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Pensions update: Law reversed on pensions liabilities in insolvency

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Pensions update Law reversed on pensions liabilities in insolvency

In brief

On 19 October 2011, we issued an update detailing the Court of Appeal decision that pension schemes will, in some cases, have to be paid before floating chargeholders, preferential creditors, unsecured creditors and even the administrators themselves, where companies become insolvent. This week, the Supreme Court reversed that decision in the same pair of cases arising out of the Lehman and Nortel insolvencies.

In more detail

The law is now that, where the Pensions Regulator has issued a Financial Support Direction or a Contribution Notice, the pension scheme's entitlement to claim the money to which that order relates is a provable debt which ranks equally with the claims of other unsecured creditors. Therefore, the pension scheme debt from the insolvent company ranks the same whether the Regulator's order is before or after the start of the insolvency and always ranks behind the claims of secured creditors.

This reverses the Court of Appeal approach, which had been that where the Pensions Regulator made such orders under the Pensions Act 2004, they were treated as expenses of the administration if the company had already entered the insolvency process. This gave the amounts involved a super-priority in insolvency. Instead, the Supreme Court has ruled that reversing the normal priority would have required the clearest of legislative intent. The Supreme Court found that there was no such clear intent when the Pensions Act 2004 created the powers for the Regulator to issue such orders. Therefore, the pension scheme, as creditor, should be treated the same as unsecured creditors.

This is not necessarily bad news for pension schemes. The Court of Appeal Judgment meant that it was far harder for an employer with a final salary pension scheme to obtain secure lending because of the risk of a pension scheme deficit dwarfing the size and quality of the security. It actually could have had the unintended consequences of pushing such employers and their schemes into the insolvency world just because there was such a pension scheme. Indeed, following the Court of Appeal Judgment, the Pensions Regulator went to great efforts to emphasise that it did not wish to hamper the legitimate working of the administration restructuring process and set out that, under legislation, it was required to act reasonably and to take account of parties directly affected by regulatory actions, which included giving parties the opportunity to address the Regulator before any order was made.

It should be noted that the Regulator has publicly welcomed the Supreme Court Judgment and the clarity that it provides. Their press statement focuses on the fact that it had been argued that a Financial Support Direction could not be issued against an insolvent company at all and the Supreme Court has made it clear that an order could be made against such a company. Nevertheless, the main effect of the case is to reverse the position taken by the Court of Appeal (and the High Court before it) that the amounts covered by a Financial Support Direction had a super-priority; the Supreme Court has made it clear that they do not have such super-priority.

For further information or tailored advice please contact your usual Fieldfisher adviser or one of our pensions partners, Michael Calvert or David Gallagher.

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