Marcus Laughton, lawyer at The Pensions Regulator, examines some of the outcomes of the long-running Lehman Brothers pension saga
The long-running Financial Support Direction (FSD) proceedings in the Lehman Brothers case ended in a global settlement which took effect on 19 August.
It is expected that the deal will provide enough cash (£184m) for scheme members to enjoy full ‘buy-out’ benefits, and the scheme will not have to enter the Pension Protection Fund.
The various target parties also agreed to withdraw an appeal to the Court of Appeal in relation to the ‘Storm Funding’ proceedings, ensuring that the first instance decision of the High Court on this matter remains the current law.
The initial FSD proceedings arose shortly after Lehman Brothers Limited (the sponsor of the pension scheme) and other members of the UK group entered administration in September 2008.
The various parties (regulator, trustees, PPF and nearly 40 targets including the US parent company Lehman Brothers Holdings Inc) have been battling it out since a Warning Notice – based on evidence obtained from the regulator’s investigations – was issued in May 2010.
The numerous hearings before various panels, courts and tribunals over the years reached double figures recently and have, helpfully, clarified a fair chunk of the law relating to the regulator’s powers.
What follows is an attempt to distil some of the more important principles from the lengthy proceedings.
The regulator stated in its recent section 89 report that it will act to protect members’ interests when it considers it appropriate to act. The four years of litigation against a consortium of lawyers acting for nearly 40 targets suggests that the regulatory body is not afraid of the battles an international insolvency brings in its wake.
The long march through the High Court, Court of Appeal and Supreme Court between November 2010 and May 2013 ended with the Supreme Court judgment that made it clear that FSDs are effective against insolvent targets, and rank as provable debts, providing clarity to the UK’s restructuring and rescue practitioners.
The High Court judgment in the ‘Storm Funding’ case – one of the examples of satellite litigation that the FSD case threw up – holds that the regulator is not confined to arguing that a crystallised section 75 debt is a ‘cap’ for sums sought on behalf of the trustees where there are multiple targets in one of the regulator’s actions.
In the Lehmans case, the deficit in the scheme had risen by approximately £55m since the day before the group entered insolvency proceedings in September 2008 and the date of the settlement.
The regulator and the Lehman Brothers trustees argued that this fact should be taken into consideration by the judge when deciding if the section 75 debt was to be interpreted as a historic measurement or a ceiling on the regulator’s ambition. The fact that the targets collectively agreed to pay full buy-out sums to the trustees before withdrawing their Court of Appeal proceedings suggests that the financial bar for making payments in support of pension schemes has been raised significantly.
Role of the trustees in proceedings
The Court of Appeal upheld an Upper Tribunal ruling that trustees of schemes are correctly defined as ‘Directly Affected Persons’ under the Pensions Act 2004. This means they may be represented in proceedings initiated by the regulator and beyond.
The Lehmans targets had argued that trustees merely duplicated work done in preparing for cases by the regulator. The courts found that trustees of pension schemes had a very real interest in being represented and making representations, and that while they often had a community of interest with the regulator, their position was not reduced to being merely duplicative of its efforts.
Another argument rejected by the Court of Appeal was one raised after the Determinations Panel decided not to issue FSDs against a number of the targets on the Warning Notice.
The lawyers for those targets argued that the Upper Tribunal was ‘timed out’ from coming to a different decision (and thus issuing FSDs to these targets) because of a two year limitation period for The Pensions Regulator to act set out in the Pensions Act 2004. The Court of Appeal decided that this time limit did not apply where, as here, the Upper Tribunal was reviewing a decision to issue FSDs which had been originally made within the two year time limit – even if that time limit had expired by the time the Upper Tribunal came to make its decision.
The regulator fully supports the outcome of this long-running case, which demonstrates its commitment to initiating and pursuing regulatory action over a long period of time and at all judicial levels, and clarifies a number of legal points around the scope of its powers.
