December 2010

High Court judgment finds in favour of the Pensions Regulator in the matter of Nortel and Lehman Brothers

Today the eagerly awaited judgment in the matters of Nortel GMBH and Others and Lehman Brothers International (Europe) was handed down in the High Court by Mr Justice Briggs.

Nortel and Lehman Brothers both operated large occupational pension schemes. Both groups of companies went into insolvent administration.

This application was brought by administrators of 16 companies in the Nortel Group and 4 in the Lehman Brothers Group challenging the use of the Pensions Regulator's powers against companies in insolvency. The issue for the court was the effect of the insolvencies upon any action taken by the Regulator under the moral hazard provisions of the Pensions Act 2004.

The application asked whether Financial Support Directions ("FSD")  issued by the Regulator after the date of administration (which require the companies to provide financial support to pension schemes in deficit in the Nortel and Lehman groups) give rise to liabilities that are provable claims, or to administration expenses, or to no liabilities whatsoever. At stake was the ability of the Regulator to use its powers against companies in insolvency where a pension scheme is in deficit.

The High Court concluded that where an FSD is issued to an insolvent target company after the commencement of its insolvency, the cost of complying with it (i.e. the financial support to be provided to the scheme under an arrangement approved under section 45 of the Pensions Act 2004 ("2004 Act")) is an expense in the insolvency of that target and therefore must be paid before any distributions to unsecured creditors. The case considered the impact of the Pensions Act 2004 on the rescue culture promoted by administrations, and gives detailed guidance on the meaning of contingent liabilities in an insolvency.

The judgment also states that the same is true for sums specified in a Contribution Notice, in certain circumstances.  

The decision has considerable ramifications for how groups of companies structure their affairs regarding pension schemes and how the Pensions Regulator takes action against insolvent companies.

The judge granted leave to appeal to the Court of Appeal.

Raquel Agnello QC and Tom Robinson from 11 Stone Buildings, and Jonathan Hilliard from Wilberforce Chambers, were instructed by Marcus Laughton of the Pensions Regulator.

The full judgment is reported on the www.bailii.org website and can be accessed via this link.