IN AN EAGERLY AWAITED JUDGMENT the Supreme Court unanimously upheld the appeal brought by Nortel Networks and Lehman Brothers in their long-running litigation against the Pensions Regulator over the issue of whether pension scheme liabilities should have “super-priority” in corporate insolvencies.
While the questions before the five judges were quite narrow in focus and set in the context of the kind of pension scheme shortfall which is quite unusual (the Nortel pension scheme was owed £2.1bn), the ramifications for the insolvency industry, corporate lending and the economy generally are unusually wide-ranging.
The Supreme Court decided that the debt owed to a pension scheme does not have super-priority over other creditors. It will now rank as an unsecured claim in a company’s administration or liquidation, even where the debt did not arise until after the commencement of the insolvency process. Unsecured creditors are generally suppliers and/or HM Revenue & Customs.
The Supreme Court also found that even if that liability had not been provable, it would not have been payable as an expense of the administration – which gave it super creditor status.
Previously in 2010 the High Court was asked to determine, among other things, in the context of the Nortel and Lehmans administrations, as to how if at all, these pension contributions should rank in such a company’s insolvency process. The potential claim against Lehmans totalled £140m with the claim against Nortel totalling £2.1bn.
At the end of 2010, the High Court held that such pension contributions were not provable debts in the Nortel and Lehman insolvency processes and effectively had super creditor status effectively paid ahead of all other creditors.
This was challenged by Nortel and Lehmans. In October 2011, the Court of Appeal upheld the High Court’s decision meaning that, in circumstances where a company was part of a group including a company with an occupational pension scheme, that company ran the risk, on its insolvency, of being liable to repay amounts to the Pensions Regulator before all its other creditors.
This created a much greater risk for financial institutions lending money because the secured creditors, generally the lenders, would rank behind the pension contributions – which, as seen from the Nortel and Lehmans administrations, can be substantial.
The net effect of this is that pension scheme members are unable to jump ahead of other creditors when a company enters administration. This is a positive for both administrators and liquidators, who now have increased clarity about what constitutes an expense and what does not. This clarity is enormously important because when unclear it undermined their ability to trade insolvent businesses because they did not know whether assets could be used to support the trading (and pay their fees) or whether the pension scheme would “scoop the pool”.
However, the Supreme Court unanimously overturned the High Court’s and Court of Appeal’s decisions and held that the pension contributions rank as a provable unsecured claim in a company’s administration, even where the debt did not arise until after the commencement of the administration. The Supreme Court also found that even if that liability had not been provable, it would not have been payable as an expense of the administration.
The judgment will be warmly welcomed by financial institutions who are now reassured that the risk profile of companies is more predictable.
Until this was clarified, lenders to companies with pension scheme shortfalls ran the risk of the security they took to protect against insolvency being worthless. The consequence has been that many lenders have had to adjust their view of the creditworthiness of certain borrowers which has impacted on their access to credit or at least to the cost of borrowing.
This judgment will, therefore, have a positive impact on the economy as a whole, as lending from these institutions is now more likely or will be more affordable meaning those businesses which would otherwise have struggled to raise credit will now have a better chance of achieving financial stability.
And from the perspective of pension schemes, all is not lost because one possible outcome of the case that the scheme’s claim could not be pursued against the insolvent company, and would be lost in a black hole, has been averted by the judges.
Neil Smyth is a partner in restructuring and corporate recovery at Taylor Wessing
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