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Nortel & Lehman appeal: the verdict 14 October 2011

The Court of Appeal upheld a ruling that pension contribution claims will now rank more highly in an insolvency than other creditors.

It ruled against Ernst & Young and PricewaterhouseCoopers - who were appealing a previous ruling on behalf of the two bankrupt firms.

Under section 75 of the Pensions Act, any company that has sponsored a final salary or defined benefits pension scheme is expected to make up the shortfall between the scheme’s assets and the liabilities.

Preferential treatment

Today’s ruling means E&Y must now give preferential attention to the £2.1 billion of scheme liabilities from Nortel Networks.

PwC, meanwhile, will need to consider the £125 million in pension scheme liabilities it is processing from Lehman Brothers International Europe.

Angela Dimsdale-Gill, partner at Hogan Lovells, said much has been made of this decision being a disaster for rescue culture, but it is important to consider the alternative.

She explained: “If the finding had been that a Financial Support Direction (FSD) against an insolvent target disappeared down a black hole, it would have been equally disastrous for members of pension schemes up and down the country.

“They are sufficiently vulnerable as it is. You should fund your pension scheme on a proper basis [because] running up huge deficits is in no-one’s interests in the long-term.”

Far from over

Richard Williams, head of restructuring for Pinsent Masons, said the Court of Appeal had come to a similar view as the original judge.

He explained: “The judgement may encourage trustees of pension schemes to take a more aggressive negotiating stance since contribution claims can now rank highly in an insolvency to the detriment of other stakeholders.

Williams added that it was likely these cases would proceed to the Supreme Court if the consequence of the current legislation on insolvency is not clarified by Parliament in the meantime.

 

 

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