Joanne Wright, partner and personal insolvency specialist at Begbies Traynor, discusses the possible effects a rise in interest rates could have on UK insolvency figures
Last week the Governor of the Bank of England announced that he is prepared to increase interest rates, despite it being widely reported that any rise in household costs could lead to many people experiencing significant financial difficulty.
Recent figures from the Insolvency Service reported that the number of insolvencies during the second quarter of this year rose for the first time since 2010, with 27,029 people declaring themselves bankrupt or entering into an Individual Voluntary Agreement (IVA) – a 5.1% increase compared with the same period last year.
Many people within the industry believe that a gradual rise in interest rates over the next two years could lead to an even greater increase in personal insolvencies.
One reason for this is that historically low interest rates over the last five years has led to many people living in an artificial bubble of financial limbo, with low mortgage repayments increasing the amount of disposable income they have to spend.
At the same time low interest rates has also seen a rise in people using credit cards to supplement their lifestyles. Research by Visa Europe has found that household spending increased for the 10th month in a row in July, with consumers spending 2.4% more on their cards compared with the same month last year.
The leisure sector in particular has experienced a significant increase, with spending in bars and restaurants rising by 8.1% compared with July 2013. The latest Red Flag Alert Report from Begbies Traynor also found that 22% fewer bars and restaurants experienced significant financial problems in the second quarter of 2014, compared with the first quarter of 2014.
Taken together, this is a strong indication that as the economy continues to grow many people are continuing to indulge themselves rather than saving for the future.
Consumers are also making larger, more extravagant purchases. One sector which has seen a boom is car sales, with figures from the Society of Motor Manufacturers showing that new car purchases in the UK have risen by 10% in the last 12 months, with four out of five new car purchases being made using credit.
This could indicate that as confidence grows, some people are returning to pre-recession spending habits and borrowing money to indulge themselves and supplement their lifestyles. Although an increase in consumer spending does have positive effects on the UK economy, an earlier than expected rise in interest rates could force people into financial difficulty as they will have less disposable income to meet the increased costs of their credit commitments.
According to research by Economics Help, raising interest rates by just 0.5 per cent will increase the cost of a £100,000 mortgage by £60 per month; this could have a significant effect on many peoples’ disposable income and push those who are already struggling, or may not have planned for a rise in household expenditure, into an insolvency process.
A rise in interest rates could also affect those who have already entered into an IVA, as even the slightest rise in mortgage rates could mean that many people do not have the money needed to meet their monthly repayments – this could force them to declare themselves bankrupt as they no longer have the means to meet the terms of their agreements.
An interest rate rise could also stall movement in the housing market as individuals shelve plans to move up the housing ladder. Those with current mortgages that are only sustainable because of low interest rates will be viewing the short term implications with trepidation.
At this moment in time, the date of any rise in interest rates is purely speculative, and once implemented is likely to be small, increasing gradually over time. However, it is important that people plan for the future now in order to ensure that they will be able to cover household expenses and any debts that they have, as a lack of planning may lead to more people experiencing financial difficulty once their disposable income is reduced.
Two things however are certain – historically low interest rates will rise at some point, and living on credit is not a sustainable, long-term solution for anyone.
What the graphic shows: The number of administration appointments won by the top performing firms during the month ending 31 July 2014 across England & Wales as listed in The London Gazette.
FRP Advisory topped the chart for the second month running, dominating administration appointments in July with 17 cases (an 89% increase month-on-month). 10 of the firm’s appointments came from the administration of the No Saints Group Limited – a group of companies operating a series of nightclubs and entertainment venues, primarily across the south east of England.
Begbies Traynor, Duff & Phelps, and Resolve Partners all collected nine appointments apiece during the month, ahead of Baker Tilly which was appointed to seven.
Begbies Traynor continued to perform strongly as the firm collected administration appointments across a range of market sectors and regions. Begbies Traynor has been appointed to 85 administrations so far in 2014, more than any other business recovery firm.
Of the ‘Big Four’ firms, KPMG and Deloitte were both appointed to five administrations each during July, including the administration of Unipart Automotive Limited [link] (KPMG). EY collected four appointments through the administration of the Zog Brownfield Ventures Limited group of companies, while PwC was appointed to two administrations.
