Supreme Court overturns Nortel/Lehman FSD rulings

The UK’s highest court has today ruled that financial support directions issued by the Pensions Regulator no longer have priority as expenses of administration in relation to the Nortel/Lehman case.

The Supreme Court today overturned a Court of Appeal ruling from 2011, that said that if the Pensions Regulator decided to issue a claim against a company over a pension scheme in deficit after a company enters insolvency that action would rank ahead of unsecured creditors.

However, today’s ruling has said that the regulator does not now rank ahead of unsecured creditors and as a result insolvency practitioners will now also be able to more accurately estimate the financial impact of FSDs in UK administration and ultimately make quicker distributions to all creditors.

The ruling relates to the defined benefit pension schemes of Nortel Networks which was approximately £2.1bn in deficit while Lehman Brothers’ European division was around £148m in deficit.

Linklaters global head of restructuring and insolvency Tony Bugg said: “This decision is highly significant and a victory for common sense. It will be welcomed by unsecured creditors and the lending community alike, as these sorts of pension liabilities would swamp most insolvency estates leaving nothing for creditors.

“It lays down principles which will govern how other statutory liabilities will rank in an insolvency – while something to be determined on a case-by-case basis, the Supreme Court’s judgment is clear that they will ordinarily simply rank with other unsecured creditors.”

The Supreme Court found that liabilities under a financial support direction (FSD) issued against an insolvent company would rank as a provable debt.

Mayer Brown international law firm pensions partner Andrew Block commented that "the Supreme Court’s judgment is complex and will take time to digest."

He added: "However the Supreme Court appears to have reached the decision that the lower courts would have chosen to reach, had they not felt constrained by previous case law. Whilst the decision may at first glance seem to be negative for pension scheme trustees, there is in fact an upside for them. Had the decision gone the other way, banks would most likely have become less willing to lend money to companies who sponsor defined benefit schemes.

"An inability on the part of employers to secure financing could have prejudiced the employers’ ability to fund their pension schemes in the long-term – not only would this outcome not be in the interests of trustees and scheme members, it would also defeat the Regulator’s objectives of protecting accrued benefits and reducing calls on the PPF.”

The Pension Regulator's executive director Stephen Soper commented that since the challenge was first made, the non-departmental public body has had "no intention of frustrating the proper workings of the administration process".

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