The Nortel Networks UK Pension Plan is set to receive more than £1bn in assets from its insolvent sponsor Nortel in the coming months, after US and Canadian courts agreed to open a $7bn (£5.4bn) escrow ‘lockbox’.
Negotiations have run since Nortel filed for bankruptcy protection in January 2009, and the ensuing struggle had cast doubts over the Pensions Regulator’s ability to pursue parent companies in foreign jurisdictions. Lawyers said the outcome now sets a positive precedent for future efforts.
Major creditors of Nortel had agreed a modified pro-rata sharing basis for the assets held in escrow in October, but the flow of funds to the bankrupt communication giant’s UK division had been stalled by an appeal led by two former employees in Canada.
There was no reason why UK employees, who had helped create the worldwide wealth of Nortel, should be limited in terms of their recovery just to the residual assets in the UK company
Angela Dimsdale Gill, Hogan Lovells
Judges on Friday gave the go-ahead to begin transferring funds from the lockbox, with $44m (£34m) put aside in case the pair are successful. Such a result is only estimated to reduce the trustees’ claim by $2m (£1.5m).
Once the UK sponsor has received its 14 per cent share of the assets, a British insolvency process will begin, with the scheme largest among the company’s creditors.
Scheme could avoid PPF
Despite uncertainty over the final amount to be received and its impact on the UK scheme’s fortunes, trustees informed members in April that they would proceed on the assumption that they could secure better benefits than promised by the Pension Protection Fund.
The scheme reported a £2.1bn deficit in 2009, but the cost of securing PPF benefits is expected to be significantly lower.
A PPF spokesperson said: “We are pleased that a settlement has been agreed, which we believe is in [scheme members and levy payers’] best interests.”
The spokesperson added: “The scheme will remain in PPF assessment while the trustees investigate the possibility of a buyout for members, who remain protected, receiving compensation at PPF levels.”
Jonathon Land, who advised the scheme as head of PwC’s pension credit advisory team, said that with the US courts agreeing to the opening of the lockbox, the chances of Nortel members receiving better benefits than are guaranteed by the PPF are higher.
“As every day goes past I think we feel more comfortable or hopeful of getting out [of the lifeboat],” he said.
The amount of assets the scheme was thought to be due was originally estimated at more than $1bn, but was revised up to £1bn or more as the picture became clearer.
More powers for regulators
Land praised the PPF’s partnership with the scheme throughout the process, but said the extent of the regulator’s overseas powers still made it difficult to recover money.
In countries with robust regulatory frameworks, he suggested that reciprocal agreements to extend the UK’s moral hazard powers could help in future.
“You almost wonder if they couldn’t reach a common understanding... we do it in other areas, so why couldn’t it happen here?” he asked.
Precedent could help UK schemes
Hogan Lovells' head of pension litigation Angela Dimsdale Gill, who also advised the Nortel trustees, praised the resolve of the board, and added that the solution may set a level of international precedent for dealing with insolvent companies, where they are as globally integrated as Nortel.
Nortel “didn't treat its assets anywhere as belonging to any one company in any one jurisdiction. In the litigation therefore we argued that there was no reason why UK employees, who had helped create the worldwide wealth of Nortel, should be limited in terms of their recovery just to the residual assets in the UK company,” she said.
“Since the pattern these days is that companies are increasingly 'globalised', it may well be that the Nortel precedent is referred to in another such case.”
Mark Smith, partner at law firm Taylor Wessing, agreed that the approach taken by the US and Canadian courts could be replicated in future.
“The pro-rata basis of distribution... is a fair and simple outcome in the context of a business that operated globally without really taking account of legal boundaries,” he said. “You hope that there would be quite a lot of pressure to continue with this kind of arrangement.”
This precedent might avoid the need for a reciprocal agreement between the UK regulator and North American counterparts, which he cautioned would need changes in the law, rather than simply a decision from the regulators concerned.
