Will the FSD’s issued against Lehman Brothers and Nortel be overturned?

4 November 2010

The power to impose a Financial Support Direction ("FSD") is a "reserved regulatory function" exercised by the Determinations Panel of the Regulator. The Regulator has issued FSDs against Lehman Bros and the Nortel group. The Regulator’s authority to issue the FSDs is now being challenged through the courts.

Lehman Bros and the Regulator’s FSD
In September 2010, the Regulator’s Determinations Panel issued a determination that six companies within the Lehman Brothers group - including the group’s main operating companies in the UK as well as the US parent Lehman Brothers Holdings Inc - should provide financial support to the Lehman Brothers Pension Scheme ("the Scheme") and the Regulator issued an FSD to ensure this support was undertaken.

The facts of the case were that Lehman Brothers Holdings Inc filed for bankruptcy in September 2008, triggering insolvency for the majority of the group. The sponsoring employer of the Scheme is Lehman Brothers Limited ("LBL"), a service company. The Scheme was supported up to this point with a viable recovery plan, under the scheme-specific funding regime. The insolvency of the main UK Lehman Brothers entities left LBL without the means of providing on-going support for the scheme or dealing with the £100million Scheme deficit.

Nortel and the Regulator’s FSD
The Pensions Regulator issued an FSD against 25 companies in the Nortel group in Canada, the US, Europe and Africa. The Regulator’s Determinations Panel found that it would be reasonable to impose the requirements of an FSD on the target companies after the employer of the Nortel Networks UK Pension Plan ("Plan") was found to be 'insufficiently resourced'. (The sponsor for the Nortel Plan went into administration in 2009, leaving behind a £2.1bn pension deficit.) The FSD required those companies within the international Nortel group to provide financial support for the Nortel Plan.

Court orders Nortel & Lehman Bros challenges to FSDs to be heard together

Nortel Networks and Lehman Brothers joined forces to challenge the Regulator's ability to issue the FSD in the circumstances. The Nortel Plan commented as follows:

"Over the past few weeks, it has become evident lawyers acting on behalf of the administrators have become concerned UK insolvency law is unclear about how administrators should treat an FSD ... . in terms of its 'ranking' in respect of all claims made by creditors against such ... entities... . Administrators have now asked the companies' court to rule on how an FSD/CN should be treated under insolvency law."

Given that the administrators of Lehman Brothers were seeking to have identical matters addressed, the court has ordered that the challenges must be heard together.

Comment
The question of whether the Regulator will be able to enforce the FSDs issued against Lehman Brothers and Nortel will be determined in the forthcoming High Court judgment. The key issue that will be raised is whether an FSD can be issued during on-going insolvency proceedings, the problem being that FSDs create a liability after the point of insolvency and accordingly may not be treated as existing at the commencement of insolvency. We will keep you informed of developments.

For a copy of the Regulator’s determinations and FSD please click the links below:

FSD determination on Lehman Brothers Pension Scheme

FSD determination in Nortel case