Round 2 Goes To TPR In The Nortel And Lehman Appeals

The Court of Appeal has upheld the decision of the High Court in the matters of Nortel GMBH and Lehman Brothers International (Europe) (both in administration) and other companies. The High Court had decided that liability under a Contribution Notice issued by the Pensions Regulator against a company in administration or liquidation, in relation to liabilities of a defined benefit pension scheme1, is an expense2 of that insolvency process. Accordingly, the Court of Appeal has confirmed the further extension of the type of expenses that may be considered to have the priority given to an expense of an insolvency process.

This decision will be of enormous concern to office holders who may find themselves with insufficient funds available, after payment of Contribution Notice liabilities, to fund their own remuneration and to floating charge holders and unsecured creditors who will find the funds available to them to satisfy their claims depleted by the prior satisfaction Contribution Notice obligations.

The liability in question arises out of the provisions of the Pensions Act 2004. The Act gave the Pensions Regulator (tPR) the power to impose a Financial Support Direction (FSD) upon a company connected and associated3 with an employer of a defined benefit pension scheme4. This power was given to tPR, in particular, to assist the members of an underfunded pension scheme where the employer is a company with no or few assets but is within a group of companies that have assets that the employer has no direct recourse to where the "rich" group companies benefit from the activities of the "poor" employer. Service companies are specifically referred to in the Act as falling within the reach of tPR but any employer within a group may have the characteristics (of being "insufficiently resourced") that may expose the rest of the group to becoming a target for tPR's use of these "moral hazard" powers.

Companies within the relevant group can be required, by tPR, to provide support to the pension scheme by issuing an FSD against them. tPR does not specify the support required but this may, for example, be in the form of a guarantee and/or security. If the recipient of an FSD fails to provide support to the pension scheme, then tPR can issue a notice requiring payment of a sum up to the full amount of the pension scheme liability. This notice is a Contribution Notice.

In the case of Lehman Brothers the liability to the scheme is £125 million. In Nortel it...