Pensions win for Lehman & Nortel

The trustees of Nortel and Lehman pension schemes have won their case at the Supreme Court over the priority ranking of financial support directions (FSDs) on insolvency.

The Court overturned previous decisions that the pensions regulator FSDs should be treated as an administration expense and therefore given priority over other debts, in Re Nortel; Re Lehman [2013] UKSC 52.

Instead, the court held that FSDs issued after Nortel and Lehman went into administration are provable debts that should be ranked alongside debts owed to other unsecured creditors, and behind any administration expenses.

The ruling reverses earlier decisions of the High Court and Court of Appeal.

Under the Pensions Act 2004, the pensions regulator can issue FSDs to ensure pension schemes are given sufficient financial support. Administrators for 20 companies in the Nortel and Lehman groups sought a ruling clarifying the status of FSDs.

Lehman Brothers collapsed in 2008, leaving pension fund deficits of £120m, while Nortel Networks folded in 2009, leaving a pension deficit of £2.1bn.

Tony Bugg, global head of restructuring and insolvency at Linklaters, who advised the Lehman administrators, said: “This decision is highly significant and a victory for common sense.

“It will be welcomed by unsecured creditors and the lending community alike, as these sorts of pension liabilities would swamp most insolvency estates leaving nothing for creditors. It also lays down principles which will govern how other statutory liabilities will rank in an insolvency—while something to be determined on a case by case basis, the Supreme Court’s judgment is clear that they will ordinarily simply rank with other unsecured creditors.

“An insolvency pits employees, pensioners, suppliers and other creditors against one another each fighting for a share of a limited pool of funds. The Supreme Court rightly decided that only the clearest of legislative intent should enable one group of creditors to claim priority over another.”

Stephen Soper, an executive director at the pensions regulator, said the judgment would “provide clarity to the UK’s restructuring and rescue practitioners that FSD liabilities have to be recognised in insolvent situations but do not have priority over administration expenses or secured debts”.