In previous issues of TransAtlantic, we reported that the UK Pensions Regulator had issued contribution notices (CNs) and financial support directions (FSDs) against insolvent companies in the Nortel and Lehman Brothers groups. Click here for the June story on Nortel (see page 5); click here for the November story on Lehman (see page 7).
In the latest twist – and in a decision that has alarmed insolvency professionals – the English High Court has held that imposing an FSD on companies in administration or insolvent liquidation creates “necessary disbursements” (and therefore “expenses”) in the insolvency process. Under English law, “necessary disbursements” have a super-priority over the claims of any unsecured creditors. They also take priority over the administrators’ own remuneration, although it is possible for the court to vary this in cases where there are insufficient assets to pay all “expenses”. The same would apply to a CN issued for non-payment of an FSD.
Insolvency professionals have responded by calling for an appeal and/or urgent law reform.
Background and decision
The FSD regime was created by the UK Pensions Act 2004. It enables the Pensions Regulator to issue an FSD to associated companies of a corporate employer, imposing an obligation to provide reasonable financial support to the under-funded occupational pension scheme of that employer. It also enables the Regulator to deal with noncompliance with an FSD by using a CN to impose a specific monetary liability, which the associated company (or “target”) must pay to the employer’s pension scheme.
After going into administration, certain Nortel and Lehman Brothers companies were notified that they were to be issued with FSDs. The English administrators of a number of affected companies applied to the High Court for directions about the effect of imposing an FSD after the beginning of the administration/insolvency process. The case was to determine whether an FSD or CN issued at this stage imposes any obligations on the target company and its office-holders, and the nature of any such obligations.
The critical issue was whether the cost of complying with an FSD or the monetary obligation imposed by a CN qualified in the administration or liquidation of the target, as a “provable debt” (which would rank equally with other unsecured debts), an “expense” (which has special priority), or neither of these (such that it would only be recoverable in the very unlikely event that there was a surplus available for distribution to members after all creditors were paid in full). In short, what level of priority did Parliament intend to confer upon the financial consequences of the FSD regime?
The administrators contended that an FSD or CN creates a non-provable claim against the target, which should only be payable (if at all) out of any surplus remaining after all unsecured creditors have been paid in full. Other parties, including the Regulator and pension scheme trustees, argued that nothing in the FSD regime excludes companies in an insolvency process from being made “targets” for the purpose of an FSD or CN, and that the cost of compliance should be considered an “expense” of the administration or liquidation process.
After complex deliberation, the court held that the imposition of an FSD upon companies in administration or insolvent liquidation created “necessary disbursements”, and therefore “expenses”, and that the same would apply for a CN issued for non-payment of an FSD.
Reaction and comment
While finding in favour of the Regulator and pension scheme trustees, the judge acknowledged that his decision could disrupt use of the administration process in some cases and prove unfair to other creditors of insolvent companies due to the potential for large FSDs to exhaust assets that would otherwise be available to pay for the insolvency process and to make a distribution to unsecured creditors. In the hope that a higher court might be able to navigate its way through the statutory maze to a more equitable solution, he granted all parties leave to appeal.
The decision may have even wider ramifications in the Nortel case, stemming from the European Insolvency Regulation on Insolvency Proceedings (EIR) having been used to open (as “main” proceedings) English administration proceedings over most of the European subsidiaries – not just those registered in England and Wales. This is possible where companies have their “centre of main interests” (COMI) in England and Wales, rather than in the country where they are registered.
Under the EIR, subject to some exceptions, the law of the “main” proceedings dictates the ranking of expenses and unsecured creditors’ claims in the process and this law is afforded automatic recognition and effect across Europe. As a result of the European-wide COMI filing for English administration, the English High Court’s decision is binding in the estates of those Nortel group companies registered in European countries other than England and Wales. This means that local creditors in those jurisdictions could be disadvantaged, unless steps are taken to address this. At the very least, the decision is likely to delay the winding-up of those entities, while the administrators grapple with the outcome of the decision and any appeal against it.