Nortel/Lehman: A Balancing Act

The Supreme Court handed down its decision yesterday on the combined appeals of Nortel GmbH (In Administration) ("Nortel") and Lehman Brothers International (Europe) (In Administration) ("Lehman Brothers") (together, the "Appellants") against the Pensions Regulator ("tPR"). The Appellants asked the Supreme Court to reverse the decision of the Court of Appeal from October 2011, which held that the costs of complying with a financial support direction ("FSD") or contribution notice ("CN") issued by tPR were payable as an expense of administration.

Much to the relief of employers, creditors, lenders, and insolvency practitioners, the Supreme Court has found in favour of the Appellants holding that a company's liability arising pursuant to an FSD issued after the company has gone into administration, ranks as a provable debt of the company, and not as an expense of the administration.

This article provides a brief summary of the issues in the case and discusses the impact of the Supreme Court decision on companies, lenders and the restructuring community.

Background

The financial support direction regime under the Pensions Act 2004

Under the Pensions Act 2004, tPR has power to issue an FSD requiring the recipient to put in place arrangements for the financial support of an underfunded defined benefit pension scheme. FSDs can be issued to scheme employers and to any parties connected or associated with an employer (provided certain conditions are met). The terms of an FSD can be broad and often include ensuring cash, guarantees or other security arrangements are put in place.

If a target company fails to comply with an FSD, tPR can issue a non-compliance CN requiring the recipient to pay specified sums of money into the pension scheme.

Treatment of pensions deficit on insolvency

The ordinary treatment of pension scheme deficits on insolvency of the employer company is dealt with by section 75 of the Pensions Act 1995, which stipulates that the deficit in the scheme is to be treated as a debt owed by the employer to the trustees and that the debt is to be treated as arising immediately before the onset of insolvency. The deficit for these purposes is calculated on the "buy-out" basis. As such, the debt is an ordinary unsecured debt. The only situation where such debt could potentially rank higher would be where specific contributions have been promised but remain unpaid at the date of insolvency.

The Appellants

When the Appellants went into...