Supreme Court decision in Re Nortel GMBH (in administration) and Re Lehman Brothers International (Europe) (in administration) [2013] All ER (D) 283

On 24 July 2013 the Supreme Court handed down the much awaited decision regarding liabilities to the Pensions Regulator pursuant to Financial Support Directions or Contribution Notices issued to companies in administration or liquidation. Overruling the previous decisions of the High Court and Court of Appeal, the Supreme Court held that the liabilities should rank as unsecured provable debts and not as expenses.

Background

Financial Support Directions ("FSDs") were introduced by the Pensions Regulator pursuant to the Pensions Act 2004 to address risks of groups of companies avoiding pension obligations by utilising group structures and to ensure that pension deficits were addressed and remedied.

Under the Pensions Act 2004 the Pensions Regulator may issue an FSD requiring a company connected to, or associated with, an employer to provide financial support for a pension scheme, which is suffering a deficit. The FSD does not set out the value to be provided.

If the company fails to provide such support, the Pensions Regulator can issue a contribution notice ("CN") specifying the amount to be provided.

The facts

Both Lehman and Nortel had pension schemes with a deficit. The Lehman scheme deficit amounted to £120 million. The Nortel scheme had a deficit of £2.1 billion. In both cases, FSDs were issued by the Pensions Regulator following the administration of the respective companies.

The issues

The administrators of Lehman and Nortel applied to Court for a determination as to how they should deal with the claims of the Pension Regulator. The issue to be determined was whether the claims of the Pension Regulator should rank as:

  • Expenses of the administration (under rule 12.2 of the Insolvency Rules 1986 ("IR86") and within one of the categories of expenses under rule 2.67 IR86).
    This would give the Pensions Regulator a "super priority" ahead of the insolvency practitioners' remuneration (and a number of other expenses), floating charge holders, preferential creditors and unsecured creditors.
  • Provable debts ranking pari passu with other unsecured creditors (under rule 12.3 of IR86).
    The claims of the Pensions Regulator would be treated in the same way as other unsecured claims.
  • Non-provable debts payable out of any surplus
    This would render the claim worthless where the company was insolvent and could not be rescued.

Decisions of the Lower Courts

The High Court and Court of Appeal both felt bound by the existing Court of Appeal authorities and in particular the decision in Re Toshoku Finance Plc [2002]. The Toshoku case established the general rule that a statutory liability imposed on a company after it entered administration (and so cannot be a provable debt), must rank as an expense.

This decision left insolvency practitioners with the difficulty of meeting the statutory objectives under the administration regime whilst potentially facing indeterminate FSD liabilities.

The Pensions Regulator attempted to allay the concerns of the profession by issuing a statement noting their understanding of the rescue culture and stating that they did not intend to frustrate its operation. This offered little comfort.

Supreme Court Decision

The decision was appealed to the Supreme Court, which overruled the decision of the Court of Appeal. Lord Neuberger gave a detailed judgment setting out why the Pensions Regulator's claims should rank as provable debts which, he considered, was a "sensible and fair answer".

For a debt to be provable in an administration (or, indeed, liquidation), it must fall within rule 13.12(1) IR 1986 as either (a) a liability to which the company is subject at the date the company entered administration or (b) a liability to which the company is subject after that date by reason of an obligation incurred before that date. The Supreme Court held that the FSDs fell within (b) and are therefore provable.

In order for a company to have incurred a relevant "obligation" under rule 13.12(1)(b), the Supreme Court held that it must have taken, or been subjected to, some step or combination of steps, which:

  • had some legal effect (such as putting it under some legal duty or into some legal relationship); and
  • resulted in it being vulnerable to the specific liability in question such that there would be a real prospect of that liability being incurred. If these two requirements are satisfied, then it is also necessary to consider:
  • whether it would be consistent with the regime under which the liability is imposed to conclude that the steps gave rise to an obligation.

As to (a), on the date the companies entered administration, they were both members of groups of companies and had been members for the preceding 2 years (the relevant period for the purposes of the issue of a FSD by the Pensions Regulator). The Supreme

Court held that this was "an undoubtedly significant legal relationship".

As to (b), at the date that the companies entered administration, the groups concerned included either a service company with a pension scheme (as was the case in Lehman) or an insufficiently resourced company with a pension scheme (as was the case in Nortel). Accordingly, both Lehman and Nortel were precisely the types of company which were intended to be liable under the FSD scheme.

Finally, as regards (c), the judges considered that the sensible and fair answer would be that any liability under an FSD should be an unsecured provable debt. In particular Lord Neuberger stated:

"There 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."

The Court also considered that if the CN was issued before the companies entered administration or if it was based on an FSD issued before the companies entered administration, it would rank as a provable debt. It would be somewhat arbitrary that the treatment of the liability under the FSD regime turned upon the question of the date the FSD or CN happened to have been issued.

Expenses

The Supreme Court offered some additional guidance on expenses. Even if the liabilities under the FSDs were not provable debts, they could not be expenses in the administration under rule 12.2 because:

  • a disbursements must arise out of something done by or on behalf of the administrator (the FSD did not);
  • the fact that the event occurred during the administration which gave rise to a debt by the company could not, in itself, be enough to render the debt payable as an expense;
  • statute makes clear that the liability to incur a disbursement falls on the administrator as part of the administration.

Therefore, unless stated in statute, a liability may only be an expense if legislation so intended it to be.

Comment

The decision of the Supreme Court will no doubt be welcomed by insolvency practitioners and lenders. Officeholders are free to discharge their statutory duties without the threat of liabilities being imposed by the Pensions Regulator which could significantly deplete or extinguish the value of the insolvency estate. Likewise lenders have one less uncertainty when faced with a borrower in administration.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.