Implementing a global settlement of disputes (Re Nortel Networks UK Ltd and other companies)

Implementing a global settlement of disputes (Re Nortel Networks UK Ltd and other companies)

A seven-year wait by the creditors of the insolvent Nortel group for allocation of its assets could be nearing its end after the Companies Court’s approval of a settlement deal. Alexander Riddiford, barrister at South Square, explains the court’s decision.

Original news

Re Nortel Networks UK Ltd and other companies [2016] EWHC 2769 (Ch), [2016] All ER (D) 205 (Jun)

The Companies Court granted an application by the administrators of 19 companies in the Nortel group to allow them to implement a global settlement of disputes arising in relation to the collapse of the group. The agreements comprising the global settlement had recently been executed but would only become effective if, among other things, the administrators obtained the Companies Court’s approval of the implementation of the global settlement. It was expected that the process of seeking the approval of creditors and the courts in Canada and the US would follow, leading to a distribution of assets to the various insolvent estates worldwide shortly afterwards. The Companies Court held that the global settlement was in the best interest of each of the 19 European, Middle Eastern and African (EMEA) companies in the group for which the administrators were responsible, together with their respective creditors.

What was the background to the case?

The Nortel group was a multinational telecommunications and data networking equipment manufacturer with more than 130 subsidiaries in more than 100 countries. The group collapsed in 2009.

This case was a successful application by the administrators of 19 EMEA entities in the Nortel group, each of which had been in administration in this jurisdiction since the group’s collapse, for directions under paragraph 63 of Schedule B1 to the Insolvency Act 1986 giving them liberty to implement the global settlement of the vast majority of the group’s claims. The claims settled pursuant to the global settlement include litigation in the US and Canada concerning the proper allocation among the US, Canadian and EMEA entities within the group of a multi-billion-dollar ‘Lockbox’, held in New York, containing the proceeds of sale of group assets.

What was the main issue arising?

The main issue was whether the administrators had reached the conclusion that the companies in administration should enter into the global settlement on a rational and proper basis. The court decided that they had.

What are the main terms of the global settlement proposed?

The global settlement is a complex nexus of interrelated agreements with four principal aspects:

  • the settlement of the Lockbox allocation dispute
  • the settlement of certain UK pensions claims
  • the settlement of various claims between the 19 EMEA entities in administration themselves
  • the settlement of certain claims relating to one of the French entities that is among the 19 EMEA entities in administration

What are the benefits for the EMEA companies entering into the global settlement?

There are various benefits for the EMEA companies. Some principal benefits include:

  • the avoidance of the litigation risk (including costs, delay and uncertainty), which would arise if the Lockbox dispute continued to be litigated in the US and Canada
  • the avoidance of the risk that the US and Canadian courts might reach a deadlock as regards how the Lockbox monies should be allocated
  • a good return for creditors, and
  • a return to creditors sooner than would occur if the various pieces of settled litigation had in-stead been continued with

What is the effect of the global settlement on financial support directions (FSDs) and contribution notices (CNs) against the EMEA companies and on the debt due from the English subsidiary under section 75 of the Pensions Act 1995?

The pensions settlement, which is one of the four aspects of the global settlement, serves to settle various claims, including the dispute regarding the issue of FSDs and/or CNs between the UK Pensions Regulator, the EMEA companies and the English subsidiary’s pension scheme. As a part of the compromise, the EMEA companies which are the targets of an FSD (other than the French subsidiary) have agreed to promulgate company voluntary arrangements (CVAs) which shall include a requirement that, if post-petition interest is payable to any creditor of that company, the rate payable shall be a specified commercial rate of interest rather than the much higher statutory rate. The result of such CVAs will be that where unsecured creditors will be paid in full, any surplus monies from the Lockbox will flow to the English subsidiary in order to enhance the dividend payable by it to its pension scheme.

What are the next steps?

The global settlement is conditional on a variety of steps some of which, such as approval by the English and French courts, have now been satisfied. Further conditions remain to be satisfied prior to the global settlement becoming effective, including the approval of creditors and the courts in the US and Canada. Once all such conditions have been satisfied, a favourable return to creditors of each of the 19 EMEA entities in administration is expected.

Alexander Riddiford appeared with William Trower QC on behalf of Alan Bloom, Alan Hudson, Christopher Hill and Stephen Harris, of Ernst & Young LLP, and David Hughes, of Ernst & Young Chartered Accountants, (the administrators of the EMEA companies), instructed by Kevin Pullen and John Whiteoak, of Herbert Smith Freehills LLP. 

Interviewed by Robert Matthews. 

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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First published on LexisPSL Restructuring and Insolvency

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About the author:
Kathy specialises in restructuring and cross-border insolvency. She qualified as a solicitor in 1995 and has since worked for Weil Gotshal & Manges and Freshfields. Kathy has worked on some of the largest restructuring cases in the last decade, including Worldcom, Parmalat, Enron and Eurotunnel.