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Legal Focus
OCTOBER 2013
Pensions in Insolvency
Insolvency is often a stressful process for all involved, and when you take into account the complications that pensions can bring to the table, it begins to get very complex. Following the Supreme Court recently giving its ruling in the Lehman and Nortel pension appeal cases concerning pensions in insolvency, we find out more by speaking to Denise Fawcett, Partner at Pitmans LLP, a full service commercial law firm based in London and the Thames Valley.
What is the legal framework concerning pensions in insolvency?
The Pensions Act 1995 expressly states that the debt due to Trustees from a sponsoring employer of a defined benefit pension scheme (“Section 75 Debt”) does not have preferential status. Therefore there has been no requirement for a statutory framework as the Section 75 Debt is treated as any other unsecured claim. As this is often the largest debt that a company has, the Trustees will have a substantial say in the decisions made by an office holder that require creditor approval or which may be challenged by creditors and possibly the choice of office holder. They may be able to take steps to put the employer into an insolvency process in the way that any other unsecured creditor may do.
When the Pension Protection Fund (“PPF”) was brought into being by the Pensions Act 2004 members of pensions schemes were given the protection of a guarantee of their benefits provided by the PPF. On the insolvent liquidation, administration of a company or in the event of a Company Voluntary Arrangement, the scheme enters a PPF assessment period with a view to the PPF taking over the liabilities of the scheme. When the assessment period starts the PPF takes over creditor rights.
The Pensions Act 2004 also brought into being the Pensions Regulator (“tPR”) with the power to impose sanctions on companies (and individuals) that would not ordinarily be liable for any or all of the Section 75 Debt.
The Pensions Regulator has powers (for example, to issue a Contribution Notice or Financial Support Direction (“FSD”)) that it can use against an individual or company in any circumstances albeit circumstances justifying the use of these powers are most likely to come to light following an insolvency.
FSD’s require the target to provide support for a pension scheme. This may be in the form of a guarantee, interest in assets, charge etc. If support
is not given to the tPR’s satisfaction then it may issue a Contribution Notice requiring payment to be made to the scheme. Contribution Notices can also be issued where there has been a detrimental act in relation to the scheme.
The Pensions Act 2004, unlike the Pensions Act 1995, does not expressly state that any debt arising as a result should have any particular ranking in the “waterfall” when realisations are distributed to creditors of an insolvent company.
How will the recent Supreme court ruling in the Lehman and nortel pension appeal cases concerning pensions in insolvency impact future pensions in insolvency issues?
The Supreme Court overturned the decision of the Court of Appeal. The Court of Appeal had considered the status ofFSD’s issued by tPR against targets that are in an insolvency process.
The Court of Appeal decided that, where FSD’s or Contribution Notices are issued against a company in administration or
credit lines to customers connected with a defined benefit pension scheme. With banks taking an already conservative approach to lending at present, this additional “fly in the ointment” would be extremely damaging to borrowers.
What are the implications raised by this case? liquidation, the resulting
obligation would be an expense in the process and would therefore need to be discharged in priority to unsecured and preferential creditors, floating charge holders and office holder’s remuneration.
The First Instance and Court of Appeal decisions had a huge impact on pensions in an insolvency situation. Until the decisions were reached, tPR’s sanctions had been treated as unsecured claims. These decisions further extended the categories of debt that would be treated as an expense of an insolvency process, giving the Trustees priority in the order of distribution of realisations in the insolvency estate. The categories of expenses had already been extended by the decisions in Goldacre (Offices) Limited –v- Nortel Networks UK Limited which rendered rent, falling due during the period of an administration, an expense of the process. Office holders were concerned at this trend towards giving priority to creditors.
The Supreme Court decision has returned the position to what it was generally considered to be before the administrators of Nortel and Lehman requested the Court’s direction on the point. There is, therefore, little impact on the pensions world. Trustees have merely lost a priority claim that the Supreme Court has determined that the scheme should not have been afforded. However, in order to achieve the outcome that it wanted to achieve, the Supreme Court had to overturn case law (some that is over 100 years old) on the question of what contingent liabilities are provable in an insolvency as a debt, such as costs liability arising out of claims issued pre-insolvency. There is now more scope to argue that contingent claims arising in the course of the insolvency but which may have existed in some vague form pre-insolvency, are provable as unsecured claims and, therefore, are to be paid pro rata with other unsecured claims and “cleared” as a result. LM
contact: denise Fawcett Partner at Pitmans LLP- London
tel: +44 (0) 207 634 4642 Email: dfawcett@pitmans.com Website: www.pitmans.com/people/denise-fawcett.php
Lenders became nervous of lending or extending existing