Commentary
This is a useful case study of how the TPR may interact with insolvency proceedings to protect the interests of members’ and the PPF even when it involves foreign courts.
Case summary
The Nortel Networks UK Pension Plan (the ‘Plan’) entered insolvency proceedings with a deficit of £2.1bn.
TPR undertook investigations in respect of the use of a potential Financial Support Direction (‘FSD’) and an above PPF level buy-out was secured for the Plan.
The UK Supreme Court confirmed that FSDs are effective against insolvent companies.
Analysis
(i) Facts and background
Nortel was a multinational telecommunications and data networking manufacturing group (the ‘Group’) operating globally with a UK subsidiary.
The subsidiary, Nortel Networks (UK) Limited (‘NNUK’), was the principal employer of the Plan.
In January 2009 the group entered local insolvency proceedings including in the UK.
Its assets were sold for US $7.3 billion and transferred to a ‘lockbox’ account – i.e. the funds were held in this account until allocation could be agreed among creditors/decided by the courts.
The cost of securing members’ benefits in full was estimated to be £2.1bn.
(ii) Summary of decision
Stage 1 – UK Proceedings
Following a hearing in front of The Pension Regulator’s Determinations Panel, FSD proceeding were issued against the parent company in Canada and various other group companies.
Considerations included being a highly integrated group and operating on basis of business lines rather than individual legal entities. Evidenced by NNUK playing a key role in global operations in terms of infrastructure and management functions and intercompany loans.
Administrators of group companies and others took joint court action to confirm legal status of the FSDs against insolvent companies which was heard by the UK Supreme Court in July 2013.
The UK Supreme Court confirmed FSDs are effective against insolvent companies and rank as provable debts. This removed considerable uncertainty in the pensions and insolvency fields and sets a precedent to guide trustee and insolvency conduct in the future.
Stage 2 – US and Canadian Proceedings
Numerous court actions were taken in the US and Canadian courts against Group companies which had various degrees of success including confirmation that the trustees and PPF could make claims on the basis of what might have been recovered by the Plan under UK regulatory action.
In May 2015 coordinated proceedings in the US and Canadian courts resulted in a joint conclusion that the lockbox funds should be allocated between the individual companies in the group pro rate to their respective creditor claims. NNUK received a share which reflected its sizeable liability to the Plan.
A legally effective global settlement was reached in 8 May 2017. TPR withdrew their anti-avoidance action once company voluntary agreements were agreed to reflect the terms of the settlement.
Four separate mediation processes were entered into in North America since 2010 with the aim of ensuring a fair result for the Plan’s members. TPR was supportive taking into account the mediation being quicker and less costly. The final mediation process, starting in October 2015, resulted in settlement agreement.
TPR believed the final outcome was equivalent to the result sought in 2010 when issuing FSDs.
A Settlement agreement resulted in excess of £1bn being paid to the Plan which allowed for the pension to be bought out at above PPF levels of benefits saving costs to the PPF and improving the position of the Plans members.
(iii) Key legal principles
TPR may issue FSDs under S43 of the Pensions Act 2004 compelling group companies to provide financial support it believes it is reasonable to do so on the facts.
FSDs are effective against insolvent companies and rank as provable debts.
The TPR’s anti-avoidance powers have been taken into account internationally as well as in the UK.
Practical Considerations
The significant settlement and use of anti-avoidance powers shows the willingness and power of TPR to pursue employers even where it involves insolvency, international factors and many parties of conflicting interests.
Employers, trustees and insolvency practitioners must be aware that insolvency does not act as a bar to the use of TPR’s powers. TPR have demonstrated that they may use its powers, acting in the interest of members and prevent schemes having to rely on the PPF for support.
Key words
FSD; USA; Canada; International; Pensions; Insolvency; Anti-avoidance Powers; S43 Pensions Act 2004.