The Nortel Allocation Dispute – Billion Dollar Victory for the UK Pension Claimants
13 May 2015
Ground-breaking judicial decision in favour of 33,000 UK pensioners
Last night, Judges in the U.S. and Canada issued a decision 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 decision means they can 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 result comes after six bitter years of litigation and affects the lives and incomes of 33,000 Nortel pensioners in the UK and 20,000 pensioners of Nortel Canada. It is the first insolvency case in which assets have been distributed cross-border according to the claims of creditors following a cross-border trial, and makes legal history.
Judge Gross of the Delaware Bankruptcy Court and Justice Newbould of the Supreme Court of Ontario delivered their judgments on 12 May simultaneously. 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 conducted a joint trial – connected by video-link, and broadcast across a private internet network to client parties worldwide – to determine how the principal assets realised from Nortel's global insolvency should be divided among the various insolvent companies.
Yesterday they both published decisions that the allocation methodology advocated by the UK Pension Claimants was correct, and should be adopted in preference to the various competing methods proposed by the other parties to the case.
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.
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:
"This bold decision does justice to the people who created the wealth of Nortel and who were promised an income in retirement for their commitment to the company in its heyday.
"This is a victory by UK Pensioners for Nortel pensioners on both sides of the Atlantic. They were the only party running the successful argument as their primary case. Today they can welcome this decision for fairness and common sense, along with Nortel pensioners in Canada."
John Tillman, lead insolvency partner on the case, added:
"We are delighted with the Judges' support for the pro rata approach which the UK Pension Claimants have argued for in these proceedings. Our objective throughout has been to try to ensure that the 33,000 remaining members of the UK pension scheme receive a fair share of the proceeds which are to be distributed from the worldwide insolvency process."
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.
Yesterday, both Judges agreed 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 judgment:
"The Court's adoption of pro rata allocation is the only outcome that reflects uncontroverted evidence and leads to a just result."
Both Judges rejected various alternative theories which had been advocated by other parties, including each of the separate groups of office-holders representing the European, U.S. and Canadian insolvent companies. In this regard, Judge Gross (of the US) observed in his judgment:
"The Courts also agree that the self-serving allocation positions of the Canadian Interests, the US Interests and the EMEA Debtors are not determinative or helpful."
Those representing the U.S. insolvent companies and the Canadian insolvent companies had advanced competing theories which would have seen the vast majority of the Lockbox funds go to the U.S. or Canada respectively, leaving much less for any other companies and their creditors.
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 Faulkner and James McCreath, also all of Wilberforce Chambers.