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Nortel Case: Supreme Court ruling recognises key pensions remedies in insolvency cases

24 July 2013

LONDON, 24 July 2013 – Today the UK Supreme Court has given judgment in the Nortel and Lehman Brothers pensions cases, ruling that pensions Financial Support Directions (FSDs) and Contribution Notices (CNs) rank as provable debts in an insolvency. This ensures that these statutory provisions have effect when they are most needed.

The case began three years ago in the wake of the bankruptcies of both Nortel and Lehman Brothers, which each left behind a UK pension fund with a substantial deficit. In each case, the relevant employer company could not meet that deficit, and the question for the courts was whether statutory pensions remedies - FSDs and CNs - could be used to require other companies within each group to help make good the deficit. Those other group companies were themselves insolvent, but did have assets available to make some payment on creditor claims. 

The Supreme Court's decision has now confirmed that FSDs and CNs, which are issued under the Pensions Act 2004, effectively rank as provable debts alongside other general creditors if issued against insolvent target companies. The Court ruled that FSD and CN liabilities are not administration or liquidation expenses which would rank ahead of general creditors, but nor do they rank behind general creditors such that they would be unlikely ever to be paid (the option which had become known as the 'black hole').

Background

If an employer company cannot support its under-funded pension scheme, the UK Pensions Regulator has a statutory power in defined cases to issue FSDs and CNs against related group companies which it considers ought to provide financial support to that scheme. The broad aim of those provisions is to ensure that, if a corporate group is run in a manner which leaves the employer company unable to fund its pension scheme properly, other group companies can be directed to support the scheme in appropriate cases.

This regime is designed to protect both pension scheme members and the UK Pension Protection Fund, which might otherwise have to assume certain liabilities of an under-funded scheme if it cannot be supported by the employer company.

In the Nortel and Lehman Brothers cases, the Pensions Regulator pursued FSDs against various group companies. That process only began after the relevant target companies had themselves entered administration, even though the rationale for the FSDs related to the way in which each group was run pre-insolvency.

The UK Supreme Court today ruled that FSDs and CNs under the Pensions Act 2004 are effective in this common scenario. The relevant FSD or CN liability will effectively rank as a provable debt alongside other general creditors if issued against target companies which are in insolvency proceedings. This decision balances the competing interests of both pensioners in underfunded pension schemes and other creditors of an insolvent target company, and provides clarity for both insolvency office holders (such as administrators and liquidators) and pension scheme trustees.

The chairman of the Nortel UK Pension Plan Trustee, David Davies, said:

"These proceedings have been important in establishing that FSDs and CNs still work when a whole group has collapsed. If they had not worked in that common scenario, pensioners would have been prejudiced. Other creditors of a target company – who may stand to receive a material payment on their debts even if they are not being paid in full – would have received a benefit at pensioners' expense if FSD and CN liabilities had been effectively excluded from the insolvency distribution."

ENDS
About Hogan Lovells

Hogan Lovells partners Angela Dimsdale Gill, John Tillman and Joe Bannister act in the Nortel case for the Trustee of the Nortel UK pension scheme and the PPF.
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