Re Nortel GmbH

JurisdictionEngland & Wales
CourtChancery Division
JudgeMr Justice Briggs
Judgment Date10 Dec 2010
Neutral Citation[2010] EWHC 3010 (Ch)
Docket NumberCase Nos: 542, 550 552, 553, 554, 535, 549, 537, 538, 540, 547, 551, 544, 548, 541, 539 of 2009 and 7942, 7943, 8243 and 8445 of 2008

[2010] EWHC 3010 (Ch)

IN THE HIGH COURT OF JUSTICE

CHANCERY DIVISION

COMPANIES COURT

Before: Mr Justice Briggs

Mr Justice Briggs

Case Nos: 542, 550 552, 553, 554, 535, 549, 537, 538, 540, 547, 551, 544, 548, 541, 539 of 2009 and 7942, 7943, 8243 and 8445 of 2008

IN THE MATTERS OF: NORTEL GMBH, NORTEL NETWORKS NV, NORTEL NETWORKS S.P.A., NORTEL NETWORKS BV, NORTEL NETWORKS POLSKA SP.Z.O.O., NORTEL NETWORKS HISPANIA S.A., NORTEL NETWORKS INTERNATIONAL FINANCE & HOLDINGS BV, NORTEL NETWORKS (AUSTRIA) GMBH, NORTEL NETWORKS SRO, NORTEL NETWORKS ENGINEERING SERVICE KFT, NORTEL NETWORKS PORTUGAL S.A. NORTEL NETWORKS SLOVENSKO S.R.O., NORTEL NETWORKS FRANCE SAS, NORTEL NETWORKS AB, NORTEL NETWORKS (IRELAND) LIMITED, NORTEL NETWORKS S.A.

AND IN THE MATTERS OF

LEHMAN BROTHERS INTERNATIONAL (EUROPE) (in administration)

LEHMAN BROTHERS EUROPE LIMITED (in administration)

LEHMAN BROTHERS HOLDINGS PLC (in administration)

LEHMAN BROTHERS UK HOLDINGS LIMITED (in administration)

AND IN THE MATTER OF THE INSOLVENCY ACT 1986

Between
(1) Alan Robert Bloom
(2) Alan Michael Hudson
(3) Christopher John Wilkinson Hill
(4) Stephen John Harris
(5) David Martin Hughes
Applicants
and
(1) The Pensions Regulator
(2) Board of the Pension Protection Fund
(3) Nortel Networks UK Pension Trust Limited
Respondents
And Between
(1) Anthony Victor Lomas
(2) Steven Anthony Pearson
(3) Michael John Andrew Jervis
(4) Dan Yoram Schwarzmann
(5) Derek Anthony Howell
Applicants
and
(1) The Pensions Regulator
(2) Board of the Pension Protection Fund
(3) Peter Anthony Gamester
(4) Brian Seward
(5) Peter Sherratt
(6) Thomas Paul Bolland
(7) Lehman Brothers Holdings Incorporated
(8) Neuberger Berman Europe Limited (formerly Lehman Brothers Asset Management (Europe) Limited)
Respondents

Appearances

Mr William Trower QC, Mr Tom Smith and Mr Andrew Mold (instructed by Herbert Smith LLP) for the Nortel Administrators

Mr Robin Dicker QC, Mr Paul Newman QC and Mr Daniel Bayfield (instructed by Linklaters LLP) for the Lehman Administrators

Ms Raquel Agnello QC, Mr Jonathan Hilliard and Mr Thomas Robinson (instructed by The Pensions Regulator)

Mr Richard Sheldon QC, Mr Michael Tennet QC, Ms Felicity Toube and Mr Edward Sawyer (instructed by Hogan Lovells International LLP) for Nortel Networks UK Pension Trust Limited and the Board of the Pension Protection Fund)

Mr Gabriel Moss QC, Mr Nicolas Stallworthy and Mr David Allison (instructed by Travers Smith LLP) for the Trustees of the Lehman Brothers Pension Scheme and the Board of the Pension Protection Fund

Mr Barry Isaacs and Mr Richard Hitchcock (instructed by Weil, Gotshal & Manges) for Lehman Brothers Holdings Incorporated and Lehman Brothers Asset Management (Europe) Limited

Hearing dates: 24 th, 25 th, 26 th, 29 th & 30 th November 2010

Approved Judgment

Mr Justice Briggs

INTRODUCTION

1

There are before the court applications for directions by the administrators of twenty companies in two groups, all of which raise the same common questions as to the effect of the Financial Support Direction (“FSD”) regime created by the Pensions Act 2004 upon companies in administration or insolvent liquidation. The answers to the common questions depend entirely upon issues as to the interpretation of a number of interrelated statutory provisions both in the pensions legislation and the insolvency legislation and, in particular, an understanding of the way in which Parliament intended that those two regimes should interact.

