A critical ruling in the Nortel legal case has big repercussions for international insolvencies involving pension schemes, Natasha Browne hears
The Nortel UK Pension Scheme had 40,000 members and a deficit of £2.1bn when the company went bust in 2009. During the strenuous six-year legal battle to keep the scheme out of the Pension Protection Fund (PPF), that membership reduced to around 33,000 as people died.
Last week the existing pensioners finally got the settlement their trustees had been fighting for. In a joint ruling by judges in the US and Canada, it was agreed the company's $7.3bn (£4.6bn) residual assets would be evenly distributed among its creditors. These were mainly British and Canadian pensioners and North American Bondholders.
Hogan Lovells, which represented the UK trustees and the PPF, argued throughout the litigation that the cash should be shared on a pro rota basis. Head of pensions litigation Angela Dimsdale Gill (pictured) described the verdict as a "victory by UK pensioners for Nortel pensioners on both sides of the Atlantic".
PwC has been the scheme's financial adviser since the company entered insolvency. Pensions partner Jonathon Land commends the trustees' perseverance. He says: "A lot of the credit goes to the trustees for being prepared to take the fight to the US and Canada, and to get an answer that works for the pensioners.
"It's very easy for people to abdicate responsibility and leave it to others, but to really fight for what they believe is the right thing takes courage. And I think we often forget how big a job it is to be a trustee of a pension scheme."
Experts say it is too soon to speculate on exactly how much the UK scheme will get. It is also unclear whether it will be enough to keep it out of the PPF. Nevertheless, the value of Nortel's bonds dropped by more than 20% after the ruling, according to Land. He adds: "Twenty percent of £4bn is a lot of money and that money will go to other pensioners around the world."
Squire Patton Boggs consultant Andrew Powell says the ruling was an example of clear-sighted judicial reasoning. He adds: "It showcases two jurisdiction's ability to work together in finding a simple, clear and fair outcome for unsecured creditors.
"The judges in both cases must be commended for cutting through swamp-like detail in what is an incredibly complex group of companies."
Land says the bondholders probably thought they would get a better deal than the pensioners because they were located in North America and closer to those legal systems. But he adds: "There is a rule in life, ‘never bet against the pensioners in court', because when judges go away and sit in a dark room to write, they think about the people.
"What has happened here is that the judges have ruled on a very fair system, which gives a fair return to the pensioners and a fair return to the bondholders. And that has surprised a lot of people."
The ruling is open to appeal by the bondholders. But Powell does not believe this will happen.
He says: "There was a concern at one stage that the US and Canadian courts might in some way deprioritise the UK pension scheme, the merit of their case being lost in a sea of commercial complexity. This was avoided by the courts adopting an overriding principle: to use its inherent powers to do justice between the parties.
"I doubt there will be an appeal in this case given that the outcome seems broadly favourable to all parties."
Land says an appeal would work to erode the fairness of the judgment and prove complicated because it would have to be taken in two separate jurisdictions.
He says: "The question would be; is it reasonable to appeal something that has actually been allocated on a fair process? They [the bondholders] would only appeal to try to get an unfair answer in their favour."
Lessons for the future
Last December, the trustees won a claim of £339.75m against the assets of the Canadian branch of the business. This was because it was guaranteed under a recovery plan agreed after the scheme's last triennial valuation.
But the judge rejected attempts to recoup more than £1bn - a claim which was related to a financial support direction (FSD) from The Pensions Regulator (TPR). Although the scheme could ultimately regain a similar sum through the latest ruling, the previous judgment was a defeat for the regulator.
Lawyers said the court's dismissal of the FSD brought the watchdog's ability to pursue directions overseas into question. Still, a TPR spokesman says the regulator is aware of the latest judgment and is assessing its impact alongside advisers and other affected parties.
Meanwhile, Land is optimistic last week's landmark ruling has set a precedent not just for pension schemes in international insolvencies, but international insolvencies in general. This was strengthened by the £184m settlement reached in the Lehman Brothers FSD case.
He says: "These are the two big cases which will, I think, set the ground rules for the next 20 years in terms of how any future insolvencies of international groups with pension schemes are sorted out.
"In America, you do this thing called sub-consolidation of a group of companies. They will look at a group of companies in a complex insolvency and they will allocate the assets according to the creditors. In Canada they will do the same thing. It's never ever happened in an international insolvency before; this is the first time.
"So it's not just an iconic example for pensions, it's an iconic example of how international insolvency may evolve."
Timeline of the Nortel proceedings
- October 2012: The Nortel Networks UK Pension Trust and the PPF file a claim to be determined at trial for at least $1.335bn (£827m) in the US Bankruptcy Court in Delaware
- January 2013: Representatives from the scheme and the PPF travel to Canada in a bid to secure more than $2bn (£1.2bn) from an international mediation
- Two weeks later: the group return home empty-handed after the mediation failed. The chief justice of Ontario the honourable Warren K Winkler says the efforts are “no longer worthwhile"
- December 2013: Nortel Networks agrees to pay the UK trustee $37.5m (£22.9m) to settle claims against its US firms
- December 2014: The Ontario Superior Court of Justice turns down claims relating to a potential FSD from TPR and intra-company guarantees as well as claims for ‘oppression' and ‘unjust enrichment'
- May 2015: Judges in the US and Canada rule that Nortel’s assets should be equally distributed among its creditors
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