Herbert Smith Freehills (HSF) and Linklaters have triumphed in the crucial pension scheme deficit case brought by the administrators of the Lehman Brothers International (Europe) and Nortel schemes in the Supreme Court.
Handing down a unanimous judgment this morning, the Supreme Court ruled that pension scheme deficits claimed under the powers of the Pensions Regulator do not qualify as an administration expense in the case of an insolvency, but instead as a debt.
The decision overturns the first instance and Court of Appeal (CoA) rulings, which found that the cost of complying with financial support directions (FSDs) issued to an insolvent company must be paid prior to any distribution to the company’s unsecured creditors (14 October 2011).
Supreme Court Justices Lord Neuberger, Lord Mance, Lord Clarke, Lord Sumption and Lord Toulson today rejected that argument, ruling that payment of pensions schemes deficits should not be prioritised over other creditor claims in an insolvency but treated equally.
Commercial set South Square picked up leading roles on both sides on the case. William Trower QC was instructed by HSF partner Stephen Gale for the Nortel administrators, while Linklaters partner Euan Clarke turned to set mates Robin Dicker QC and Mark Phillips QC for the Lehman administrators.
On the opposing side, South Square silks Richard Sheldon QC, Felicity Toube QC, Gabriel Moss QC and Barry Isaacs QC all took roles (see full line-up below). The Pensions Regulator was represented by Erskine Chambers’ Raquel Agnello QC.
The case began three years ago in the wake of the bankruptcies of both Nortel and Lehman Brothers. Both companies had a UK pension fund with a substantial deficit, which the insolvent companies could not meet.
In a statement David Davies, chairman of the Nortel UK Pension Plan Trustees, said: “These proceedings have been important in establishing that FSDs and CNs [contribution notices] still work when a whole group has collapsed. If they had not worked in that common scenario, pensioners would have been prejudiced. Other creditors of a target company – who may stand to receive a material payment on their debts even if they are not being paid in full – would have received a benefit at pensioners’ expense if FSD and CN liabilities had been effectively excluded from the insolvency distribution.”
Mayer Brown’s joint restructuring, bankruptcy and insolvency head Devi Shah added: “The previous Court of Appeal decision caused considerable issues for restructuring professionals on the ground – they had to consider potentially large pension deficits when assessing the prospects of companies on the verge of insolvency, making rescue of the enterprise a risky and uncertain business. Today’s Supreme Court decision lifts that burden.”
Taylor Wessing’s restructuring and corporate insolvency head Nick Moser agreed that the ruling would come as a relief to investors. “Today’s judgment will be welcomed by financial institutions who are now reassured that the risk profile of companies is more predictable” he said.
The line up
For the appellants, the Nortel administrators
For the appellants, the Lehman administrators
South Square’s Mark Phillips QC and Stephen Robins and Wilberforce Chambers’ James Walmsley instructed by Linklaters partner Euan Clarke
For the appellants, the Lehman administrators (2)
South Square’s Robin Dicker QC, Wilberforce Chambers’ Paul Newman QC and South Square’s Daniel Bayfield instructed by Linklaters partner Euan Clarke
For the respondents in both appeals, the Pensions Regulator
Erskine Chambers’ Raquel Agnello QC, Wilberforce Chambers’ Jonathan Hilliard and 11 Stone Buildings’ Thomas Robinson, instructed directly by the Pensions Regulator
For the respondents, Nortel Networks UK Pension Trust and for the Board of the Pension Protection Fund
South Square’s Richard Sheldon QC, Felicity Toube QC and Wilberforce Chambers’ Michael Tennet QC instructed by Hogan Lovells partner Joe Bannister
For the respondents, the Lehman pension fund trustees and for the Board of the Pension Protection Fund
South Square’s Gabriel Moss QC, Outer Temple’s Nicolas Stallworthy QC and South Square’s David Allison instructed by Travers Smith partner Peter Esam
For the respondents, Lehman Brothers Holdings and Neuberger Berman Europe
South Square’s Barry Isaacs QC instructed by Weil Gotshal & Manges partner Joanne Etherton