The Supreme Court has provided much-needed clarity on the 'priority' of Contribution Notices and Financial Support Directions in corporate insolvencies
The long-running game of legal ping-pong involving the Lehman and Nortel insolvencies, and the questions it raised about the extent of the Pensions Regulator's powers to make good deficits in insolvent companies' pension schemes, has finally been settled by the Supreme Court.
We now know that Contribution Notices and Financial Support Directions, two of the Regulator's most potent weapons in its 'moral hazard' armoury, do not rank as 'expenses of the administration' and do not, therefore, have any degree of 'super-priority' over the claims of other creditors.
Whilst not necessarily good news for trustees or the PPF, the Court's decision has been roundly welcomed by the industry in general – and by insolvency practitioners in particular – and is felt to have restored a degree of common sense to this particular piece of the UK legal landscape.
Background
Contribution Notices and Financial Support Directions were introduced by the Pensions Act 2004 and give significant power to the Pensions Regulator to ensure that corporate entities stand behind their pension deficits.
- Contribution Notices essentially allow the Regulator to direct a company or an individual to make a contribution to an occupational pension scheme, up to the full amount of its buy-out debt, if it (the Regulator) suspects that action has been taken to prevent such a debt falling due; to reduce the amount of any such debt; or to make any debt which does arise less easy to recover.
- Financial Support Directions enable the Regulator to 'pierce the corporate veil' and hold all members of a corporate group responsible for the pension deficit of any one group member, irrespective of whether they have been engaged in any form of 'debt avoidance' activity (in other words, on a no-fault basis).
The issues in Lehman and Nortel
Central to the dispute in Lehman and Nortel was the question of the priority afforded to Contribution Notices and Financial Support Directions, particularly those not issued by the Pensions Regulator until after the corporate insolvencies had occurred. If not a 'provable debt', which would rank alongside the claims of other unsecured creditors, they could only realistically be an 'expense of the administration'. As such they would rank in priority to the claims of unsecured and secured creditors, and could potentially be of such magnitude to prevent the liquidator or administrator himself being paid in full.
The High Court decided in December 2010 that CNs and FSDs were indeed 'expenses of the administration'. The judge recognised, however, that there were some serious practical consequences flowing from his decision; and was almost apologetic about the fact that he was constrained by previous judgments of the Court, in other words by legal 'precedent', to give the answer he had given. The Court of Appeal nonetheless upheld his judgment when it considered matters nearly a year later.
The judgment of the Supreme Court
Two further years (and for insolvency practitioners, many more sleepless nights) later, we finally have both legal certainty and the restoration of a modicum of common sense. CNs and FSDs are provable debts in corporate insolvency situations, even if they were not issued until after the insolvency took place. Accordingly they will rank alongside other unsecured creditors of the defunct entity, and – most importantly – lower down the 'pecking order' than both expenses of the administration and the claims of secured creditors.
How relevant is all this?
On the one hand, not very. The Pensions Regulator has used its 'moral hazard' powers in only a handful of occasions since they were introduced nearly a decade ago, in extremely high-value cases where the corporate insolvency itself had already attracted a considerable amount of press attention. Does it really matter if CNs and FSDs are expenses of the administration or merely provable debts?
Furthermore 'section 75 debts', which arise whenever corporate entities withdraw from multi-employer pension schemes (or whenever any final salary pension scheme goes into wind-up), have long been provable debts; are regularly enforced by pension trustees; and, subject of course to the extent of the assets available to creditors, already provide a tried-and-tested means of ensuring some element of recovery for the pension scheme.
But then again...
On the other hand, the Pensions Regulator has made its mark on the UK pensions industry not by regular enforcement action but via subtle behavioural change. In spite of the fact they have only been used sparingly, the possibility of a CN or an FSD being issued is often one of the most important considerations when any form of corporate activity first reaches the drawing board. Ans in most respects we have, for some time, known exactly where we stand as regards TPR's the use of its powers. Corporate activity is much more likely to operate effectively under the auspices of a stable and proportionate regulatory regime than if it is fog-bound by a climate of fear about possible regulatory reprisals, however unlikely they might actually be.
In addition, thanks to the Supreme Court in Nortel, the very ability of insolvency practitioners and other business recovery professionals to 'do their day jobs' will no longer be hampered by concerns about the priority afforded to pension deficits. This can only be a good thing for the UK business community, particularly as the fundamental objective of any administrator is to rescue a business as a going concern: it is only if this cannot be achieved that insolvency becomes a consideration. And a healthy business environment (including a proper opportunity for troubled but inherently 'good' businesses to return to full health) must, in turn, be of benefit to those final salary pension schemes which do remain.
Maybe it's the case here that the law, for once, is not the ass it is sometimes made out to be...?
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