The Pensions Regulator (the “Regulator”) has published a statement setting out its approach to the issuing of financial support directions (“FSDs”) in insolvency situations. The statement is designed to calm fears following the decision in the joined Nortel and Lehman cases that the “super priority” of FSDs could have a negative impact on the corporate rescue and lending industries.
An FSD requires the recipient to put in place arrangements for the financial support of a defined benefit occupational pension scheme. It may only be issued to a party who is connected or associated with a participating employer in the scheme.
In 2009, FSDs were issued against a number of companies in the Nortel Networks and Lehman Brothers groups. All the recipient companies had entered insolvency proceedings at the time that the FSDs were issued. The administrators of the recipient companies applied to the High Court for a determination as to the nature of an FSD for the purposes of the statutory insolvency priority order. The High Court reluctantly held that an FSD ranked as an administration expense and therefore had priority over all creditors other than those with fixed charges. The Court of Appeal upheld the decision1.
The decision raised concerns that giving such “super priority” status to FSDs could damage the corporate rescue culture by preventing administrators from recovering their costs and could make banks less willing to lend to companies with a defined benefit pension scheme in their group by preventing them recovering their debt.
The Regulator’s statement contains a number of key points:
- The decision in the Nortel and Lehman cases has not changed the Regulator’s approach to seeking financial support for pension schemes, and the same approach would be followed whether an FSD ranked as an expense or a provable debt.
- The Regulator is aware of the importance of effective corporate rescue and lending cultures and does not wish nor intend to frustrate them.
In practice, the fears expressed concerning the potential impact of the decision on the corporate rescue and lending cultures are unlikely to be realised for a number of reasons including the following:
- An FSD only requires a form of support to be put in place and does not specify a monetary amount or the form of such support. When assessing whether the support proposed by an FSD recipient is reasonable, the Regulator will consider a number of factors including: the position under insolvency law had the FSD been issued before the insolvency event; the recipient’s financial circumstances; and the interests of directly affected parties including the claims of the recipient’s other creditors. An FSD is unlikely to lead to a contribution amounting to the scheme’s entire deficit.
- FSD liabilities are “necessary disbursements” of the administrator and therefore rank below most other administration expenses. Moreover, the Regulator would not object in most circumstances to a court application to vary the order of priority to rank FSD liabilities behind the administrator’s reasonable remuneration, and would consider proposals to re-order other categories of administration expense above FSD liabilities.
- The Regulator also points out that certain key expenses incurred by an administrator in keeping a business running with a view to securing its sale will already have priority under the insolvency rules over any costs of complying with an FSD.
- Although the process of determining whether to issue an FSD can be lengthy, the Regulator will not deliberately prolong the process until after an insolvency event in order to take advantage of the “super priority” status of FSDs. The Regulator also encourages administrators and other interested parties such as lenders to approach the Regulator before, or at the start of, the insolvency process to discuss any potential regulatory action.
The Regulator’s recognition of the concerns about the impact of the decision in the Nortel and Lehman cases will be welcomed by the insolvency industry. However, despite the Regulator’s comments as to their obligation to act reasonably when considering proposals for financial support put forward by an insolvent recipient of an FSD, each case will still depend on its particular facts and the Regulator’s assessment of what is reasonable may not be the same as that of a lender.
Give the breadth of the approach in the cases where regulatory action has been taken, it remains challenging for advisers to give comfort to lender and insolvency practitioner clients. Until cases like Nortel and Lehman run their course, uncertainties will remain. Lenders are therefore likely to remain concerned about their ability to recover their debt where an FSD is issued once insolvency proceedings have commenced.