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Nortel decision restores claims by the Pensions Regulator to position envisaged by Parliament, expert says

Out-Law News | 24 Jul 2013 | 12:04 pm | 3 min. read

Claims by the Pensions Regulator in relation to an insolvent company's pension scheme rank as provable debts alongside the claims of other unsecured creditors, the UK's highest court has ruled.

Restructuring expert Alastair Lomax of Pinsent Masons, the law firm behind Out-Law.com, said that the Supreme Court's decision (41-page / 334KB PDF) "almost certainly restores the position to that originally envisaged by Parliament". Its decision had been eagerly awaited by many in the pensions, insolvency and banking sectors, as two lower courts had previously ruled that claims brought by the regulator after a company entered formal insolvency would rank above the claims of other creditors.

"This is a landmark decision – it clarifies in a number of key respects exactly how claims made by creditors against a failed business will rank and how its assets must be distributed to them," Lomax said.

"The decision directly impacts on the status and priority of moral hazard claims brought by the Pensions Regulator in the interests of pensioners following the insolvency of their employer. Banks will certainly welcome this ruling since it lifts the threat that it posed to recoveries under their security. This in turn should have a positive effect in terms of increased availability of finance for UK corporates that are connected with defined benefit pension schemes," he said.

The decision relates to claims made by the Pensions Regulator on behalf of former employees of Nortel Networks and Lehman Brothers' European division who had been members of defined benefit (DB) pension schemes sponsored by their employers. When the companies went into administration Nortel's scheme was approximately £2.1 billion in deficit, while Lehmans' was approximately £148 million in deficit.

Since 2004, the Pensions Regulator has had wide powers to seek financial contributions or support to meet a pension scheme deficit from companies connected to or associated with the pension scheme employer through financial support directions (FSDs) and contribution notices. These powers prevent the 'moral hazard' that solvent companies in the same corporate group could leave the scheme without adequate funds knowing that the Pension Protection Fund (PPF), which guarantees the pensions of members of DB pension schemes in the event of employer insolvency, would cover the deficit.

When Nortel and Lehmans went into administration, the Pensions Regulator began the process of issuing an FSD against insolvent companies within the two groups that did not participate in the pension schemes using these powers. Both the High Court and the Court of Appeal previously found, albeit with some reluctance, that these claims ranked as expenses of the administration because they were made after the administrators were appointed in each case and did not exist before the insolvency event. Had the claims been made before the administrators' appointment they would have ranked lower in the hierarchy of creditors, as unsecured provable debt.

However, the Supreme Court decided that this approach was wrong. In his leading judgment, Lord Neuberger said that the insolvency expenses regime was designed to capture things done in the process of an administration or liquidation by the administrator or liquidator. It was not the default category for claims that would not otherwise rank as provable unsecured debts.

"While it would be dangerous to treat any formulation as an absolute rule, it seems to me, at any rate subject to closer examination of the authorities and counter-arguments, a disbursement falls within [the category of administration expense] if it arises out of something done in the administration (normally by the administrator or on the administrator's behalf), or if it is imposed by a statute whose terms render it clear that the liability to make the disbursement falls on an administrator as part of the administration – either because of the nature of the liability or because of the terms of the statute," he said.

"Adopting the approach I have suggested, it appears to me that a potential liability under a FSD or a liability under a CN does not fall within the scope of expenses of an administration ... there is no question of such a liability resulting from any act or decision taken by or on behalf of the administrator or any act or decision taken during the administration. The liability self-evidently arises out of events which occurred before the insolvency event," he said.

Lomax said that the Supreme Court's decision reflected the "common sense position", by ranking claims by the Pensions Regulator at the same level as the pension scheme trustees' own claims. They were neither "super-priority" insolvency expenses, nor did they fall into the "so-called 'black hole' of non-provable claims". In its ruling, the Supreme Court effectively backed the current approach of the Pensions Regulator, which announced following the Court of Appeal's decision that it did not plan to change its approach to issuing FSDs or contribution notices.

However, what made the decision particularly significant was its wider impact in corporate insolvencies, particularly in relation to recent cases regarding the treatment of rent on administration, he said. Earlier this month, landlords pursuing the administrators of Game for millions of pounds in rent that went unpaid while the retailer was insolvent were told that their case could be fast-tracked to the Court of Appeal.

"The Supreme Court's decision strongly suggests that the rationale for recent decisions giving super priority to rent claims post-insolvency is dead in the water," he said. "If it signals a return to 'pay as you go' principles for prior-ranking insolvency expenses then it will be regarded as a boost for corporate rescue and a victory for common sense."