Vol 10 (2013) - Issue 5

Article preview

Provable Debts and Administration Expenses: Lehman and Nortel in the Supreme Court

Introduction
The Supreme Court has recently handed down judgment in the Lehman and Nortel pensions appeals,2 reversing the decisions of Briggs J and the Court of Appeal and, in the process, sweeping aside numerous other well-known and long-established decisions.
The Supreme Court unanimously allowed the appeals (Lords Neuberger (President), Mance, Clarke, Sumption and Toulson) and held that:
1. The liability imposed on a company by the Pensions Regulator by way of a financial support direction ('FSD') and a contribution notice ('CN') under the Pensions Act 2004 ('the 2004 Act') after the commencement of the company’s administration will fall within Rule 13.12(1)(b) of the Insolvency Rules 1986 so as to be provable in the company’s administration, even if the FSD was not issued until after the commencement of the administration.
2. The liability will not be payable as an expense of the administration. Where: (i) a statutory liability is one which could have been imposed before or after an insolvency event, (ii) the liability does not give rise to a provable debt, and (iii) the statute is completely silent as to how the liability should be treated if it is imposed after an insolvency event, the liability can only be an expense if the nature of the liability is such that it must reasonably have been intended by the legislature that it should rank ahead of provable debts.

The decision is one which is bound to be welcomed by insolvency practitioners and others working in the insolvency industry.

Its legal relevance lies principally in the explanation of how to identify: (i) whether a contingent liability is provable in an administration or liquidation; and (ii) whether a statutory liability will be payable as an expense in an administration or liquidation. As to the former, the Supreme Court has sought to define the concept of 'obligation' for the purposes of rule 13.12(1) (b) of the Insolvency Rules 1986 ('the 1986 Rules'). As to the latter, the Supreme Court has sought to clarify the concept of 'necessary disbursements' within rule 2.67(1)(f) of the 1986 Rules.
Commercially, the decision is bound to be seen as promoting the rescue culture. Substantial expense claims hinder the ability of an administrator or liquidator to achieve an advantageous result for creditors.
The decision also avoids the risk of liquidity drying up more generally. Prior to the decision of the Supreme Court, the liability under the 2004 Act was payable as an expense and, therefore in priority to the floating chargeholder. Those lending to companies against the security of a floating charge were therefore at risk of making no recovery at all where the borrower was the target of liabilities under the 2004 Act after the commencement of insolvency proceedings.
However, the decision of the Supreme Court could potentially generate as much uncertainty as it has resolved. In particular it means that the position in respect of statutory liabilities (particularly in the regulatory context) must be judged on a case-by-case basis, and accordingly the decision leaves significant scope for future argument as to when and whether, for the purposes of rule 13.12(1)(b), an obligation has been 'incurred' under particular statutory provisions.
There will also be room for debate as to whether the legislature must reasonably have intended that a particular statutory liability should rank ahead of provable debts.

The facts
The Lehman group included a company which entered into service contracts with, and ran a pension scheme for the benefit of, employees who worked for other group members.