What we can learn from the Nortel ruling

But what does this decision mean for the UK pension scheme and, more widely, the effectiveness of the Pensions Regulator’s moral hazard powers?

The Nortel group was a global, integrated telecoms giant which went into insolvency in January 2009.

From mid-2009 onwards Nortel’s assets were sold, generating $7.3bn (£4.7bn), which is to be held in an escrow account in New York while decisions are made about how the assets will be distributed.

In the UK, Nortel sponsored a defined benefit pension scheme with 33,000 members. At the time of the sponsor’s financial collapse, the UK scheme had a buyout deficit of £2.1bn and it represented one of the largest creditors of the Nortel group.

The scheme is now in a Pension Protection Fund assessment period. 

Litigation

The Nortel litigation with the UK pension scheme is complicated and has been protracted.  

In June 2010 the Pensions Regulator’s Determinations Panel imposed financial support directions against 25 companies in the Nortel group, on the basis that the UK employer was “insufficiently resourced” and that it was reasonable to impose such directions. 

This decision has led to further litigation both in the UK and in North America, but to date no monies have been received by the UK scheme.

The UK litigation focused on the question of where an FSD ranked in the UK insolvency process. 

The Supreme Court ruled in July 2013 that an FSD ranked as a provable debt alongside the claims of other unsecured creditors.

The May 2015 decision made legal history, but it must also come as a relief to the Nortel pensioners that the end of six years of litigation might be in sight.

The North American litigation has considered – and subsequently rejected – arguments about FSD enforceability and ruled on how the sum held in escrow should be allocated. 

The allocation decision

The allocation decision by the US and Canadian courts breaks new ground.

It is the first insolvency case where assets have been distributed cross-border according to the claims of creditors, following a cross-border trial conducted in two jurisdictions simultaneously.

Both the US and Canadian judges agreed with the arguments of the UK pension scheme trustees and the PPF that the integrated nature of the Nortel group and its assets as a whole meant that, as a matter of fairness, the proceeds of the Nortel asset sales should be shared on a pro rata basis relative to the respective levels of creditor claims against each estate.

What does this all mean?

The May 2015 decision made legal history, but it must also come as a relief to the Nortel pensioners that the end of six years of litigation might be in sight.

However, the decision relates to how the assets in the unique and specific circumstances of the Nortel insolvency are to be distributed.

It demonstrates the challenges and protracted processes facing UK pension schemes, the PPF and the regulator when dealing with an underfunded DB scheme and an insolvent employer.  

Yet the case does not provide any more clarity on the extent to which FSDs might be enforced in North American jurisdictions.

The regulator is of the opinion that FSDs (and contribution notices) can extend overseas and the Nortel determination, along with the Sea Containers, Bonas and Carrington Wire cases, are evidence of its views. 

However, to date, the regulator has not succeeded in enforcing its moral hazard powers overseas either in the EU or further afield.

Instead, the target companies have either agreed to settle – as with Sea Containers and Lehman Brothers – or the regulator has opted not to pursue the overseas entity, as was the case with Carrington Wire.

Ruth Bamforth is an associate at Walker Morris