in which assets had been ordered to be distributed cross-border according to the claims of creditors worldwide. But it was not welcomed by US claimants who brought formal applications to both Courts to have the matter reconsidered within days of the judgments being handed down. Their complaint was that the judgments had given rise to an inequitable result.
On 6 July, the Judges in both Canada and the US handed down their rulings on the complaints by the US parties that the previous judgments were unjust. Both Judges saw no reason to change their earlier rulings, and resisted the attempt by the US to have them modified.
Dismissing the suggestion that his judgment had given rise to what must have been an unintended result, Judge Gross of the Delaware bankruptcy Court, said:
"The Court understood the implications of its decision when rendering the Allocation Decision."
Justice Newbould of the Supreme Court of Ontario said that the figures put forward by the US parties in support of alleged manifest injustice were "misleading".
On the main point argued by the US parties, Justice Newbould concluded:
"I see no injustice in the result. I need not repeat what is contained in the reasons for judgment released on 12 May, 2015. Nothing argued on this motion leads me to consider that I erred in any way in those reasons."
In the earlier judgments released in May, both Judges adopted the argument made by the Trustee of Nortel's UK pension plan and the UK Pension Protection Fund (collectively known as the UK Pension Claimants) that the assets of the global Nortel Group should be divided on a pro rata basis based on creditor claims.
In an unprecedented act of cross-border insolvency co-operation, the Judges had conducted a joint trial across the summer of 2014 – connected by video-link, and broadcast across a private internet network to client parties worldwide – to determine how assets realised from Nortel's global insolvency should be divided.
The UK Pension Claimants had argued throughout that, as a matter of fairness and given the highly integrated nature of the group and its assets, the proceeds of the joint asset sales should be shared among the insolvent entities on a pro rata basis relative to the respective levels of creditor claims against each estate.
The confirmation yesterday of the May 2015 decisions means that the only route now available to disgruntled US creditors is an attempt at an appeal, although Judge Gross urged the parties to avoid the delay and cost of that if possible.
Hogan Lovells represented the Trustee of the Nortel UK pension scheme and the Pension Protection Fund.
Commenting on the case, head of pensions litigation Angela Dimsdale Gill, commented:
"Naturally we are delighted that the Judges have confirmed their earlier decisions. We saw no possible basis for the modification of the judgments and the Judges have demonstrated that they are robust in their view that a pro rata distribution of the remaining Nortel assets is the fairest and most just result.
We hope the matter can now be swiftly concluded and that all creditors can access what is rightfully theirs."
Nortel Networks collapsed into insolvency in January 2009, with its European, U.S. and Canadian entities making simultaneous insolvency filings in London, Delaware and Toronto. Recognising the hugely integrated nature of Nortel's business, and the difficulty of realising its assets on a country-by-country basis, the various insolvency office-holders worked together to sell the key assets and business units on a joint, global basis.
However, being unable to agree at that early stage how the resultant proceeds should be allocated among the insolvent entities, it was agreed that the proceeds should be held in escrow in what became known as the "Lockbox" until agreement was reached. More than six years later, around US$7.3bn stood ready to be allocated. However, the question of allocation fell for judicial determination because the various stakeholders were unable to agree how the proceeds should be shared.
Nortel's group company based in the UK, Nortel Networks UK Limited (NNUK), was, at the time of the insolvency, the sponsoring employer of a large defined benefit pension scheme with over 40,000 members. At the date of the Nortel collapse, that scheme had a buy-out deficit of approximately £2.1bn, making the pension scheme trustee (and alongside it, the UK Pension Protection Fund) one of the largest creditors in the worldwide insolvency.
THE ALLOCATION TRIAL
In 2013, Judge Gross in Delaware and Justice Newbould's predecessor in Toronto, Justice Morawetz, decided that the allocation dispute should be resolved by way of a joint trial before both courts.
Following an intensive litigation process with approximately 140 depositions conducted across the world, and disclosure of around three million documents, the trial of the dispute took place jointly before both courts – connected by videolink – over 21 days in May and June 2014. In addition to the three main office-holder constituencies - Europe, Canada and the U.S. – the Judges permitted key stakeholders to participate in the dispute as "core parties". These additional stakeholders included representatives of Nortel's ad hoc bondholder committee and the UK Pension Claimants.
In May this year, both Judges delivered decisions agreeing with a pro rata approach which had been advocated by the UK Pension Claimants.
In essence, this approach involves sharing the Lockbox proceeds among the various insolvent companies rateably in proportion to the creditor claims which exist against each company.
In reaching this view, both Judges paid close attention to the integrated nature of Nortel's business and assets, and the manner in which it had operated prior to collapse. As Judge Gross commented in his May judgment:
"The Court's adoption of pro rata allocation is the only outcome that reflects uncontroverted evidence and leads to a just result."
Within days of the judgments being delivered by the two Courts, the US parties brought Motions for Reconsideration arguing that, without modification, the judgments would give rise to an inequitable result. The Motions were heard for a full day on 25 June. In judgments delivered yesterday, both Judges found that there was no basis for changing the formula pursuant to which they had previously ruled the Nortel assets should be distributed.
The pro rata decision therefore stands.
THE HOGAN LOVELLS TEAM
The Hogan Lovells core team was led by Angela Dimsdale Gill, head of pensions litigation, with insolvency litigation partners Crispin Rapinet and John Tillman taking the lead on insolvency issues. Pensions litigator Matthew Bullen was lead associate.
The Counsel team was led by Michael Tennet Q.C. from Wilberforce Chambers, with support from Sebastian Allen, Edward Sawyer, Ben Faulkener and James McCreath, also all of Wilberforce Chambers.