2

It is common ground that the answers to those questions are likely to be of very great significance, to the administrators, to the unsecured creditors of the companies concerned, to the trustees of the two pension schemes concerned, and to the schemes' members whose interests are designed to be protected by the FSD regime. Furthermore, an understanding of the interrelationship of the two statutory regimes (pensions and insolvency) is likely to be essential in the proper exercise by the Pensions Regulator (“the Regulator”) of the important discretions conferred upon it by the FSD regime. The answers to the common questions are also likely to be of real importance in the context of the fulfilment of the objectives of the rescue culture which now lies at the heart of the insolvency code, and in particular that part of it intended to be achieved by administration.

3

In bare outline, the common questions are as follows. The FSD regime enables the Regulator in specified circumstances to impose, by the issue of an FSD to associated companies of a corporate employer, an obligation to provide reasonable financial support to the under-funded occupational pension scheme of the employer, and to deal with non-compliance with that obligation by imposing, by Contribution Notice (“CN”), a specific monetary liability payable by the associated company to the trustees of the employer's pension scheme. I shall refer to the associated company, in accordance with the established jargon, as the target in relation both to an FSD and a CN.

4

The question for determination is whether, in circumstances where an FSD or a CN is first issued after the target company has gone into administration or liquidation, it imposes any and if so what obligation on the target company and its office-holders. The critical issue is whether the cost of complying with an FSD, or the monetary obligation imposed by a CN, ranks in the administration or liquidation of the target as a provable debt, or as an expense, or neither of those, so that it is recoverable only in the very unlikely event that there is a surplus otherwise available for distribution to members after all creditors have been paid in full.

5

Subject to one timing point, no one has suggested that the outcome of these applications is in any way fact specific, in the sense that it depends upon particular facts about the twenty administrations before the court, or about the particular relationship between the two employer companies and the target companies, or even the size of the pension scheme deficits or the particular facts about each company's insolvency, such as the amount of its available assets, and the number and value of its creditors' claims. All those matters are however likely to be relevant factors in the decision-making processes which the FSD regime imposes both on the Regulator and on those responsible for the management of the target companies.

6

There has not in fact yet been issued either an FSD or a CN to any of the target companies before the court, although the Regulator has moved a considerable distance along the potentially lengthy road which may (but not necessarily will) in due course lead to the issue of one or more of either type. Nonetheless the questions are by no means academic, precisely because a proper understanding of the effect of an FSD and a CN upon companies in administration or liquidation is a fundamental part of the equipment which both the Regulator and the target companies' office-holders will need to bring to bear upon the decision-making processes to which the FSD regime gives rise. Since the questions themselves are, as is common ground, purely matters of statutory construction which are not themselves dependent upon particular facts about any target company's insolvency, it is both convenient and in my judgment necessary for those questions to be determined, and (if possible) any appeals from this judgment also determined, before the Regulator and the office-holders can reasonably be expected to be able to carry out that decision-making responsibly and effectively.

THE FSD REGIME

7

The FSD regime together with the Scheme Specific Funding regime, introduced by the Pensions Act 2004 (“the 2004 Act”) represented a further stage in a series of statutory interventions designed to protect employees from the adverse consequences of under-funded occupational pension schemes, following on from the Minimum Funding Requirement (“MFR”) and statutory debt regimes under the Pensions Act 1995 (“the 1995 Act”), which were perceived to be inadequate in a number of important respects.

8

Both the MFR regime and the FSD regime were introduced against the backdrop of European Directives, and in particular Council Directive 80/987/EEC and, in the case of the FSD regime, Directive 2003/41/EC, but it has not been suggested that the requirements of those Directives significantly affect the issues of interpretation raised by these applications, other than in the general sense that they require member states to take the necessary measures to protect the interests of employees or ex-employees in relation to pension rights in the event of their employer's insolvency.

9

One aspect of the 1995 Act is however of central importance to an understanding of the effect of the FSD regime upon insolvent targets. Section 75 of the 1995 Act provides that upon the happening of certain events (described as “relevant events”), an amount equivalent to any shortfall in the assets of an occupational pension scheme as against its liabilities existing immediately prior to the relevant event is to become a debt due from the employer to the trustees of the scheme. One of those relevant events, described as an “insolvency event”, consists of the employer going into insolvent liquidation. Section 75(8) provided that a debt due by virtue only of section 75 (generally known as a “section 75 debt”) was not to be regarded as a preferential debt for the purposes of the Insolvency Act 1986 (“the Insolvency Act”).

10

Section 75 was amended in two relevant respects by the 2004 Act. First, it provided by subsection (4A) that where a relevant event consisted of an insolvency event,...

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