Fresh legislation is needed following latest Nortel-Lehman case

Reaction to the High Court judgement on Lehman-Nortel has made a swift transmission from shock to denial.

Even before Mr Justice Briggs had put pen to paper, further appeals were widely speculated, and the case looked set for a higher court.

The strength of the judge’s conclusion – that a financial support direction (FSD) constitutes an expense in administration – has already provoked calls for the law to be amended. And the result surprised the schemes as much as the administrators.

“I’d hoped that at the minimum it would be a provable claim,” says PricewaterhouseCoopers partner Jonathan Land, who advises the Nortel scheme. 

“Something in my mind says I can still see it ending up there. But from a pension scheme perspective this is the best possible answer.”

The judge admitted conferring on FSDs “superpriority” as expenses was “both potentially unfair to the target’s creditors and inconsistent with a decision taken in 2004 not generally to elevate employees’ pension claims above the claims of the creditors”.

Though he accepted admitted the FSD “does indeed have a potentially adverse impact” on rescue culture, he was persuaded it could be largely dealt with through priority orders in administration.

He also said the notion that the insolvency of a target could completely nullify this power of restitution seemed to “fly in the face of commonsense”.

Insiders say the judge was effectively forced to choose between the two extremes of FSDs being neutered by an insolvency event, and giving FSDs the priority.

While the emotive arguments of the regulator’s counsel may have carried the day, he verdict could have a negative impact on the administration process.

Banks will be affected by expenses coming out ahead of their floating charge, and unsecured creditors will be placed behind the pension scheme.

“An employer, who you would think would have the primary liability, is only provable if it goes down the tubes,” a person close to the case says.

“But you might find some remote group company who has some association with the pension scheme, and it is an expense in their administration. How can that be right?”

The regulator put out a second statement saying “it is not in anybody’s interests if the administration process is not properly funded”, and pointed to certain “mechanisms” to prevent this in the judgement, such as priority orders.

In his statement, Justice Briggs found there was no reference to insolvency in the FSD rules, which set up the regime, or in the relevant sections of the 2004 act. But he concluded the law, as written, intended insolvency legislation – including priority orders – would “sufficiently deal with its consequences”.

According to many inside and outside this case, the insolvency legislation has not provided a sufficient answer, and fresh legislation is needed. But should those seeking financial support be held to account for the legal landscape?

The regulator is not responsible for the relationship, or lack of relationship, between its powers of restitution as established in the Pensions Act 2004 and rescue culture.

The High Court judgement, for however long it is allowed to stand, is a victory for the schemes, and a vindication of their right to pursue their members’ interests through legal channels, regardless of how fit for purpose those channels may be.

Land adds: “It’s a good result and it has come quickly, and it is one step on the way to helping the pensioners.”