This appeal was brought by the insolvency practitioners dealing with the Nortel and Lehman Brothers companies. The Regulator’s Determinations Panel has, in relation to both the Nortel and Lehman Brothers pension schemes, issued warning notices of its intention to issue Financial Support Directions (FSDs) against group companies. In November 2010 the High Court held that the cost of providing the financial support under an FSD issued by the Regulator after an insolvency event is an expense in the insolvency and therefore ranks above any distribution to unsecured creditors (and even above the fees of the insolvency practitioner!). The Court of Appeal has upheld this decision.
The full judgment can be found here
The case highlights the important distinction between a “provable debt” (which is payable to a creditor in accordance with the priority order set out in insolvency legislation) and an “expense” of the insolvency, which is payable before any unsecured debt.
An FSD is a direction by the Regulator for the target of the FSD to put in place some form of (unspecified) financial support for the pension scheme. If this is not complied with then it can be followed by a Contribution Notice (CN) requiring immediate payment of an amount up to the full value of the deficit in the pension scheme. A CN can also be issued without there first being an FSD in circumstances where actions or omissions of the target have caused detriment to the scheme. FSDs and CNs must always be preceded by a warning notice.
The following findings were made or confirmed:
- the liability under a CN issued while the company is in liquidation, pursuant to an FSD issued during administration, is a provable debt in the liquidation (this was a finding of the High Court and not subject to appeal); and
- the liability under a CN issued during an administration would not be a provable debt unless a “prior legal obligation” (such as an FSD) had occurred before the company entered administration. It leaves open the question of the impact of a warning notice issued before an administration.
Insolvency practitioners may be able to alleviate the problems caused by this ruling – either by asking the court to use its powers to vary the priority order or by challenging the reasonableness of the Regulator’s decision to issue an FSD or a CN. We understand that in any event there may be a further appeal to the Supreme Court.
Summary of position after Court of Appeal judgment
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