Nortel & Lehman Brothers Ruling

The ruling in this case has caused quite a few headlines. In summary the result of the ruling is that obligations arising from Financial Support Directions (FSDs) issued by the Pensions Regulator to insolvent companies are to be treated as an expense of administration rather than a provable debt. This means that such obligations have priority over all other creditors. The headlines are because this is seen as unfair on the other creditors.

The judge himself has said he found the result unsatisfactory as it could be “an impediment to the achievement of the objectives of the rescue culture” and “potentially unfair to the target’s creditors”. He also suggested that legislation might be considered to change this.

I generally disagree with the headlines and to understand why we need to look at what an FSD is and what it is used for.

A FSD falls under the Pensions Regulator’s (tPR) moral hazard powers. The idea is that if a company tries to avoid its pension obligations by “insufficiently resourcing” a company then tPR can issue a FSD to force them to contribute to the pension scheme. A simple example would be where a subsidiary pays a large dividend to its parent but then becomes insolvent with an underfunded pension scheme. A FSD would then be issued on the parent.

Given this, provided FSDs are issued in the correct circumstances, it seems only fair that the resulting obligations should have priority as arguably if the company had been run correctly in the first instance then the money would have already been paid to the fund.

As Simon Kew of Jackal Advisory put it:

“Should the Regulator focus its attentions more on bringing money into schemes whilst the employer is still trading and able to support the scheme? I would be sure that with appropriate regulatory pressure during the scheme funding negotiations, Nortel or Lehman Brothers could have either ‘written a cheque’ to clear deficits, mitigate deficits by providing security or certainly significantly increase their contributions to the scheme”

If this had happened then the money would have been spent already so wouldn’t be available now and the position would be the same as with the FSD.

Of course the one problem with this is the caveat I had above i.e. “provided FSDs are issued in the correct circumstances”. If this isn’t the case then further legislation may still be required but for now I don’t think we should get too concerned about the verdict.

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