Vol 8 (2011) - Issue 1

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Regulator Imposed Support for Pension Schemes: A New Category of Super Priority Insolvency Expense

A new category of super priority insolvency expense has been established by the High Court which will have wide ranging implications for the restructuring world. Mr Justice Briggs held that the costs of complying with Financial Support Directions ('FSDs') issued by The Pensions Regulator ('TPR') qualify as administration expenses, payable in priority to unsecured creditors, floating charge holders and the administrator’s own remuneration and expenses.

The FSD regime
The FSD regime was established by the Pensions Act 2004 to provide TPR with a means to ensure that companies connected to UK entities that are sponsoring employers of defined benefit pension schemes contribute towards the schemes’ deficit. An FSD directs the target companies to put forward arrangements for the provision of reasonable financial support sufficient to enable the continuation of the scheme and reduction of the scheme’s deficit. The form of the support (e.g. a guarantee) is to be approved by TPR in advance. Failure to comply with an FSD may result in the issuing by TPR of a Contribution Notice ('CN'), which requires the target to make a specified payment to the pension trustees.

TPR has used its FSD powers sparingly. The first occasion was in relation to the Sea Containers group, headed by a Bermudan parent company in Chapter 11 bankruptcy proceedings in the US. The FSDs imposed on two group companies led to an agreed arrangement with the pension trustees which was approved by TPR and by an order of a Delaware court.

The next time TPR sought to impose FSDs was against certain companies respectively in the Nortel and Lehman groups. There has already been litigation in the US and Canadian bankruptcy courts concerning TPR’s actions against the companies in insolvency processes in those jurisdictions, which has yet to be fully worked through. Many of the relevant target companies were in administration in England, including certain non- UK registered companies. Their administrators brought the application before Mr Justice Briggs in this case. The question to be determined was how any costs of compliance with an FSD issued after the target company has entered into administration or liquidation, as well as the amount required to be paid pursuant to any subsequent CN, rank in an administration or liquidation.

The Court’s decision

The Court held that where an FSD or CN has been issued before the 'cut-off date' for an insolvency, the associated costs and/or debt will rank as an unsecured debt. However, where an FSD or CN is issued after the cut-off date, it will rank as an expense of the administration or liquidation. There is one quirk in relation to CNs arising as a result of the (non-retrospective) change to the Insolvency Rules in April 2010, which applies where the target company has gone into administration before 5 April 2010 and an FSD is made while it is in administration but TPR issues a CN for non-compliance after the target company has gone into liquidation. Here the amount payable pursuant to the CN will be an unsecured claim, provable in the liquidation. This is because the relevant cut-off date will be the date of the liquidation (as opposed to the date of the preceding administration, which is the case for administrations commenced after that date). At the date when the liquidation commences, the non-compliance CN is considered to be a pre-liquidation liability contingent on failure to comply with the FSD.