Overturning the High Court and Court of Appeal decisions in Bloom and Others v The Pensions Regulator and Others, the Supreme Court has ruled that financial support directions (FSD)and contribution notices (CN) issued by The Pensions Regulator in insolvencies create “provable debts” which should be given unsecured, non-preferential, creditor ranking.
The Supreme Court sided with the administrators for the Nortel and Lehman Brothers groups, and unanimously agreed that FSD / CN should not be considered expenses of the administration process and given “super priority” status. Since expenses of the administration process rank higher than most other debts, potentially leaving little or nothing of an estate behind, the Supreme Court’s decision has been applauded by secured and unsecured creditors alike. Additionally, the decision should prove beneficial for pension scheme sponsors, and for employees due redundancy pay or wages in insolvency situations.
The Pensions Regulator itself appears to have welcomed the outcome, with Executive Director Stephen Soper noting that it “will provide clarity to the UK’s restructuring and rescue practitioners that FSD liabilities have to be recognised in insolvent situations but do not have priority over administration expenses or secured debts”.
This decision clarifies the treatment of FSD and CN on employer insolvency, although it is a downgrade from the "super priority" of the Court of Appeal's decision. The insolvency industry will be relieved and no doubt agree with the Supreme Court's assessment that its treatment of a potential FSD liability as a provable debt is "sensible and fair".
For the Regulator a provable debt will be seen as preferable to consigning the liability to an unrecoverable black hole, which would otherwise have rendered an FSD ineffective.
For employers the decision is good news as there had been concern that sponsoring employers of DB schemes might have struggled to borrow money if lenders were concerned that a pension scheme deficit would have priority over their security in an insolvency.
It is therefore beneficial to have the clarity of the ruling that FSD and CN rank as provable debts and the confirmation that they can be issued against insolvent targets. Most important of all, the judgement makes it clear that FSD and CN are not to be ranked behind the interests of other creditors of bankrupt companies, which had been contended by several parties throughout the history of this case. The Regulator, trustees, members and the PPF, as well as lenders to corporate groups, all now know where they stand.