Nortel and Lehman Brothers Case on FSDs Decided - A workable way forward

Nortel and Lehman Brothers Case on FSDs Decided - A workable way forward

Published:

Author: Heather Chandler

The case involved two groups (the Nortel group and the Lehman group) each of which contained occupational pension schemes with substantial funding deficits.

Facts

The Pensions Regulator (PR) had issued Financial Support Directions (FSDs) to the group companies; in both cases following the placement of the group into administration. An FSD is a direction from the PR, where the employer supporting a scheme is either a service company or insufficiently resourced, requiring another person(s) to connect with that employer to make financial arrangements to support the scheme.

The question to the court was whether the costs of complying with the FSDs (and any subsequent Contribution Notice (CN)) constitute a provable debt, an expense of the insolvency, or are not recoverable at all. Where an FSD is issued before insolvency it was common ground the liabilities under it would constitute a provable debt in the recipient's subsequent insolvency.

The High Court and the Court of Appeal both took the view that the issue of FSDs after the Insolvency commenced were in the circumstances expenses of the insolvency and therefore, as such, would rank ahead of any other debt. The decision of the Court of Appeal was appealed to the Supreme Court.

Supreme Court ruling

On 24 July 2013, the Supreme Court unanimously allowed the appeal, holding that the liability should rank as a provable debt, overturning the decision of the Court of Appeal.

The Court focussed on the definition of "obligation" for the purposes of section 13.12(1) (b) of the Insolvency Rules 1986 and whether the liability was "an obligation incurred before" the insolvency event.

The court set out three conditions which must be satisfied for this to be the case:

  • The company must be subject to a state of affairs which has some legal effect
  • Such state of affairs must make the company vulnerable to the specific liability
  • It must be consistent with the relevant regime under which the liability was imposed for it to be considered to be an "obligation" for the purposes of section 13.12(1)(b)

The Court concluded that each condition was satisfied in this case by virtue of the fact that each company was a group company and was subject to the corresponding legal obligations; the group included either a service company with a pension scheme or a company which was insufficiently resourced rendering them potentially liable under the FSD regime; and, to decide otherwise leaves the perverse and unfair position resulting from the decisions of the lower courts.

In so deciding the Supreme Court necessarily dealt with the barrier of the decisions in the key cases of Glenister and Steele. These Court of Appeal decisions restricted contingent claims to those where there was a pre-existing legal obligation.

What does this mean for pension schemes?

Where a company suffers an insolvency event and an FSD has been issued (whether before or after the event), the scheme will rank only as an unsecured creditor for the purposes of enforcing the FSD/CN. This means that the liability will rank with other unsecured creditors. This greatly reduces the effectiveness of the FSD regime in circumstances where it is likely that the target company will enter into administration.

The decision, whilst giving clarity for the purpose of the treatment of FSDs, does still create some problems within the field of Insolvency by widening the concept of contingent creditor and also has the potential to impact on accountancy standards.

Nevertheless, in the field of Pensions whilst the FSD will not have a "super rank" the regime does still offer wider protection than is otherwise available under the employer debt provisions.

Section 75 of the Pensions Act 1995 as amended, provides that an employer debt will be triggered where a scheme's sponsoring employer suffers an insolvency event or, in the case of a multi-employer scheme, where a participating employer ceases to have any active members when another scheme employer continues to do so. Such a debt will also rank as an unsecured claim. An employer debt under section 75, however, may only be enforced against the relevant statutory employer, whereas an FSD may be issued against "persons/entities connected with or an associate of the employer".

It may also be the case that these decisions will in some small way help final salary pension schemes to survive a little longer. With any pension scheme debt remaining, all things being equal, unsecured investors should not be frightened away from investing in companies with such schemes in fear they could "lose everything" if, via an FSD, the debt gains a "super rank" on insolvency.