A Conflict between the Insolvency Act and the Pension Act

By Akpareva, Wendy Aruoriwo | Nottingham Law Journal, Annual 2014 | Go to article overview

A Conflict between the Insolvency Act and the Pension Act


Akpareva, Wendy Aruoriwo, Nottingham Law Journal


Re Nortel GmbH and Lehman Brothers International (Europe) (1) [2013] UKSC 52 (Lord Neuberger, President, Lord Mance, Lord Clarke, Lord Sumption and Lord Toulson)

INTRODUCTION

In 2013, the Supreme Court overturned the controversial decision of the Court of Appeal which held that financial contribution to an underfunded pension scheme should rank higher than debts to other creditors. The decision finally lay to rest how financial contributions to underfunded pension schemes should be ranked when a company is insolvent. The Re Nortel/ Re Lehman case is illustrative of conflicts that may arise during insolvency proceedings. In this case, there was a clear conflict between the protection of the vulnerable (pension schemes) and the preservation of the overall collective interest in insolvency proceedings. This conflict was further underlined by two bodies of law; the provisions of the Insolvency Act 1986 and the Pensions Act 2004 and this is the focal point of this paper. The paper will therefore examine the tension between the provisions of the Insolvency Act 1986 and the Pensions Act 2004 as it relates to the classification of claims made in relation to under-funded pension schemes during a company's insolvency.

THE FACTS

In 2009, a regulatory action was commenced by the Pensions Regulator against Re Nortel/ Re Lehman Brothers respectively; both companies had become insolvent and gone into administration. The pension schemes of both companies were considerably underfunded (2) and under the provisions of the Pension Act 2004, the Pension Regular could issue a Financial Support Direction (FSD) (3) order requiring a defaulting company to make a financial contribution to underfunded pension schemes. (4) In Nortel and Lehman Brothers such an order was issued in a bid to protect the benefits of the pension scheme members and limit demands on the Pension Protection Fund to pay compensation for lost pension benefits.

FSDs require the recipient to put forward a financial support proposal to remedy the deficiency and where the recipient of the FSD fails to offer a proposal, the Pensions Regulator may issue a Contribution Notice (CN) which requires the recipient/target company (Nortel and Lehman Brothers in this case) to pay a specific sum determined by the Regulator, to the pension scheme. Administrators for some of the subsidiary companies in Lehman and Nortel companies respectively, sought the direction of the court on three main questions regarding the FSD/CN. Firstly, they wished to know the effectiveness of liabilities ensuring from a FSD issued in the wake of insolvency; secondly, if such liabilities would rank as provable debt and thirdly if the FSD liabilities would rank as an administration expense. The case which commenced in the High Court (5) and went on appeal to the Court of Appeal (6) saw both courts being of the view that where a CN was issued in relation to an FSD which itself was issued before a company entered into insolvent administration, the CN would rank as a provable debt, whereas, if the CN related to an FSD issued after such event, it would rank as an administration expense; the High Court therefore held that an FSD should be considered as an administration expense and this decision was upheld by the Court of Appeal. On appeal to the Supreme Court, the decision of the Court of Appeal was overturned.

MATTERS ARISING

Where a company is insolvent and has relied on any of the mechanisms available under the Insolvency Act to come to an arrangement with its creditors on how its liability to them will be realised, the insolvency legislations (the Insolvency Act 1986 (7) and the Insolvency Rules 1986) (8) as interpreted and extended by the courts have laid down the order of priority for payment out of the debtor company's assets to its creditors and it is as follows;

* Secured creditors;

* Expenses of the insolvency proceedings;

* Preferential creditors;

* Floating charge creditors;

* Unsecured provable debts;

* Statutory interest;

* Non-provable liabilities; and

* Shareholders. …

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