There was a small increase of 15% in total administrations between June (125 cases) and July (144) – however the July 2014 level is still 19% lower than a year previously (July 2013: 171).
The majority of sectors, including construction, property, and retail, stayed mainly flat, although there were large increases in administrations within the hospitality & leisure (750% month-on-month increase) and manufacturing sectors (92%).
There were no administrations from the financial sector during July (down from six in June), while there were no legal-based administrations for the second consecutive month.
Partner, Hogan Lovells
The High Court handed down judgement at the end of July 2014 in the case of Laverty and others as Joint Liquidators of PGL Realisations PLC and others v British Gas Trading Limited. In an important decision for the insolvency industry, it was held that the statutory deemed contracts regime for gas and electricity supply did not give utilities companies priority over other creditors.
The case concerned the Peacocks group, which operated a retail chain when it collapsed into administration in January 2012. At that time, one Peacocks company held a series of gas and electricity supply contracts with British Gas on behalf of the group. It was a term of the contracts that if the company appointed administrators then British Gas could terminate the contracts, which it did shortly after the appointment.
The Electricity and Gas Codes provide that where there is no express contract in place, one will be deemed to exist for any supply of utilities made. Under the Gas Code, the deemed contract is between the supplier and the “consumer”.
Under the Electricity Code it is with the “occupier” or “owner” of the property. When British Gas terminated the express contracts, by virtue of the leases in place, one or other of the companies in the group fell within those definitions and so deemed contracts were imposed on them.
The terms of deemed contracts are for the relevant utilities companies to determine. British Gas’ terms included that the deemed contract would continue, even after the customer had vacated the premises supplied with gas or electricity, until someone else that British Gas accepted as a customer took over the supply. When the administrators sold the business in February 2012, they closed the remaining 224 stores (177 of which were supplied by British Gas) and ceased trading. Although those stores were by that stage empty, the deemed contracts continued.
The administrators accepted that the cost of utilities supplied to the stores while they continued to trade from them was an expense of the administration (on the basis that the administrators were deriving benefit from the supplies). However, as the landlords of a substantial number of the closed stores did not accept the administrators’ offer to surrender the leases, significant additional charges (comprising fixed standing charges and ongoing usage at some stores) accrued after the administrators had vacated.
The administrators contended that any charges accruing once the stores had been vacated ranked as unsecured claims provable in the administration. British Gas claimed that the ongoing charges, totalling about £1.2m, were automatically an expense because the deemed contracts had arisen during the administration, even if the charges had not been incurred as a result of something done by the administrators or for their benefit. The dispute was taken to Court.
The Chancellor of the High Court, who heard the case, applied the test set out by Lord Neuberger in the landmark Supreme Court decision of Nortel GmbH from July 2013. The Court concluded that if utilities contracts are terminated after the company enters insolvency and new contracts are deemed to arise under statute, liabilities under those deemed contracts are not treated as administration expenses simply because they arose during the administration. Although technically new contracts, the deemed contracts had arisen out of a pre-existing “obligation” within the meaning of the Insolvency Act 1986, as the companies had fallen within the scope of the deemed contracts regime as soon as the group took supplies from British Gas, which was before the administration. Equally, there was nothing in the Gas or Electricity Codes, or in the nature of the liability, to indicate that Parliament intended that the liabilities under the deemed contracts should rank as anything other than provable debts (i.e. unsecured claims). On that basis, the charges were provable and not expenses of the administration.
If the Court had found that the deemed contract charges were automatically an administration expense, utilities companies would be able unilaterally to achieve priority over other creditors in respect of supplies that were never requested and made to premises after administrators had closed them. For a property-heavy business like a retailer, that could be a significant liability. In certain circumstances it could make an administration unfeasible.
