Administrators for Nortel Networks and Lehman Brothers have won a case in the Supreme Court, after it ruled that The Pensions Regulator’s (TPR) does not have priority rights to the assets of insolvent companies.
The Supreme Court overturned the decision of the Court of Appeal and held that financial support directions (FSD) imposed by The Pensions Regulator (TPR) on certain employers within the Nortel Networks and Lehman Brothers group, after these entered administration, are simply provable debts and are not expenses.
This means that, In the case of Re Nortel; Re Lehman (2013) UKSC 52, TPR does not rank ahead of unsecured creditor when claiming money to pay off underfunded pension schemes.
The ruling gives employers clarification around the Pension Protection Fund’s (PPF) ‘moral hazard’ powers, which impose pension funding liabilities on parties that are not necessarily pension scheme employers, so as to avoid scheme deficits falling on to the PPF.
These powers include the ability to issue against a target financial support direction requiring reasonable financial support to be put in place for an underfunded workplace pension scheme.
The Supreme Court ruled that these ‘moral hazard’ powers are not designed to give pension liabilities expense status.
Tony Bugg, global head of restructuring and insolvency at Linklaters, which advised the Lehman Brothers administrators, said: “The concern before [the] decision was that TPR had the power to boost the ranking of its claim simply by waiting for a target company to enter administration.
“The Supreme Court unanimously agreed that Parliament cannot have intended such an unfair and arbitrary result.
“More widely, the decisions of the lower courts had threatened to increase the costs of lending since any statutory liabilities ranking as an expense would have been met out of a form of security commonly relied on by lenders: the floating charge.
“Such liabilities are often unquantifiable until they arise and are potentially large rendering the security worthless.”