In the Matters of Storm Funding Ltd ((in Administration)) and Other Companies (in Administration) and Another
| Jurisdiction | England & Wales |
| Judge | Mr Justice David Richards |
| Judgment Date | 18 December 2013 |
| Neutral Citation | [2013] EWHC 4019 (Ch) |
| Date | 18 December 2013 |
| Docket Number | Cases No: 7942, 7944, 8210, 8211, 8243, 8603, 8604, 8953, 9434, 9579, 9580, 9635, 9851 and 11056 of 2008 |
| Court | Chancery Division |
[2013] EWHC 4019 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT
Royal Courts of Justice
Rolls Building
Fetter Lane, London, EC4A 1NL
Mr Justice David Richards
Cases No: 7942, 7944, 8210, 8211, 8243, 8603, 8604, 8953, 9434, 9579, 9580, 9635, 9851 and 11056 of 2008
Mr Paul Newman QC, Mr Daniel Bayfield and Mr James Walmsley (instructed by Linklaters LLP) appeared on behalf of the Applicants
Mr Mark Arnold QC and Mr Richard Hitchcock (instructed by Weil, Gotshal & Manges) appeared on behalf of Lehman Brothers Holdings Inc.
Mr Nicolas Stallworthy QC (instructed by Travers Smith LLP) appeared on behalf of the Trustees
Ms Raquel Agnello QC, Mr Jonathan Hilliard and Mr Thomas Robinson appeared on behalf of the Pensions Regulator
Hearing dates: 15–17 October 2013
Introduction
The administrators of 14 companies in the Lehman Brothers group apply for directions as to the potential liabilities of those companies to make payments to or for the benefit of the Lehman Brothers Pension Scheme (the scheme) established principally for the benefit of persons employed by Lehman Brothers Limited (LBL) but seconded to work for other group companies. I will refer to the 14 companies as the Applicant Companies.
LBL was a service company, providing a range of services to other companies in the Lehman group in the UK and Europe. It was the main employer in the UK for the Lehman group and seconded staff as required to other companies in the group. On 15 September 2008, administrators were appointed to the principal UK-based companies in the Lehman group, including LBL. All the companies were insolvent.
The appointment of administrators of LBL constituted a relevant event under section 75 of the Pensions Act 1995 (the 1995 Act). This gave rise to a liability of LBL to pay to the trustees of the scheme (the trustees) an amount equal to its share of the deficit in the scheme as at the date of the appointment of the administrators (the section 75 debt). In accordance with the provisions of section 75, the amount of the liability was subsequently certified as £119m. This represented LBL's share of a total deficit on the scheme of £121m. By reason of section 75(4A), this debt is taken for the purposes of insolvency law applicable to LBL to have arisen immediately before the appointment of the administrators and is, accordingly, a provable debt in the administration and any subsequent liquidation of LBL. The amount of dividends which LBL will be able to pay to its creditors is currently unclear and therefore the amount which the trustees will receive from LBL is presently unknown.
In the circumstances which apply to LBL and its pension scheme, the Pensions Regulator (the Regulator) is empowered by the Pensions Act 2004 (the 2004 Act) to issue a direction to other companies in the same group as LBL, requiring them to provide financial support for the scheme. In default of the provision of such support, the Regulator is empowered to issue "a notice to any one or more of the persons to whom the direction was issued stating that the person is under a liability to pay to the trustees or managers of the scheme the sum specified in the notice (a "contribution notice")": section 47(2) of the 2004 Act. The sum specified in a contribution notice "may be either the whole or a specified part of the shortfall sum in relation to the scheme": section 48(1). In this case, the shortfall sum is the amount of the section 75 debt due from LBL, i.e. £119m. In Re Nortel and Lehman Brothers [2013] UKSC 52 ( Nortel), the Supreme Court held that possible claims under contribution notices yet to be issued are contingent liabilities capable of proof in the administration or liquidation of potential targets, such as the Applicant Companies.
The principal issue arising on this application is whether, in circumstances where two or more contribution notices are issued, the aggregate maximum amount which may be either specified in the contribution notices or recovered pursuant to them is limited to the shortfall sum, i.e. in this case £119m.
