Maintaining flexibility and pragmatism in pan-European and global insolvencies—Re Nortel Networks UK Ltd

As the Nortel Networks saga continues, Fraser Ritson, partner, and Laura Newbery, associate, at Addleshaw Goddard LLP, remark on the court's approach in this pan-European insolvency decision

Original news

Re Nortel Networks UK Ltd and others [2015] EWHC 2506 (Ch), [2015] All ER (D) 05 (Sep)

The Chancery Division made several orders, following the filing for insolvency protection in 2009 by the companies in the Nortel Group, in respect of the net proceeds from the global sale which were being held in escrow pending agreement or court determination as to how the proceeds should be allocated among the parties. The orders in general permitted the administrators in the UK appointed pursuant to the Insolvency Act 1986 (IA 1986) and the Insolvency Rules 1986, SI 1986/1925 (IR 1986), to declare dividends to its unsecured non-preferential creditors and to promulgate company voluntary arrangements in respect of the relevant companies in the group.

What was the background to the hearing?

On 14 January 2009 the Nortel Group was placed into insolvency procedures in Canada, the US and England. The companies in administration in England were incorporated in jurisdictions across Europe, the Middle East and Africa (EMEA companies) but the centre of main interests of each was in the UK.

The business and assets of the Nortel Group were sold during 2009 and 2010. $7.3bn was paid into escrow (Lockbox) pending determination of how the proceeds should be shared among the group and its creditors.

Following a 21-day trial in the US, judgments were handed down directing how the money in the Lockbox was to be distributed.

Unlike their US and Canadian counterparts, the administrators of the EMEA companies (the administrators) had not formally adjudicated creditor claims, having no authority to do so under English law until funds were available for distribution.

As adjudication of claims had commenced in the US and Canada, the administrators applied for directions to institute fair and efficient procedures for requiring creditors of the EMEA companies to submit their claims, so as to allow them to share in the allocation of the monies in the Lockbox.

The application was complicated by the need to recognise assurances the administrators had given in their proposals that local creditors would not be prejudiced by not having commenced secondary proceedings in the particular EMEA jurisdiction.

What were the legal issues that the judge had to decide in this application?

This case looked at the circumstances in which the court ought to exercise its discretion to grant permission under IA 1986, Sch B1, para 65(3) to allow an administrator to make a distribution to unsecured creditors.

The second legal issue was whether it was possible to modify IR 1986, SI 1986/1925, r 2.95-7 in relation to the proof of debt process in the administration, given the mandatory requirement that the administrators must make a distribution within two months of the last date for proving.

Thirdly, the court looked at whether it was possible for the administrators to declare a dividend in circumstances where there were pending applications to vary/reverse decisions on proofs (usually prohibited by IR 1986, SI 1986/1925, r 2.97(2)).

The application of IA 1986, Sch B1, para 66 in making ransom payments via a company voluntary arrangement (CVA) to make good the assurances given by the administrators to local creditors was also considered.

What did the judge decide, and why?

In relation to Nortel Networks UK (the only one of the EMEA companies incorporated in the UK, so not at risk of secondary proceedings), the judge decided:

• pursuant to IA 1986, Sch B1, para 65(3) the administrators are at liberty to make such distributions to its unsecured, non-preferential creditors as they consider appropriate

• pursuant to IR 1986, 1986/1925, r 2.97(2) the administrators are at liberty to declare dividends notwithstanding that there might be pending applications to the court to reverse or vary a decision of the administrators on a proof, on the basis that full provision be made for such disputed proofs

In relation to the other EMEA companies, the judge decided that the administrators of the EMEA companies, apart from Nortel Networks UK and Nortel Networks S.A. are at liberty to promulgate CVAs in substantially the terms set out in the administrators' evidence.

In relation to Nortel Networks S.A, where it was decided that secondary proceedings should be opened in France, the administrators are at liberty to promulgate a CVA providing for a claims determination mechanism and such other terms as they might think appropriate.

The reason for the orders was to allow the EMEA companies to catch up with the adjudication process in the US and Canada, in order to secure the release of the monies due to the EMEA companies from the Lockbox. Snowden J thought that this was in the best interests of the creditors of the EMEA companies as a whole.

To what extent is the judgment helpful in clarifying the law in this area?

The case demonstrates a willingness on the part of the English court to adopt a pragmatic and flexible approach when dealing with pan-European and pan-global insolvencies.

The case provides further guidance on the circumstances in which the court ought to exercise its discretion to permit administrators to make distributions to unsecured, non-preferential creditors.

The judge provided helpful reasoning regarding the use of IA 1986, Sch B 1, para 66 to permit the administrators to make payments to creditors whose claims against a particular EMEA company would be preferential under local law (endorsing the approach which had been taken in similar pan-European insolvencies) and the use of CVAs to effect the same.

What practical lessons can those advising take away from the case?

This is very much a victory for common sense. The specific facts of the case are, of course, unique but practitioners can take comfort from the degree of pragmatism and flexibility shown by the court to permit fair and efficient procedures for the adjudication of creditor claims in this long-running saga. The guidance around the circumstances in which the court is prepared to permit administrators to make distributions to unsecured non-preferential creditors is also helpful.

First published on LexisPSL Restructuring and Insolvency

Interviewed by Stephanie Boyer

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

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