UK Supreme Court rules on priority ranking of pension liabilities in company insolvencies

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On 24th July the UK Supreme Court handed down its unanimous decision in relation to the LBIE/Nortel appeal, overturning the previous Court of Appeal and first instance judgments.

A link to the judgment is below:

http://www.supremecourt.gov.uk/decided-cases/docs/UKSC_2011_0259_Judgment.pdf

In summary, the Supreme Court ruled that where the UK Pensions Regulator issues a Financial Support Direction ("FSD") or Contribution Notice ("CN") against a target company in relation to a defined benefit pension scheme ("DB scheme"), whether before or after the company's entry into administration, such CN or FSD claims will rank as "provable debts" in the administration and will rank equally with the company's unsecured creditors.

The decision reverses the previous position, which created an anomaly under which liabilities relating to an FSD or CN issued against a target company in relation to its DB scheme before its administration were considered to be provable debts for the purposes of an administration, whereas those DB scheme liabilities relating to an FSD or CN issued after its entry into administration were considered to be expenses of the administration. The effect of this treatment was to prioritise such post-administration FSD and CN claims above both unsecured creditors and floating charge holders.

The significance of this decision is that UK administrators will no longer need to manage the risk of having insufficient assets available to meet the expenses of the administration and can concentrate on achieving the aims of the administration, which can include rescuing the company as a going concern. DB schemes are likely to see greatly reduced recoveries in the administration as a result. The same principle will be applied by extension to DB scheme liabilities in a company's liquidation.

The importance of the decision for investors in stressed or distressed companies or groups of companies is that there is no longer a risk to an investor's floating charge security as a result of DB scheme FSD or CN liabilities accruing against a company after its insolvency and ranking above that floating charge security. DB scheme FSD or CN liabilities, whether accruing before or after a company's insolvency, will always rank as unsecured debt only.