Landmark pensions ruling upheld

The Court of Appeal has upheld a landmark ruling that gives priority to company pensioners - ahead of creditor banks and bondholders - when those companies become insolvent.

Today's decision is a victory for the Government's Pensions Regulator.

But critics warned the ruling could deter lenders to businesses and "impact on corporate Britain's ability to sustain any sort of recovery".

The appeal was brought by administrators acting for the estates of two bankrupt firms.

The bank Lehman Brothers has pension scheme liabilities of £125 million and the Canadian telecoms group Nortel Networks £2.1bn.

Appeal judges Lord Justice Laws, Lord Justice Lloyd and Lord Justice Rimer unanimously backed a ruling by Mr Justice Briggs in the High Court last December that UK law requires that the pensioners get paid before the banks who have lent the bankrupt company money.

Lord Justice Lloyd said that "despite the oddities, anomalies and inconveniences" of the High Court decision, it was right not least because the only alternative would be that the pension scheme liabilities would "go into a black hole".

The appeal judge said: "That cannot have been the intention of Parliament."

The case may now go to the Supreme Court for a final ruling.

Under section 75 of the Pensions Act 1995, a company sponsoring a defined benefits pension scheme can be obliged to make up any shortfall between the scheme's assets and its liabilities.

Lord Justice Lloyd said that, in the Lehman Brothers insolvency, the shortfall under section 75 was estimated to be about £125 million.

In the case of Nortel Networks UK Ltd it was put at £2.1 billion when the company went into administration in January 2009.

Today the appeal court upheld the High Court ruling that where a Financial Support Direction (FSD) was issued by the regulator against insolvent companies, like Nortel and Lehman, the costs of complying with it would rank as an "expense" of the administration or liquidation.

The judges all ruled the law required that the administration expense must be paid before any distributions to preferred creditors, floating charges and unsecured creditors.

Jonathon Land, partner at PwC, who advised the Nortel pension plan trustees on the case, said: "Today's Court of Appeal ruling is highly significant and impacts the Nortel pension plan, and pension schemes more widely.

"The Nortel case judgment will improve the position of the pensioners who are currently negotiating with US bond holders over the split of 7.5 billion of cash realised from the sale of global assets."

Nick Moser, head of restructuring and corporate recovery at international law firm Taylor Wessing, said: "The parties have been asked to return to court, in a fortnight, to hear whether the administrators can appeal to the Supreme Court.

"The judges' comments do not help the administrators in their quest for a successful outcome. It also will result in banks and other lenders having to reassess the credit risks of their borrowers even more closely than before."

Mr Moser said that, while the regulator would only use its powers to issue contribution notices once companies entered the insolvency process when "reasonable" to do so, "the concern of the wider business community is that the risk of pension scheme liabilities trumping all other creditors' claims will impact on corporate Britain's ability to sustain any sort of recovery".

Stephen Soper, the Pensions Regulator's executive director for defined benefit funding, welcomed today's ruling.

He gave a reassurance that there were "substantial reasons" why, in practice, the fears that had been expressed in relation to the effect of the judgment on the business "rescue culture" were unlikely to be realised.

Mr Soper said: "We welcome the clarity that this ruling brings in respect of our power to issue a financial support direction to insolvent as well as solvent companies.

"In particular, this ruling further supports the claims of the Nortel and Lehman pension trustees in their respective administrations.

"It is important to note that this judgment does not change our approach to seeking financial support for a pension scheme.

"We are required by law to act reasonably and have regard to the interests of those directly affected by our powers.

"We recognise the importance of the UK having an effective restructuring and rescue process and have no intention of frustrating its proper workings."

Mr Soper said that, following the High Court judgment, some insolvency practitioners warned that it represented a serious setback to the UK's "rescue culture" if debts to occupational pension schemes arising from FSDs ranked above other creditors in an insolvency.

He stated: "The regulator fully appreciates the need to have an effective rescue culture and, as with other areas of our work, we will continue to actively engage with our regulated community to ensure that this need is balanced with our statutory objectives to protect individual members and the companies who pay the Pension Protection Fund levy."

PA