Lehman/Nortel: FSDs Regulated

Liabilities to pension scheme trustees that derive from a financial support direction issued after administration have low ranking, alongside the claims of other unsecured creditors.

31 July 2013

Liabilities to pension scheme trustees that derive from a financial support direction  (FSD) issued after a company has gone into administration have low ranking, alongside the claims of other unsecured creditors (like ordinary trade creditors).  

The Supreme Court's decision yesterday in relation to the Lehman and Nortel schemes overturns the view reluctantly reached by the Court of Appeal and the High Court that these liabilities enjoy 'super priority' status as expenses of the administration.  If that view had been upheld, the effect would have been to rank FSD liabilities above even the claims of secured creditors e.g. a bank holding a floating charge.

Winners and losers

Yesterday's decision will be welcomed by lenders, corporate borrowers and licensed insolvency practitioners in particular.  It supports established financing practices and rescue efforts following insolvency.     

Pension scheme members, the Pensions Regulator (TPR) and the Pension Protection Fund (PPF) would no doubt have preferred super priority to be upheld.  This is because it results in greater protection for members' benefits and helps TPR meet its statutory objectives of safeguarding benefits and reducing risk to the PPF.  Even so, the outcome is better for them than if the Court had found a post insolvency FSD to have no effect at all.  

That said, if the Court had come to any other decision – by confirming super priority or finding a post insolvency FSD had no effect at all, for example  –  Parliament would probably have legislated to overturn it and give these liabilities precisely the ranking the Court now has.   

Note that the case is not about liabilities that derive from an FSD issued before insolvency: it is accepted that these rank with the claims of unsecured creditors.  Post insolvency FSDs have now come into line.  

Oversight

The question of ranking arose because steps were not taken to reconcile pensions and insolvency legislation when TPR was given power to issue FSDs and contribution notices (CNs).  The judge who first heard the case called it 'a legislative mess'.  

The section 75 employer debt regime says the debt is deemed to arise immediately before insolvency.  This ensures it ranks with other unsecured claims.  It was an oversight that there was no corresponding provision in the legislation that created FSDs and CNs.  The  courts were left to shoehorn FSDs into one category or another of admissible claim under the Insolvency Act.  Given the legislation, there were anomalies whichever way the Supreme Court turned.  It settled for the least incongruous solution – and one that will generally be seen as the right outcome.

If you would like more information, please get in touch with Richard Knight.

Key contact

Richard Knight

Richard Knight Partner

  • Head of Pensions
  • Pensions Services
  • Pensions Legal Advice

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