FSD’s issued against Lehman Brothers and Nortel upheld in the High Court

14 December 2010

On 4 November 2010 we issued an insight entitled Will the FSD’s issued against Lehman Brothers and Nortel be overturned? The insight discussed the case brought by the administrators for 20 companies in the Lehman Brothers and Nortel groups which sought directions over the status of a Financial Support Direction (“FSD”) issued against an insolvent company. They argued that such an FSD was wholly ineffective and could not require the payment of any sums by insolvent companies in support of a pension scheme.

High Court judgment
On 10 December, Mr Justice Briggs issued his judgment in favour of the Pensions Regulator and in support of the FSDs that had been issued. In a press release, the Pensions Regulator commented:

"Mr Justice Briggs ruled that where an FSD is issued against a company after insolvency, the cost of complying with that direction is an expense in that insolvency. It therefore must be paid before any distributions to unsecured creditors. The Pensions Regulator welcomes the judgment.

"It confirms an FSD is valid if issued after an insolvency event. In particular, it supports the claims of the Nortel and Lehman pension trustees in their respective administration processes. More generally, this ruling clarifies the effect of an FSD on an insolvent target. However, it will not alter the regulator's approach to determining FSDs in any situation.”

The Nortel pension scheme had a buy-out deficit of £2.1billion at the point of the group’s collapse in January 2009, and the Lehman scheme a buy-out deficit of around £148m when last valued, in 2007. This judgment will help secure support to reduce the deficits in the schemes.

Nortel trustee's reaction

The Nortel Scheme trustee chairman commented:
"The trustee is very pleased at this decision. The difficulty arose out of the fact that the legislation was silent on this point. Although the matter is likely to go to appeal, we hope and believe that the judge's decision will be upheld.

"Our case is that if an insolvent company can ignore FSDs and Contribution Notices altogether, it will frustrate the Pension Regulator's function in protecting pensions, and arguably do so where it is needed most, when a company goes under. The trustee believes that this judgment strengthens its position in seeking to make recoveries for the scheme from Nortel companies worldwide."

Comment
The judgment means that the pension scheme trustees of the two schemes have been provided with a “super priority” in obligations arising from the FSDs issued against their parent companies by the Pensions Regulator. This is because the pension obligations imposed by the FSDs could be constituted as “administration expenses,” or costs incurred during bankruptcy proceedings with “super priority” status that are paid before the administrator's own costs, some secured creditors' claims and all unsecured claims.

Appeal likely
Mr Justice Briggs has granted permission for the parties to appeal. Sources close to the parties in the case say that it is "inevitable" there will be an appeal.