Recently, the Court of Appeal upheld the High Court's decision in the Nortel Networks and Lehman Brothers disputes. The judgment confirms that liabilities under Financial Support Directions (FSDs) and Contribution Notices (CNs), which are issued by the Pensions Regulator, will rank ahead of almost all other claims when a company becomes insolvent. The discussions in the case focused on whether FSDs and CNs are classed as 'provable debts', expenses of the insolvency or, indeed, neither.

It is common for defined benefit pension schemes to hold insufficient funds or other assets to meet their liabilities in full (principally to pay benefits). If that happens and the sponsoring employer becomes insolvent, the scheme liabilities and assets may be taken on by the Pension Protection Fund (PPF), for the purpose of 'topping up' benefits to the level that the PPF can pay.

The Pensions Regulator has various powers that it can exercise in order to ensure the efficiency of the PPF and to minimise claims upon it. The Regulator can impose CNs or FSDs on companies, in certain circumstances. Respectively, they require the recipient to contribute to the scheme or to put in place financial arrangements in order to assist an employer that has an obligation to contribute to the scheme.

In the Nortel/Lehman Brothers cases, the questions were whether FSDs and CNs are classed as provable debts and where they rank against other liabilities in a distribution of an insolvent company's assets. The High Court and, now, the Court of Appeal have confirmed that, to be a provable debt, an FSD or CN would have to have been issued before the insolvency took place. In these cases, the FSDs and CNs were issued after each relevant company became insolvent and, therefore, are not provable debts. However, the Court echoed views expressed in a previous House of Lords case and has confirmed that FSDs and CNs are to be viewed as statutory debts and that, as such, they rank as expenses of the insolvency process. This means that they have 'super priority' over, and should be paid in preference to, most other claims.

The effect of this decision is that the ability of creditors to recover funds from some insolvent companies will be reduced (possibly entirely) in favour of claims made by the Pensions Regulator. The Court of Appeal's decision was not unexpected, but it is clear that many have concerns about the effect of the judgment. It is anticipated that there will be a further appeal to the Supreme Court.