News headline.

In October 2011 the Court of Appeal (CA) handed down its decision in the linked appeals in the matters of Nortel/Lehman, insolvent groups with extensive pension scheme deficits.  The CA held that the liability created by a Financial Support Direction (FSD) issued by the Pensions Regulator against a company following that company’s insolvency would rank as an expense of the administration. As such, the liability created by the FSD would have priority over other creditors of the company and other expenses including office holder’s remuneration.

FSD priority gone

The Supreme Court has overruled this decision, holding that liabilities created by FSDs are simply provable debts in an insolvency, ranking alongside the claims of other unsecured creditors.  It reverses the effect of the CA decision, so amounts owing under an FSD no longer have to be paid in priority to the expenses of the insolvency practitioner and other creditors.

What does this mean?

The CA decision has meant nervous times for insolvency practitioners and lenders; the Supreme Court decision will be welcomed by both groups.

  • Had the CA decision been upheld, the position of insolvency practitioners would have been very difficult when faced with an insolvent company which, following the issue of an FSD, had a debt of an unspecified amount ranking above other expenses, debts secured under a floating charge, and preferential and unsecured creditor’s claims.
  • Lenders will have given much greater thought over the past year (or charged a higher fee) before making loans to a company which had any involvement with a defined benefit pension scheme in deficit.  Given the extent of the deficit in many occupational pension schemes, any floating charge holder risked seeing none of their money returned at all in the event of the company becoming insolvent and an FSD being issued.

The Regulator has also welcomed yesterday’s decision, because the Court decided that the liability created by an FSD does rank as a provable debt.  The administrators for twenty companies in the Nortel and Lehman groups, who brought the case, had argued that the liability created by an FSD was neither an expense of the administration nor a provable debt.  The Court did not move the liability as far down the priority order as it might have done.

This is a positive spin by the Regulator on the demotion from the “super priority” ranking, but realistically, the potential disruption to commercial lending and the rescue of insolvent businesses was too great to be allowed by the Supreme Court.  When bestowing moral hazard powers on the Pensions Regulator, the Government cannot have meant the liability arising from an FSD to take precedence over all the creditors of an insolvent company and the expenses of the insolvency practitioner.

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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.