Lehman/ Nortel High Court judgment

Pensions Regulator response.

Mr Justice Briggs last Friday handed down his judgment in a case brought by the administrators of 20 insolvent companies in the Lehman Brothers and Nortel groups.

The Pensions Regulator was a respondent in the case, together with the trustees of the Nortel and trustees of the Lehman Brothers UK pension schemes. These two schemes account for more than 43,000 members.

Mr Justice Briggs ruled that where a Financial Support Direction (FSD) is issued against a company after insolvency, the cost of complying with that direction is an expense in that insolvency. It therefore must be paid before any distributions to unsecured creditors.

The Pensions Regulator welcomes the judgment. It confirms an FSD is valid if issued after an insolvency event. In particular, it supports the claims of the Nortel and Lehman pension trustees in their respective administration processes.

More generally, this ruling clarifies the effect of an FSD on an insolvent target. However, it will not alter the regulator's approach to determining FSDs in any situation.

Our statutory objectives require us to protect pension scheme members and the Pension Protection Fund.

In pursuit of these objectives, we can issue an FSD to secure reasonable financial support is provided to a pension scheme. We are required by the Pensions Act 2004 to act reasonably in using these powers and to have regard to the interests of those directly affected by them.

Where schemes are left with inadequate financial support, the regulator engages with all who might have a responsibility to support the scheme to ensure, where possible and reasonable, that the interests of scheme members are protected.

Where an FSD is issued, the form and sum of any resulting financial support will be proposed by the company or companies concerned, and approved by the regulator if it is reasonable in all the circumstances.

R3 response.

Last Fridays ruling could have consequences for the UK’s business environment and highlights a conflict between insolvency and pension law. Judge Michael Briggs himself notes this decision could be ‘an impediment to the achievement of the objectives of the rescue culture’.”

“Promoting outstanding pension debts to super-priority status after the insolvency means that returns to unsecured and preferential creditors could be wiped out. Under this scenario business rescue procedures make less sense and creditors have less certainty when lending in the first place. While some pension funds may benefit, other creditors will suffer as will the value generation capacity of UK plc overall.”

John Frances, Technical Director of R3, the insolvency trade body