UK - The Court of Appeal has ruled in favour of The Pensions Regulator in the Nortel/Lehman Brothers legal challenge.
The judgment, released this morning, upheld the original high court decision that the liabilities are an expense of the administration and the trustees retain their super priority status as creditors above other unsecured claims.
The ruling, which is expected to go on to the Supreme Court, means contribution notice liabilities may be recovered as an expense in an insolvency.
Allen & Overy pension partner Maria Stimpson said: "The decision is disappointing and unfortunate for the UK's business rescue culture/reputation, but it is not a surprise - the clear view of Briggs was that a legislative change was required. It is almost bound to be appealed to the Supreme Court and so isn't likely to be the end of the story."
Mayer Brown partner Martin Scott said: "When the High Court judgment was announced, the industry cited its ‘winners and losers'- the ‘winners' being pension trustees whose hand could be strengthened in restructurings by the ‘super priority' status of FSDS and CNS.
"Months down the line however, it is unclear that there are any winners - the reduced pot available to fund rescues will harm all creditors and it is yet to be seen if it leads to an improvement in the overall position for pension scheme members - even if payments are ultimately made pursuant to the FSDS that are imposed, these may not be enough to take members' benefits above PPF levels."
Stimpson added: "In recent years there's been a lot of debate about whether The Pensions Regulator's bark was worse than its bite - the tables have now completed turned, and the regulator's now showing its power in a way which has taken the industry by surprise.
"It remains unclear whether the government will legislate to 'reverse' the consequences of this decision or whether it will it take the insolvency of a massive company with a huge pensions deficit to force a knee-jerk reaction?
"It's important that these issues are resolved. We would expect the regulator to fight to protect pension scheme benefits and take every action possible to stop schemes ending up in the PPF - that is in keeping with the powers it has been given by parliament.
"The decision is a case of the court desperately trying to give effect to the regime to avoid pension liabilities disappearing down a black hole. However, this decision surely goes beyond what the legislators intended.
"Furthermore, the solution they are using just won't work where the insolvency is being dealt with under the laws of another jurisdiction. Surely now the government must accept the regime needs recasting to make it work properly?"
Hogan Lovells acted for the trustee of the Nortel pension scheme and for the Pension Protection Fund.
It said in a statement: "Our client, the trustee of the Nortel Scheme, is delighted with this decision. It helps very considerably to shore up the position of the members of the Scheme and the security of their benefits. It also ensures that in appropriate cases, companies within a corporate group which ought to contribute towards its pension scheme are made to do so.
"The regulator's power is particularly important when corporate groups collapse, as was the case in Nortel, because at that point there is a real risk that the sponsoring employer company alone will not be able to cover any scheme shortfall which exists."
TPR executive director for DB funding Stephen Soper said: "We welcome the clarity that this ruling brings in respect of our power to issue a financial support direction to insolvent as well as solvent companies. In particular, this ruling further supports the claims of the Nortel and Lehman pension trustees in their respective administrations.
"It is important to note that this judgment does not change our approach to seeking financial support for a pension scheme. We are required by law to act reasonably and have regard to the interests of those directly affected by our powers.
"We recognise the importance of the UK having an effective restructuring and rescue process and have no intention of frustrating its proper workings."
PwC partner Jonathon Land advised the Nortel pension plan trustees on the case.
He said: "Today's Court of Appeal ruling is highly significant and impacts the Nortel pension plan, and pension schemes more widely.
"The Nortel case judgment will improve the position of the pensioners who are currently negotiating with US bond holders over the split of $7.5bn of cash realised from the sale of global assets."
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