The status of a leasehold property after an administrator has closed it down, has no further economic interest in it and has offered a surrender of the lease to the landlord, remains an area of frustration, as this case highlights. Unless there is a new tenant ready to move in, a landlord will often not accept the offer of surrender for months or even years in order to avoid liability for ongoing rates on the empty property. This leaves the company exposed to various statutory liabilities associated with property occupation like deemed utilities contracts, Council Tax, the Occupiers Liability Act and environmental legislation.
From the landlords’ perspective, they will still want the property to be insured, secured and have a utility supply (for example to power the alarm and enable any roller shutter on the entrance to be operated). In future, when properties are vacated by administrators, it is possible that utilities companies may seek to disconnect electricity and gas meters unless the landlord agrees to pay for ongoing supplies.
The decision will be welcomed by supporters of the rescue culture and could be seen as continuing the trend set by Nortel GmbH and Games Station from earlier this year that, to quote Lord Neuberger, “all possible liabilities within reason should be provable”.
Mathew Ditchburn is a partner in the real estate disputes team at Hogan Lovells and acted for the administrators and liquidators of the Peacocks group.
Radical steps should now be considered to help women working as insolvency practitioners in a profession overwhelmingly dominated by men, says Fiona Hotston Moore, forensic partner at Ensors
|Fiona Hotston Moore
It is not a balanced occupation where 79% of the workforce is male by the mid-point of a working life, as is the case with insolvency practice. Furthermore, it’s important that the profession reflects the demography of its clients.
Temporary quotas, however hard they might be to enforce, may even be necessary to ensure that there are women able to offer a mentoring ‘ladder up’ for juniors, and be role models for schools to encourage new female entrants.
Firms that introduced quotas as best practice would certainly send a powerful signal that the status quo is not acceptable. In the last year both the European Central Bank and Lloyds Bank have announced gender quotas for top levels of management.
Action is needed because however reassuring the talk of equality and diversity in the profession, and there are certainly plenty of finely worded corporate documents produced, the statistics tell a different story.
Just under half of all insolvency practitioners under the age of 35 are women. But by the age of 46 most are men – a startling reversal.
Women face inflexible human resources departments and male thinking, particularly around issues such as working hours.
This creates a cycle of inaction and imbalance: fewer women being promoted and accommodated means fewer to bring others in and an entrenching of (largely male) business-as-usual inertia. Imbalance is reinforced and opportunities shrink.
As a campaigner for diversity in professional services, time and again I hear women complain of being denied promotion because they are not part of a male ‘golf course’ networking circuit, or being subtly written-off when they have children. Time and again I also hear that progress is being made.
But ‘progress’ should not use the past as a benchmark for the present. Situations can be better than they were but still not good enough. And a commitment to diversity is not the same as delivering it.
Perhaps not many jobs really get secured on the 19th hole these days but the point is that women generally build less professional networking into their lives than men. Many also feel side-lined from promotion if they leave, even for a few years, to look after children before returning.
I am not suggesting that deliberate female exclusion zones exist around insolvency. We are not living in the 1950s. But I do think that unconscious bias remains amongst men and human resources departments, which in some respects is more insidious and harder to tackle than visible discrimination.
Once you cut through the good intentions and stated aims, the stark reality hits. Women are not making it through in numbers which either represent their gender or the numbers in the profession at earlier points in their careers.
Only 22% of insolvency firm managers at partner/chief executive officer level and above were female in 2008. It is hard to imagine that has changed much since.
Women do take career breaks for children, of course. But what is striking is how little seems to be done to attract them back afterwards. Insolvency practitioner status is one of the hardest professional qualifications to achieve, so what a waste not to encourage people back after a career break.
A membership survey by R3 in 2013 found that of those who thought more could be done by their firms to promote diversity, 43% felt uneasy because the idea ran counter to promoting on merit.
This is a familiar argument: I agree that you do not end one type discrimination by introducing another. But temporary quotas might just be needed to jump-start change. A level playing field would not, I am certain, become a formidable hill ever again.
What is clear is that not having quotas, career breaks, mentoring and role models mean that whilst commitments to diversity are on paper, that is unfortunately where they usually stay.