The difference depending on the answer to this question is substantial in the present case and could be even more so in other cases. Based on actuarial estimates provided to the trustees of the scheme, they are advised that the current buy-out deficit is substantially greater than that certified as at 15 September 2008. The buy-out deficit fluctuates from month to month, having regard to changes in gilt yields and buy-out assumptions, investment returns and other factors. Estimates of the deficit on the scheme on a buy-out basis given in the first half of 2013 ranged from £214 million to £275 million. If neither of the suggested limits apply, the Applicant Companies may be exposed to additional liabilities considerably in excess of £100 million.
The companies are in a position to make distributions to their unsecured creditors and each will have to make a reserve against its contingent liability to contribute to the scheme. The administrators of the Applicant Companies hold net realisations of approximately £600 million and estimate that the total sums that will in due course become available for distribution will be in excess of £1 billion. On 24 June 2013, permission was given pursuant to paragraph 65 of schedule B1 to the Insolvency Act 1986 to make distributions to the unsecured creditors of the Applicant Companies.
The issue is raised purely as a question of construction of the relevant provisions of the 2004 Act. There is no issue raised as to the amounts which might reasonably be specified in or recovered under contribution notices. Any such issue would not be appropriate for determination on an application for directions under the Insolvency Act.
The submissions of the administrators of the Applicant Companies are supported by submissions made on behalf of Lehman Brothers Holdings Inc. (LBHI), which is a direct or indirect creditor of the Applicant Companies with almost £4 billion of admitted claims. It is also the ultimate parent company of the Lehman group. Submissions in opposition are made on behalf of the trustees and the Regulator.
The facts
By way of expansion of the outline of facts given above, the scheme was established in 1965 and provides defined benefits on a final salary basis in relation to service up to 30 April 1999 and predominantly defined contribution benefits for service after that date. On and after 1 May 1999, the scheme continued to provide defined benefit accrual for a small group of members and also to increase the past service benefits of other pre-May 1999 members by continuing to define those past service benefits by reference to a member's final salary whilst employed in the Lehman group. There are approximately 2300 members of the scheme with defined benefits.
On 24 May 2010, the Regulator issued a warning notice to certain companies within the Lehman group. The warning notice, issued pursuant to sections 43 and 96(2) of the 2004 Act, stated that the Regulator believed that it was reasonable to require those companies to put in place financial support for the scheme.
The warning notice sought the issue of a financial support direction (FSD) under section 43 of the 2004 Act to 73 entities, subsequently increased to 74 entities. Following representations, this number was reduced to 44 entities, including the Applicant Companies and LBHI. The power to issue FSDs is exercised by the Determinations Panel, an independent statutory panel of the Regulator. On 13 September 2010, the Determinations Panel issued a determination notice providing that an FSD be issued to six out of the 44 entities identified by the Regulator. The six companies included three Applicant Companies.
The determination notice was referred under the provisions of the 2004 Act to the Upper Tribunal both by the companies to whom FSDs were to be issued and also by the trustees, who sought a direction for the inclusion in the FSD of the remaining 38 companies (in practice now 37 companies, following the dissolution of one of them). Those 38 companies applied to the Upper Tribunal to strike out the trustees' reference. By a decision handed down on 14 June 2012, the Upper Tribunal refused the application and an appeal was dismissed by the Court of Appeal on 21 June 2013: LB Re Financing No 1 Ltd v The Trustees of the Lehman Brothers Pension Scheme [2013] EWCA Civ 751. A directions hearing for the substantive references to the Upper Tribunal is scheduled for early 2014. Accordingly, all the Applicant Companies will or may be the subject of an FSD and, potentially, a subsequent contribution notice.
The directions sought by the administrators
The application notice (as amended) seeks directions under three paragraphs. Paragraph 3, which sets out the only direction sought by the application notice as originally issued, is directed to the principal issue described above and is as follows:
"As to whether, on the true construction of ss.48(1) and 49 of the 2004 Act, the Regulator may issue contribution notices under s.47 of the 2004 Act ("CNs") to more than one qualifying target which in aggregate specify a sum which is in excess of the maximum shortfall sum in relation to the relevant scheme under s.48(2)(a) of the 2004 Act, so as to enable (if the Regulator or other person empowered to recover the debt arising from the said CNs so chooses) recovery from those targets of an aggregate sum greater than the said shortfall sum."
The administrators regard this as the critical issue for decision at this stage, because it will assist them in determining the level of distributions to unsecured creditors...
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