Overview
The recent UK Supreme Court judgment in Re Nortel GMBH (in administration) and others; Re Lehman Brothers International (Europe) (in administration) and others [2013] UKSC 52 (the Nortel Appeal) overturned the decisions of the High Court and the Court of Appeal, which previously gave “super-priority” to liabilities under financial support directions and contribution notices issued by the Pension Regulator (PR) against companies following their insolvency.
Background
Pursuant to the UK Pensions Act 2004 (the Act), the PR is given a number of “moral hazard” powers which allows it to impose liabilities upon connected and associated companies who are not necessarily pension scheme employers (“target companies”).
The most relevant of these powers are:
(a) Financial Support Directions (FSDs); and
(b) Contribution Notices (CNs).
The PR takes the view that it can impose FSDs and CNs against connected and associated companies of UK scheme employers wherever they are situated.
In the Nortel case, the PR imposed FSDs on 20 companies in two groups, all of which were in administration or insolvent liquidation at the date of issue of the FSDs. As the Act was silent on the issue, there was no certainty on the priority of these liabilities in the winding-up of the companies or even whether they were provable claims.
The matter was initially brought before the High Court where it was held that a FSD/CN may be imposed on both solvent and insolvent companies; and, when imposed on insolvent companies, would rank as an expense of the winding-up. The consequence of the High Court decision was to give “super-preferential” status to FSDs/CNs imposed after an insolvency event and unsecured status to FSDs/CNs issued before an insolvency event. Confirming the approach of Briggs J, the Court of Appeal upheld that decision on 14 October 2011.
Effect of the High Court and Court of Appeal Decisions
From a practical/commercial standpoint, the decisions of the High Court and the Court of Appeal meant that lenders were in a very precarious position vis-à-vis companies who were in danger of having a FSD/CN imposed upon them in that the FSD liability might have priority over their security. Further, unsecured intra-group loans (frequently used to finance transactions) would rank behind a FSD liability issued post-insolvency.
While it was unclear if the Irish courts would attribute the same priority to FSD/CN liabilities issued after an insolvency event affecting an Irish company, to the extent they would, the Nortel decision would decrease the pool of assets available to lower-ranking creditors of those Irish target companies.
The Nortel Appeal
On 24 July 2013, the Supreme Court reversed the decision of the lower courts and held that the FSD liability was a “provable debt” ranking alongside other unsecured debts and would never rank as an expense of the liquidation with super-preferential status. This is a welcome relief for lenders and other creditors of Irish companies which are part of a group which operates a UK DB scheme.