Pension schemes with FSDs rank as unsecured creditors: Nortel and Lehmans

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Financial support directions (FSDs) are orders from the Pensions Regulator to other members of a corporate group to stand behind the obligations of a service company or under-resourced employer and provide financial support to an underfunded defined-benefit scheme. The Pensions Regulator issues a formal warning notice to the companies it considers in scope, and a determinations panel of the regulator then issues a determination to issue an FSD. The actual FSD can only be issued once all appeal processes have been exhausted.

In the case of the Nortel group and the Lehman Brothers group, determinations were not made until after the majority of the companies targeted had entered insolvency proceedings.

In the joined case of Nortel and Lehman Brothers, the Supreme Court allowed these post-insolvency determinations to render the subsequent FSDs provable debts in the administration and overruled both the Court of Appeal and the High Court. Both lower courts had concluded that the determinations had been issued too late for an FSD to count as a debt. Rather than let the liability fall away entirely, the lower courts had found an alternative way to give effect to the order by treating the FSD as an expense of the administration. This gave trustees ‘super priority’ status, with the FSD payable in priority over all creditors except those with fixed charge security over assets…

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