Re Nortel GmbH ((in Administration)) and related companies

JurisdictionEngland & Wales
CourtSupreme Court
JudgeLord Sumption,Lord Neuberger,Lord Clarke,Lord Mance,Lord Toulson
Judgment Date24 Jul 2013
Neutral Citation[2013] UKSC 52

[2013] UKSC 52

THE SUPREME COURT

Trinity Term

On appeal from: [2011] EWCA Civ 1124

Before

Lord Neuberger, President

Lord Mance

Lord Clarke

Lord Sumption

Lord Toulson

In the matter of the Nortel Companies
In the matter of the Lehman Companies
In the matter of the Lehman Companies (No. 2)

Appellant

William Trower QC

Tom Smith Andrew Mold

(Instructed by Herbert Smith Freehills LLP)

Appellant

Mark Phillips QC

Stephen Robins James Walmsley

(Instructed by Linklaters LLP)

Appellant

Robin Dicker QC

Paul Newman QC

Daniel Bayfield

(Instructed by Linklaters LLP)

Respondent

Gabriel Moss QC

Nicolas Stallworthy QC

David Allison

(Instructed by Travers Smith LLP)

Respondent

Raquel Agnello QC

Jonathan Hilliard

Thomas Robinson

(Instructed by The Pensions Regulator)

Respondent

Richard Sheldon QC

Michael Tennet QC

Felicity Toube QC

(Instructed by Hogan Lovells International LLP)

Respondent

Raquel Agnello QC

Jonathan Hilliard

Thomas Robinson

(Instructed by The Pensions Regulator)

Respondent

Raquel Agnello QC

Jonathan Hilliard

Thomas Robinson

(Instructed by The Pensions Regulator)

Respondent

Barry Isaacs QC

(Instructed by Weil, Gotshal & Manges)

Heard on 14, 15 and 16 May 2013

Lord Neuberger ( with whom Lord Mance, Lord Clarke and Lord Toulson agree)

Introductory
1

These two appeals raise questions of some significance arising out of the interrelationship of the statutory schemes relating to the protection of employees' pensions and to corporate insolvency.

2

The background to the two appeals is, in very summary terms, as follows:

  • i. Many UK registered members of the Lehman group of companies, and all the UK registered members of the Nortel group of companies, have gone into insolvent administration;

  • ii. (a) One of those Lehman group companies entered into service contracts with, and ran a pension scheme for the benefit of, employees who worked for other group members;

    (b) The Nortel group included a company which had a pension scheme, and which was insufficiently resourced to fund that scheme;

  • iii. The pension scheme ("the Scheme") in each case was a final salary scheme, which appears to be, and to have been for some time, in substantial deficit;

  • iv. The Pensions Regulator subsequently initiated machinery under the Pensions Act 2004 to require certain other group members ("the Target companies") to provide financial support for the Scheme;

  • v. That machinery has been held up so it can be decided whether the liability under such a requirement would rank (a) as an expense of the Target companies' administrations, (b) pari passu with the Target companies' other unsecured creditors, or (c) as neither;

  • vi. Under option (a) the liability would rank ahead of the unsecured creditors, and may well be paid in full; under option (b) it would rank equally with those creditors; under option (c) it would rank behind them, and would probably be worthless;

  • vii. Briggs J and the Court of Appeal (in a judgment given by Lloyd LJ) concluded that option (b) was not open to them, and preferred option (a) to option (c);

  • viii. The issue now comes before the Supreme Court.

3

This judgment starts by explaining the relevant statutory provisions relating to pensions, which are mostly in the Pensions Act 2004 ("the 2004 Act"), in a description largely based on the exposition in the judgment of Briggs J, [2010] EWHC 3010 (Ch), [2011] Bus LR 766, paras 7–41. It then deals with the statutory provisions and rules relating to insolvency, in the Insolvency Act 1986 ("the 1986 Act") and the Insolvency Rules 1986 ( SI 1986/1925) ("the Insolvency Rules"), largely drawing on what Lloyd LJ said in the Court of Appeal, [2011] EWCA Civ 1124, [2012] Bus LR 818, paras 20–23 and 39. Next, it will explain the facts, in a summary reflecting what Briggs J said at paras 47–54 of his judgment.

4

After a short discussion, the judgment will then turn to consider whether the liabilities in the present cases would rank pari passu with the unsecured creditors of the Target companies. It will then consider whether those liabilities rank as expenses of the administration. Finally, it will address the power of the court under the 1986 Act and the Insolvency Rules to vary the priority of the liabilities.

