The Supreme Court yesterday issued its decision in the long-running case concerning financial support directions (“FSDs”) issued by the UK Pensions Regulator to various companies in the Nortel and Lehman groups. The case considered where a company's obligations under an FSD should rank in relation to its other debts if the company was insolvent when the FSD was issued.
By way of background, the Regulator has a statutory power in some contexts to serve an FSD on other companies in the same corporate group as an employer that sponsors an underfunded DB pension scheme. The effect is to order the companies that receive the FSD to provide financial support to the scheme. Should a recipient of an FSD fail to comply, the Regulator can issue a contribution notice requiring it to make a payment into the scheme, potentially equal to the scheme's deficit on a buy-out basis.
The issue considered by the Supreme Court was the priority that these obligations should have if the recipient company was insolvent when the Regulator issued the FSD.
When the issue was considered by the High Court and the Court of Appeal, they reluctantly concluded that, if an FSD was issued after the recipient’s insolvency, the resulting obligation would rank higher than debts that the recipient owed to its unsecured creditors, and higher even than debts owed to some secured creditors, and would have the same priority as the expenses of the administration or liquidation.
The Supreme Court rejected this conclusion. It decided that the obligations rank alongside other unsecured debts of the recipient, behind the expenses of the administration or liquidation, and behind the debts of the recipient's secured creditors.
This decision is consistent with the treatment of the section 75 debt due from a scheme's sponsoring employer on winding up or insolvency. It is also consistent with the treatment of obligations under an FSD which was issued before the recipient's insolvency.
Should you require further details of the decision, our Restructuring, Bankruptcy & Insolvency team have produced a fuller case update.