Nortel Administration: Court of Appeal Upholds Priority of Pension Claims

LONDON, 14 October 2011

The legal issue
This case concerns whether the administrators or liquidators of a company can disregard a Financial Support Direction ("FSD") or Contribution Notice ("CN") issued by the Pensions Regulator against a company in administration or liquidation. 
Each defined benefit occupational pension scheme has a sponsoring employer company. An FSD or a CN can be issued by the Pensions Regulator against a company connected with the employer in certain circumstances which are prescribed under the Pensions Act 2004. In broad terms, where a pension scheme is under-funded and the circumstances of the case make it appropriate to do so, these powers allow the Regulator to require that other members of the employer's corporate group should contribute to address the under-funding.

The background

The Nortel pension scheme in the UK has in excess of 40,000 members and a deficit estimated at over £2bn.  Its sponsoring employer was Nortel Networks UK Limited. The Pensions Regulator determined in June 2010 that an FSD should be issued against several other companies in the Nortel group (the 'target companies'), directing them to provide financial support to the scheme. However, those target companies were themselves already in administration at the time of that determination.

The administrators of the target companies applied to the Court for guidance as to how they should respond to the FSD, and a CN if one was to follow, in circumstances where the target companies were in insolvency proceedings. That application was heard alongside a parallel application by the administrators of certain Lehman Brothers companies, as the Regulator has similarly decided to issue FSDs against those companies in connection with the Lehman UK pension scheme. One of the arguments run by the Lehman Brothers administrators was that FSDs and CNs are, in practice, of no effect against companies which are already in a formal insolvency process.

The public interest

If FSDs and CNs cannot operate against companies in administration or liquidation, this would effectively remove an important source of funding from pension schemes which have a deficit. Indeed, it would arguably remove that funding at a time when it was most needed. In that scenario, a larger number of pension schemes would enter the Government "lifeboat", the Pension Protection Fund, (“PPF”).  The PPF provides compensation to pensioners, although often not at a level equivalent to the benefits they would have received if their pension scheme had stayed "afloat".

The PPF is chiefly funded by means of a levy raised on all UK defined benefit occupational pension schemes; it follows that the greater the calls on the PPF, the greater the burden on pension scheme employers generally across the country.  They pick up the bill, so to speak.

The Court of Appeal judgment

The Court of Appeal has today ruled, unanimously, that the obligations arising from FSDs and CNs rank as expenses of an administration or liquidation, as the case may be. This means that they must be honoured ahead of payments to the insolvent company's unsecured creditors. Accordingly – and importantly - the administrator or liquidator cannot ignore these pensions obligations.

Hogan Lovells commented:

"Our client, the Trustee of the Nortel Scheme, is delighted with this decision. It helps very considerably to shore up the position of the members of the Scheme and the security of their benefits.  It also ensures that in appropriate cases, companies within a corporate group which ought to contribute towards its pension scheme are made to do so. The Regulator's power is particularly important when corporate groups collapse, as was the case in Nortel, because at that point there is a real risk that the sponsoring employer company alone will not be able to cover any scheme shortfall which exists."

Hogan Lovells acted for the Trustee of the Nortel pension scheme and for the Pension Protection Fund:

Crispin Rapinet (Insolvency Litigation) , John Tillman (Insolvency Litigation), Angela Dimsdale Gill (Head of Pension Fund Litigation), Joe Bannister (Insolvency).


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