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In the matter of the Nortel Companies On appeal from the Court of Appeal Civil Division (England and Wales)
Whether, in circumstances where a Financial Support Direction (“FSD”) or a contribution notice (“CN”) under the Pensions Act 2004 is issued after a company has gone into administration or insolvent liquidation, it imposes any, and if so what, obligation on the company and its office-holders.
The cases consider the way Parliament intended the pensions and insolvency statutory regimes should interact.
In Liquidation and Administration (where there is no possibility of rescue) the insolvency legislation specifies the order of priority of the insolvency (Insolvency Act sections107, 115, 143, 175, 176ZA, 189 and paras 99 and 66 of schedule B1 and Insolvency Rules 2.67, 2.88, 4.181 and 4.218) as:
The administrators of 20 companies in two groups made court applications for directions as to the effect of the FSD regime created by the Pensions Act 2004 upon companies in administration or insolvent liquidation. At first instance, Briggs J held that (a) the liability arising under a CN to a company in administration will rank as an administration expense, (b) the liability arising under a CN issued to a company in a liquidation following an administration will rank as a liquidation expense if the FSD preceding it was issued while the company was in liquidation, although if the FSD preceding it was issued while the company was in liquidation any liability arising under the CN will be a provable debt in the liquidation, and (c) an FSD, whether issued to a company in administration or in a subsequent liquidation, imposes an obligation on the company, to be performed by the administrator or liquidator, to comply with the FSD by putting in place reasonable financial support for the scheme within the period specified in the direction. The Court of Appeal upheld the order of Briggs J.
The question was, specifically, would the liability under such a requirement rank (a) as an expense of the targets’ administration, (b) pari passu (i.e. equally) with the target companies’ other unsecured creditors, or (c) as neither?
Under option (a) the liability would rank ahead of the unsecured creditors, and may well be paid in full; under option (b) it would rank equally with those creditors; under option (c) it would rank behind them, and would probably be worthless. Briggs J and the Court of Appeal concluded that option (b) was not open to them, and preferred option (a) to option (c) that is treating the pension contribution as an expense of the insolvency.
The Supreme Court in its ruling today instead preferred option (b) and therefore unanimously allowed the appeals to the extent of declaring that a target’s liability under the FSD regime, arising pursuant to an FSD issued after the company has gone into administration, ranks as a provable debt of the company, and does not rank as an expense of the administration.
The Court of Appeal had considered itself constrained by previous authorities including Re:Toshoku Finance UK PLC  1WLR 671 but the Supreme court disagreed with the lower court’s interpretation of that case. Whilst the parties in the Nortel cases had agreed the debts were provable debts, the point was fully argued in any event, and the Supreme Court considered it. They considered whether if the FSD did not give rise to a provable debt within Rule13. 12 where the CN is issued post insolvency, could it still come within “charges and other expenses incurred within the course of the administration” under rule 12.2, and more particularly “any necessary disbursements ….incurred by the Administrator” for the purposes of rule 2.67 (1)(f) (4.128 for liquidations).
In the Court of Appeal judgment at  Bus LR 766, para 146, Briggs J said that Lord Hoffmann’s speech in Toshoku established as “a general rule” that: “[W]here by statute Parliament imposes a financial liability which is not a provable debt on a company in an insolvency process then, unless it constitutes an expense under any other sub-paragraph in the twin expenses regimes for liquidation and administration, it will constitute a necessary disbursement of the liquidator or administrator. That is the general rule, whether the statute expressly refers to companies in an insolvency process as being subject to the liability, or whether the statute achieves the same result by using a criterion for liability which is insolvency neutral. Any other conclusion would in my judgment attribute an excessive weight to the linguistic method by which different legislation achieved the same result, namely that the statutory obligation in question is a liability of a company in an insolvency process.”
Lord Neuberger said that “While it is fair to say that some observations of Lord Hoffmann in Toshoku, if read on their own, may appear to support that “general rule”, I consider that Briggs J’s summary amounts to an incorrect statement of the law. In my view, the general guidance given by Lord Hoffmann in Toshoku is to be found in para 46, where he said that “the question of whether [any particular] liabilities should be imposed upon companies in liquidation is a legislative decision which will depend upon the particular liability in question”.
So whilst the Supreme Court did not overrule the decision in Toshoku it did clarify that its extent is limited only to those liabilities that the wording of the particular statute in question shows was intended to be placed upon the office holder. Otherwise, the court considered that the office holder is liable for as an expense for those costs incurred for the use of the property in question. On this basis, there was nothing in the Pension Act 2004 to show that there was any intention for an office holder to become liable for the pension deficit liability and it would be surprising if Parliament had intended for the pension deficit to rank ahead of other unsecured creditors. The court had already satisfied itself that on the wording of Insolvency Rule 13.12, it was possible for the pension deficit liability to be a provable debt.
This decision restores order and gives some clarity to the position of insolvency expenses. The judgment that it is necessary to show that the particular piece of legislation has to impose the liability on an office holder is to be welcomed as avoiding the possible situation of their being many statutes or charges which are silent on the effect of insolvency and the prior interpretation of Toshoku had given those a status as expenses within an estate which many felt they should not have. That particular issue should now be resolved.
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