Again, of interest to all schemes providing defined benefits is the recent settlement in the litigation involving the Lehman Brothers Scheme, where the payment of £184 million, representing costs of the buying-out benefits, has been agreed.
Following a detailed investigation by TPR commencing in 2008, and a legal battle through the hierarchy of courts up to the Supreme Court (SC), members of the Lehman Brothers Pension Scheme will receive their full benefits after a settlement was reached on 18 August 2014.
We have previously reported on the decision of the SC, in which Lehman Brothers and Nortel had challenged decisions in the lower courts relating to the liability arising pursuant to a financial support direction (FSD).
The SC held that the liability under an FSD issued after the company had gone into administration was, in fact, a provable debt rather than an expense of the administration, and therefore did not have “super priority”.
On 14 August 2014, the parties in the Lehman Brothers case filed terms of settlement in the Upper Tribunal (UT), withdrawing and/or staying proceedings indefinitely. The consent order was approved by the UT on 18 August 2014, and TPR’s section 89 report is available here. The Scheme’s deficit on the buyout basis was estimated at £184 million as at 30 June 2014. The parties have agreed a settlement of an amount which is expected to be sufficient to buy out the members’ benefits in full.
Members of the Lehman Brothers Pension Scheme will be relieved to learn that they are to receive their benefits in full, and that their scheme will avoid the PPF, after a six-year legal battle following Lehman’s bankruptcy.
For detailed background on the case and the previous related judgments, see our briefing from August 2013.
As far as insolvency practitioners are concerned, the crucial part of the whole Lehmans litigation saga was the SC decision which held that a liability under a FSD was a provable debt rather than an administrative expense, and that there was no “super priority” status.
It is unclear whether the reason Lehmans agreed settling for a sum large enough to ensure the pension benefits were paid on a buy-out basis is because all unsecured creditors are being paid in full, although that seems unlikely. Lehmans’ decision to agree to the sum required to buy out all the benefits may have been driven by the ruling in theStorm Funding case in December 2013. That case involved contribution notices (CNs) issued as a result of non-payment of FSDs, and the High Court held that the sum recovered under the CNs could exceed the scheme’s section 75 debt at the time of the sponsor’s insolvency. The parties agreed to discontinue the planned appeal of this judgment to the Court of Appeal, so the High Court decision remains the current law. It therefore remains to be seen if the Lehmans settlement will have an influence on any other FSD actions currently being conducted by TPR.
TPR was understandably jubilant in its press release following publication of the terms of the settlement, as the outcome vindicates TPR’s dogged pursuit of the Lehman companies over six years of litigation. The case represents the largest sum paid to a scheme to date as a result of TPR’s willingness to use its moral hazard powers to protect both members’ benefits and the PPF.
Stephen Soper, TPR’s interim chief executive said that the result was “pleasing and appropriate” and the “case demonstrates that the regulator’s anti-avoidance powers can be used effectively, even in highly complex international insolvency situations”.