Insolvency relief for pensions from Supreme Court case

Trustees will be relieved by a Supreme Court decision making it tougher for creditors to force companies into balance sheet insolvency, according to lawyers.

The court today rejected a call to declare Eurosail-UK, an issuer of residential mortgage backed securities, insolvent. Despite continuing to meet its debts as they fell due, claimants pointed to a mismatch between ongoing receipts under mortgage loans and future liabilities under notes issued in different currencies. The discrepancy resulted in audited accounts showing a deficit between the assets and liabilities of the company.

The court, however, upheld an earlier decision that Section 123(2) of the UK Insolvency Act 1986 dealing with “balance sheet insolvency” did not apply. The section should only be relied on by a future or contingent creditors of a company “which has reached 'the end of the road'”, leading judge Lord Neuberger held. The test was not a mechanical “assets-based” approach but “imprecise, judgment-based and fact-specific”, the court also said.

Mayer Brown pensions partner Martin Scott, said trustees as well as sponsors would welcome the decision.

“Trustees of occupational pension schemes will in the main be relieved by today’s judgment,” he said.

“At a time when most schemes are heavily in deficit, they would not have welcomed a decision which would have made future challenges by creditors based on balance sheet insolvency easier to establish.

Although trustees are also creditors of the sponsoring employer, he added, it is usually in the scheme’s interests for the employer to continue to trade where it is otherwise meeting its obligations under the scheme funding legislation.

“Winding up the employer where it has not genuinely reached the point of no return will normally just result in the scheme itself either being wound up in deficit or entering the PPF.”

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