The litigation between tPR, the PPF and the administrators of Nortel and Lehman Brothers together with their respective pension scheme trustees continues.

In the latest instalment, the Court of Appeal has ruled that contribution notices (CNs) and financial support directions (FSDs) are an expense of the administration and therefore rank ahead of other creditors’ claims in the administration.

This affirms the High Court judgment in December 2010, which was reviewed in our previous alerter dated 14 December 2010 available here.

Background

The Pensions Act 2004 is silent on the status of a liability under a CN/FSD if the company on whom it is imposed becomes insolvent. This is an unfortunate omission as tPR has frequently sought to impose an FSD after the sponsoring employer of a pension scheme has become insolvent. In the instance of the Nortel and Lehman administrations the section 75 debts triggered as a result of the sponsoring employer's insolvency were respectively estimated at £2.1 billion and £125 million. In each case tPR sought to impose an FSD on other group companies to provide financial support to the pension scheme.

The status of the liability under a CN/FSD in the order of priority for payment of debts in an insolvency is important as it could have a significant impact on the size of the dividend received by the pension scheme and other creditors of a company on whom a CN/FSD is imposed. They would effectively be in competition. The arguments in the case centred on the CN/FSD liability falling into one of three possible categories:

  1. an expense of the administration ranking ahead of all other creditors;
  2. a provable debt with the same status as a section 75 debt; or
  3. not a provable debt and only payable if assets remained after all other creditors' claims were met.

The Court of Appeal Judgment

Lloyd LJ gave the judgment of the Court and endorsed the High Court decision that a CN/FSD liability should be treated as an expense of the administration. His reasons were:

  • The liability under a CN/FSD could not be a provable debt because the process for seeking an FSD had not begun until after the Nortel and Lehman Brothers companies went into administration. A debt could only be a provable debt in the administration if the company was subject to that debt before the administration or it arose out of an obligation incurred before the administration. Neither applied here.
  • In Re Toshoku Finance UK plc [2002] 1 WLR 671(HL) the House of Lords established a general rule that where by statute Parliament imposes a financial liability that is not a provable debt and does not fall into any other category for payment, then it will be an expense of the administration. As the liability under a CN/FSD was not a provable debt, it was to be treated as an expense of the administration.
  • To treat the liability under a CN/FSD as having a lower priority to a section 75 debt and relegated to the "black hole", where it would only be paid after all other creditor claims, would be a greater anomaly than treating it as an administration expense. It would also render the CN/FSD regime entirely futile against an insolvent target.

Comment

The Court of Appeal decision is not entirely surprising since it is bound by the House of Lords decision in Re Toshoku. The doctrine of precedent means that only the Supreme Court has the power to depart from Re Toshoku. It is most unlikely this is the last word in this case. The administrators sought leave to appeal from the High Court directly to the Supreme Court and this was refused because they knew that the Court of Appeal would be bound by Re Toshoku. It will be no surprise if there is an appeal to the Supreme Court. It is unlikely the Supreme Court will hear the matter until the second half of 2012.

If the matter proceeds to the Supreme Court, the question is whether it will reach a different conclusion. To do so, it will have to overturn or limit the effect of the House of Lords decision in Re Toshoku. Lloyd LJ gave good reasons why a CN/FSD liability could not be treated as a provable debt. That leaves the option of treating it as either an expense of the administration or as an experience relegated to the “black hole”. As he indicated, the former is the least worst option.

The probable solution to this is to amend legislation in the Pensions Act 2004 to provide that a CN/FSD liability should be treated as a provable debt in an administration or liquidation. The Court of Appeal indicated this would be the fairest outcome, but it did not have power to reach that conclusion. In the meantime tPR has a very effective weapon to obtain financial support for the pension schemes of insolvent companies.