While the arrival of His Royal Highness Prince George Alexander Louis of Cambridge has dominated the British (and the world) headlines this week, the U.K. Supreme Court delivered its own long awaited bundle of joy earlier today. In the latest decision in the laborious Nortel and Lehman litigations, the U.K. Supreme Court reversed a lower court decision and held that pension claims should not be treated as priority claims and, instead, they should rank equally with general unsecured claims. The full decision can be found here. The bells at Westminster may be silent for this announcement, but U.K. insolvency professionals, along with creditors in current and future U.K. restructurings, are likely rejoicing.
The Nortel and Lehman cases have been making insolvency headlines around the world since the commencement of their respective restructurings. We have previously written about certain aspects of the Nortel litigation that involved the application of the U.S. automatic stay to the U.K. pension plan trustee (our prior blog on that topic can be found here).
In the U.K., the pension regulator has the ability to issue a “Financial Support Direction” which requires a company to pay money into their pension funds. The issue, which has been working its way through the U.K. courts, is whether a Financial Support Direction issued against an insolvent company after it commenced proceedings resulted in a “royal” administrative expense (which would be entitled to priority over unsecured claims) or a “common” claim (which would rank equally with general unsecured claims).
Nortel commenced insolvency proceedings in three jurisdictions—Canada, the U.S. and the U.K.—back in 2009. Nortel’s unfunded pension liabilities are estimated by various sources to be in the range of US$3-4 billion. Lehman similarly commenced multi-jurisdictional restructuring proceedings in 2008. While the Lehman case has often been linked with the word “billion,” Lehman’s U.K. pension liabilities are estimated to be “only” US$500 million.
The pension trustees of the Nortel and Lehman pension funds asserted that the pension liabilities were administrative expenses of each of their respective estates and, therefore, should be paid first ahead of all other claims. The lower courts agreed with this argument, determining such claims to be privileged and “royal.” Whether considering the Nortel US$3-4 billion or the Lehman US$500 million, a priority claim of these sizes had significant consequences on the administrations and creditor recoveries. Views from insolvency professionals, not only in the U.K. but around the world, were that a decision affording priority to such a large, and often times unknown liability, would endanger the U.K. restructuring culture, and result in companies filing (perhaps at financial creditor’s request) in other jurisdictions.
On appeal, the U.K. Supreme Court reversed the lower court and held that pension claims ranked equally with other general unsecured claims. Lord Neuberger, writing for the majority, noted that “[T]here seems no particular sense in the rights of the pension scheme trustees to receive a sum which the legislature considers they should be entitled to receive having any greater or any lesser priority than the rights of any other unsecured creditor.” In its well written and pragmatic opinion, the court noted that it would be arbitrary to consider a Financial Support Direction issued before the commencement of an insolvency case to be a “provable debt” or general unsecured claim, but if the same direction was issued after the commencement of the case, to be a priority claim.