The trustees of the Nortel UK pension scheme edged closer to repairing its deficit last week as they reached a consensus with other stakeholders and creditors on how to divide their insolvent sponsor’s residual assets.
Lawyers acting for the scheme said the settlement and a 2015 ruling, handed down by courts in Canada and the US, could set a precedent for dealing with the insolvency of a multinational corporation.
Some suggested the amount to be received may even allow it to secure benefits for its members above those guaranteed by the Pension Protection Fund.
Since telecoms giant Nortel declared international bankruptcy in 2009, its $7.3bn (£5.99bn) assets have been held in escrow, while what the courts called "scorched earth litigation" unfolded between stakeholders to decide how they could be apportioned.
We welcome this important step on the road to this being resolved and members receiving money
PPF spokesperson
The 33,000 members of its UK defined benefit scheme, which remains in the PPF assessment period and had a deficit of £2.1bn in 2009, have endured a long wait to establish whether they would enter the pensions lifeboat.
Now a new agreement between key stakeholders, made possible by a landmark 2015 ruling that assets should be divided on a modified pro-rata basis, has brought the end of the dispute within sight.
How much will they get?
Slightly more than $1bn (£812.9m) would be allocated to service the debts of Nortel Networks UK Limited. The scheme is the chief creditor of the sponsor.
Parties outside the UK will not be allowed to challenge discussions over the final sum paid.
The settlement’s execution is subject to approval by creditors and courts in the US, UK and Canada.
Angela Dimsdale Gill, head of pensions litigation at Hogan Lovells, who represented the scheme, said the trustees were pleased with the agreement, and that it could have lasting implications.
“It is possible that it will be held up as a model or precedent in future international insolvencies,” she said.
She said global integration was an increasingly present feature of the business world, but noted: “Having said that, the circumstances of Nortel were exceptional, and the degree of integration of the global network of companies was at the extreme end.”
A spokesperson for the Pensions Regulator said: “We welcome this important step on the road to this being resolved and members receiving money. However, it is too early for us to comment on possible amounts.”
Even at its 2009 level the scheme’s total section 75 debt, or the amount required to buy out the liabilities in full, is greater than the amount the scheme is likely to receive.
But with the payout, the trustees may yet be able to insure a level of benefits above that provided by the PPF, similar to arrangements reached with the Halcrow scheme.
“Reading between the lines [of the latest announcement] there’s a chance they might get that,” said Mark Smith, pensions partner at law firm Taylor Wessing.
He pointed out that even if the scheme cannot achieve this, the injection of cash into the PPF would be welcomed by the lifeboat.
Little room for regulatory improvement
Despite the positive outcome for the Nortel scheme and its members, the protracted dispute has raised questions about the regulator’s ability to secure benefits upon international insolvency.
The regulator issued financial support directions against Nortel companies in 2010, which were subsequently upheld by the UK Supreme Court as provable debts in 2013.
But US and Canadian courts rejected the claim, based on the fact it was issued after the firm’s Canadian bankruptcy protection came into effect.
“When you’re going against someone who’s not based in your home country you’re subject to the laws of their home country,” said Smith, arguing that legislative change in the UK would be unlikely to improve regulatory clout in this area.
What we can learn from the Nortel ruling
Comment: July saw judges in the US and Canada confirm their May 2015 groundbreaking decision to distribute insolvent Nortel group's remaining assets to worldwide creditors on a modified pro rata basis.
He pointed to previous regulatory successes in dealing with international insolvency, such as the granting of financial support directions against subsidiaries of Lehman Brothers.
“I think there they were probably able to mount strong claims against UK companies associated with Lehman,” he said.
Alternatively, it is still unclear in practice whether the regulator’s powers would be valid if issued against solvent companies overseas, who cannot be afforded bankruptcy protection.
“We don’t yet know... how the US and Canadian courts will react to that,” said Smith.
