Supreme Court Rules Against Super Priority Status Of Pension Regulator’s Claims In Insolvency

The Supreme Court has boosted the rescue culture by ruling that Financial Support Directions (FSDs) issued by the UK Pensions Regulator after commencement of insolvency proceedings are not an expense of the administration and, instead, rank on a par with unsecured claims. This decision in the Nortel and Lehman administrations will be reassuring to creditors and insolvency and restructuring practitioners.

Key Points Liabilities under an FSD and subsequent Contribution Notice (CN) issued against an insolvent company were not an expense of the administration but would rank as a provable debt. The liabilities under an FSD are provable in a formal insolvency proceeding, but will not be paid ahead of distributions to unsecured creditors, floating charge holders, the administrators' own fees, unpaid wages and holiday pay. Even if the court had found that FSD liabilities were not provable, they would not have been an expense of the administration. In administration, the order of priority for payment of FSDs and CNs out of the company's assets is now, in summary terms, as follows: First: Fixed Charge Creditors Second: Expenses of the Administration Third: Preferential Creditors Fourth: Unsecured Creditors (up to a maximum of £600,000) Fifth: Floating Charge Creditors Sixth: Unsecured Provable Debts (including liabilities under FSDs and CNs) Seventh: Statutory Interest on Debts Eighth: Deferred Creditors Ninth: Shareholders The case has raised important legal and practical questions about the manner in which corporate insolvency provisions relating to the priority ranking of debts apply to the FSD regime. Not only has the Supreme Court judgment provided welcome guidance on the treatment of pension scheme claims in insolvency, but it has also analysed in detail how statutory demands made to a company in administration or liquidation rank in the process, and, generally, when and how a contingent liability will be provable in an administration or liquidation.

The decision has real practical relevance. By clarifying that liabilities arising pursuant to an FSD do not enjoy priority ranking as an expense of the administration, lenders benefiting from fixed and floating charge security no longer have the worry of floating charge realisations being wiped out by a sizeable pension claim which ranks ahead of them. Furthermore, concerns around the use of administration as a corporate or business rescue tool, which had been posed by the earlier decisions, have...