Nortel And Lehman Financial Support Directions - An Update

Background

The High Court decision in Nortel and Lehman [2010] EWHC 3010 (Ch) in December 2010 was widely seen by insolvency and restructuring practitioners as having far reaching consequences for the "rescue culture". The now familiar facts involved the issue of a Financial Support Direction (FSD) by the Pensions Regulator (Regulator) on numerous Nortel and Lehman companies following the commencement of administration proceedings. Ambiguity in the insolvency legislation on the priority that should be provided to FSDs issued in such circumstances (and subsequent contribution notices (CNs) issued for failing to provide financial support under an FSD) led to the parties involved seeking clarification from the High Court on whether such an FSD or CN was a provable debt within the insolvency legislation (ranking pari passu with all other unsecured claims), an expense of the administration (giving the pension scheme "super priority" over all other unsecured creditors and floating charge holders) or not covered at all and falling into a "black hole" as a claim that need only be met after all creditors are paid out in full.

Mr Justice Briggs found himself constrained by the governing legislation and case law to hold reluctantly that an FSD or CN issued following the commencement of administration proceedings was an expense of the administration having "super priority" over all other unsecured creditors and floating charge holder claims.

Further details in relation to the High Court's decision can be found here.

At The Court Of Appeal

An appeal from the High Court's decision was heard by the Court of Appeal in October 2011. The Court of Appeal unanimously upheld the High Court's original decision. Following the clarification provided by the Court of Appeal, it was clear that the status of an FSD or CN under insolvency laws depended largely on the timing of the insolvency event and the issuing of the FSD or CN.

An FSD and subsequent CN issued prior to administration would give rise to a provable debt ranking pari passu with all other unsecured claims. A CN issued after the commencement of administration but which is based on non-compliance of an FSD issued prior to the administration would amount to a provable debt ranking pari passu with all other unsecured claims. Where the FSD and subsequent CN were both issued following administration, however, the claim under the CN would effectively become an expense of the administration ranking above all...

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