Pension liabilities could spell disaster for administrations

THE WAR continues to rage between insolvency practitioners and the pension’s regulator over payments to pension schemes receiving priority over a practitioner’s remuneration package.

But will a recent ruling mean practitioners are walking away from administrations thereby denting the rescue culture – or are they making a mountain out of a molehill?

The dispute is over payments to a defined benefit scheme pension scheme when a company enters administration and has various businesses connected to it such as parent or subsidiaries.

Battles have been fought in the High Court and, most recently in the court of appeal last week. According to the court, pension payments in some circumstances should be paid as an expense of an administration – ahead of all other payments, including the practitioner’s fees.

This has caused outrage in the insolvency community, which is concerned about the added expense, complexity and risk to an already highly regulated rescue option.

The two warring sides are the Pensions Regulator on one side and Nortel group and Lehman Brothers on the other. The Pensions Regulator argues just a small number of administrations are likely to be affected by the ruling.

However, insolvency practitioners (IPs) have little or no time to investigate whether the pension liabilities are applicable in a case before they take it on. This could mean they walk away in fear of the risk.

The regulator does have a point. The judgment affects very specific administrations.

If a company has a deficit in its defined benefit pension, the regulator can impose a financial support direction (FSD) – a request that connected entities pay part or all of the debt.

For example if Lehman Brothers International Europe enters administration and has a deficit in its DB pension, the regulator can request all the connected companies, including the parent company in the US, pay into the scheme to reduce the debt.

However, if all the connected businesses are in administration should they pay anything into the pension scheme?

It was argued in court [that only in cases where all creditors were paid in full] payment be made to the pension scheme, an argument quickly lost.

The second proposal would add the pension liability as an unsecured creditor – paid after secured creditors, expenses, and the IPs’ remuneration.

The judges decided on option three, the liability become a cost of the administration and paid ahead of unsecured creditors and the IPs’ fees, sending a shiver down every IPs’ spine.

According to one source in the pension regulator’s corner this is not that big a deal. An IP can apply to court at the outset of their appointment to have the order at which expenses are paid changed. If the court agrees, the IP can ensure they are paid ahead of other expenses.

But court involvement defeats the principle of an administration to keep costs down to rescue a company, says Devi Shah, partner at law firm Mayer Brown.
The main point of an administration is to take away the workload on courts, she explained.

Involving the courts would just add another cost to what is potentially becoming a very expensive insolvency option, she added.


With the growing costs of administrations, IPs are looking to other insolvency options. According to the profession’s trade body R3, more than 50% of IPs have used an alternative insolvency procedure due to uncertainty surrounding expensesin an administration.

R3 president Frances Coulson said: “As it stands the ambiguous nature of the expenses regime makes it too difficult for insolvency practitioners to gauge whether administration is the best procedure for a business and its creditors.

“With the costs of administration increasing, other insolvency solutions such as pre-packs become more attractive.”


The court case has also sent alarm bells ringing in the ears of IPs for another reason: the direction the courts seem to be taking by lumping liabilities onto the expense of an administration.

“The wider point is the way the court is approaching liability, treating them all as expenses,” said Shah.

Last year, just months before this case was heard for the first time, a court ruled rent should be paid quarterly as an expense of an administration. Previously a practitioner could pay rent contract on a weekly and even daily basis. However, a court ruled quarterly rent should be stuck to if the company was continuing to trade, regardless of whether it was in an insolvency process.

Shah explains the trend could open up the possibility of future liabilities all being seen as an expense and in the end jeopardising an IP’s ability to rescue a company using an administration option because costs would eat too much into creditor returns.

The administrators in this case have not given up the fight yet, and are currently applying to the Supreme Court to appeal the judgment.

However, as it stands it seems that costly liabilities might see a tried and tested insolvency process priced out of the market.

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