The relevant statutory provisions relating to pensions
5

In order to protect employees from the adverse consequences of an underfunded occupational pension scheme, (i) the Social Security Act 1990 introduced a statutory debt regime by amending the Social Security and Pensions Act 1975, and (ii) the Pensions Act 1995 ("the 1995 Act") introduced a minimum funding requirement regime. These were perceived to be inadequate in some respects, and the 2004 Act introduced a financial support direction ("FSD") regime. The regimes under these Acts were introduced against the backdrop of European Directives, which require member states to take measures to protect the interests of employees or ex-employees in relation to pension rights in the event of their employer's insolvency.

Section 75 of the 1995 Act
6

Although it is the FSD regime under the 2004 Act which is of central importance on these appeals, section 75 of the 1995 Act is highly relevant. It provides that upon the happening of various events, which include an "insolvency event", an amount equivalent to any shortfall in the assets of an occupational pension scheme (a "scheme") as against its liabilities, which exists immediately prior to the relevant event, is to be a debt, known as a "section 75 debt", due from the employer to the trustees of the scheme (the "trustees"). Under the section as originally drafted, an "insolvency event" was limited to the employer going into insolvent liquidation, but the 2004 Act extended the expression to include going into administration. In this judgment I shall similarly use the expression to cover going into administration or going into insolvent liquidation.

7

Section 75(8) provides that a section 75 debt is not to be regarded as a preferential debt for the purposes of the 1986 Act. Section 75(4A) states that a section 75 debt is to be taken, for the purposes of an employer's insolvency, to arise immediately before the occurrence of the insolvency event.

The 2004 Act: the Regulator and the PPF
8

The 2004 Act introduced both the Pensions Regulator ("the Regulator") and the Pension Protection Fund ("the PPF").

9

The Regulator is a body corporate established by section 1, and, by section 4, it is given wide regulatory functions. When exercising any of those functions, the Regulator is required by section 100 to "have regard to":

"2(a) the interests of the generality of the members of the scheme to which the exercise of the function relates, and

(b) the interests of such persons as appear to the Regulator to be directly affected by the exercise."

Section 5(1) defines the Regulator's main objectives, which include protecting the benefits of members of schemes, and reducing the risk of compensation having to be paid by the PPF.

10

The PPF is financed from levies upon schemes. It operates by assuming the assets and liabilities of a deficient scheme, and then paying its members compensation at a prescribed rate (generally less than the full rate promised under the relevant scheme), using the industry-wide levies for the purposes of meeting the shortfall between the deficient scheme's assets and the prescribed level of compensation.

The 2004 Act: the FSD regime and FSDs
11

It was perceived that the creation of the PPF might encourage some employers to arrange their affairs so as to throw the burden of pension scheme deficiencies upon the PPF, which would unfairly burden other schemes by increasing the amount of the levies. An example of such an arrangement is where a group of companies uses a single company (a "service company") to employ people who then work for other group companies. In such a case, the employees' pension rights could be regarded as unfairly prejudiced if, by comparison with the resources of other group companies, the service company had very limited resources to meet a section 75 debt.

12

The FSD regime was designed to mitigate such problems. In a nutshell, it enables the Regulator in specified circumstances (i) to impose, by the issue of a FSD to some or all of the other group companies (known as "targets"), an obligation to provide reasonable financial support to the under-funded scheme of the service company or insufficiently resourced employer, and (ii) to deal with non-compliance with that obligation by imposing, through a Contribution Notice (a "CN"), a specific monetary liability payable by a target to the trustees.

13

The detailed provisions of the FSD regime are contained in sections 43 to 51 of the 2004 Act, and in the Pensions Regulator (Financial Support Directions etc) Regulations 2005 (SI 2005/2188) ("the FSD Regulations").

14

Section 43 is of central importance. Subsection (1) explains that the FSD regime extends to all occupational pension schemes other than money purchase schemes and certain other prescribed schemes. Section 43(2) contains the so-called "employer condition", and provides as follows:

"The Regulator may issue a [FSD] … in relation to such a scheme if the Regulator is of the opinion that the employer in relation to the scheme—

(a) is a service company, or

(b) is insufficiently resourced,

at a time determined by the Regulator which falls within subsection (9) ('the relevant time')."

Section 43(9) and the FSD Regulations define "the relevant time" as any time within a period of two years before the date of the determination of the Regulator to issue the FSD in question. It is known as "the look-back date".

15

"Service company" is defined in section 44(2) as being a company within a group of companies which, by reference to its turnover, can be seen to be principally engaged in...

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