Vol 8 (2011) - Issue 2

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Priority of Financial Support Directions in Insolvency – A Legislative Mess?

The recent decision of the High Court in the Nortel/ Lehman case1 has caused widespread consternation in the restructuring world. Despite the best efforts of Mr Justice Briggs to reach a conclusion that liabilities flowing from the Financial Support Direction regime would qualify as a provable debt, he considered he was unable to do so, as a matter of statutory interpretation and based on existing authorities by which he was bound.

The ruling, albeit at first instance, that the costs of complying with a Financial Support Direction ('FSD') (or a subsequent Contribution Notice ('CN')) will rank as an expense of the administration or liquidation for all insolvencies commenced after 5 April 2010, raises significant issues for restructurings of groups of companies with defined benefit pension schemes in the UK going forward. In cases where a FSD is issued during the course of a pre-April 2010 administration, the position is even more complicated, as a CN issued during the administration (or an arrangement entered into to comply with a FSD) will rank as an expense of the administration, whereas a CN issued in a subsequent liquidation will rank as a provable debt.

The reluctance of the Court to reach this conclusion was apparent in the judgment, with Mr Justice Briggs acknowledging that the result could be 'an impediment to the achievement of the objectives of the rescue culture'. However, the Court considered that this potential threat could be mitigated through the power of the Court to make a prospective order changing the priority of administration expenses in appropriate cases. This would enable necessary expenses, including the administrator's remuneration, to be paid irrespective of liabilities imposed under the FSD regime. In addition, the requirement that the Pensions Regulator (‘tPR’) act reasonably in issuing FSDs and CNs should mitigate against the outcome of the decision proving unfair to other creditors. Nonetheless, Mr Justice Briggs expressed the hope that a higher court could find a way through the existing authorities or that the legislation could be amended so that FSD regime liabilities would constitute provable debts, a result which would, in his view, produce 'fairness and justice' out of what was currently 'a legislative mess'.



Background

Before turning to the practical implications of the Nortel/Lehman case, it is worth considering the decision against the backdrop of the approach that tPR and the Pension Protection Fund ('PPF') have taken in a number of high profile cases involving insolvent or distressed companies in recent years. The approach of tPR and the PPF has, to date, been characterised by the ability to reach consensual deals with stakeholders which, in many cases, have enabled a restructuring of the distressed entity and the survival of the underlying business. Although tPR did not exercise its powers to issue a FSD until mid-2007, this approach was apparent as early as 2005, when the PPF agreed a consensual deal in the Heath Lambert administration in respect of the section 75 debt triggered on the administration. In that case, the PPF took on the GBP 210 million pension scheme and received 10% equity in the newco to which the underlying business was transferred, allowing the survival of the business and preservation of 2000 jobs. Similarly, a consensual deal was agreed in Pittards, where the scheme entered the PPF through a company voluntary arrangement and the PPF received 18.5% equity and cash returns from the on-going business. More recently, in Jessops, the PPF agreed to take on the defined benefit pension scheme and received 33% equity in the newco through a regulated apportionment arrangement, enabling the solvent restructuring of the group.