Lehman and Nortel group of companies going into administration - Both groups having employees receiving pension benefits
Re Nortel GMBH (in administration) and other companies; Re Lehman Brothers International (Europe) (in administration) and other companies: Supreme Court: 24 July 2013
In 2008, the Lehman group of companies (Lehman) crashed and became insolvent. In 2009, Nortel Networks UK Ltd (Nortel) went into administration. Lehman and Nortel ran pension schemes which were insufficiently resourced, with the effect that there was a shortfall in each scheme under section 75 of the Pensions Act 2004 (the 2004 act).
The Pensions Regulator (the Regulator) initiated machinery under the 2004 act to require certain other members of each group (the target companies) to provide financial support for the scheme. In the case of Lehman, the principal Lehman employer company within the UK was Lehman Brothers Limited (LBL). The Regulator issued warning notices to a number of Lehman group companies on the ground that LBL was a ‘service company’, pursuant to section 43(2)(a) of the 2004 act, and that the other requirements of section 43 of the 2004 act were satisfied.
The Determination Panel (the Panel) of the Regulator determined that a financial support direction (FSD) should be issued against six target companies in the Lehman group. In the case of Nortel, the group’s principal operating company in the UK was Nortel Networks UK Limited, which was the principal Nortel employer in relation to the Nortel scheme. The Regulator issued a warning notice to a number of target companies in the Nortel group on the basis that the scheme was insufficiently resourced, pursuant to section 43(2)(b) of the 2004 act, and that the other requirements of section 43 of the 2004 act were satisfied.
The Panel determined that a FSD should be issued, although a stay of the FSD process had meant that the FSD had yet to be issued pending the instant proceedings. The administrators of companies in the Lehman and Nortel groups applied for directions, all of which raised the same common question as to the effect of the FSD regime upon companies in administration or insolvent liquidation. The question for determination was whether, in circumstances where a FSD or a contribution notice (CN) was first issued after the target company had gone into administration or liquidation, it imposed any, and if so what, obligation on the target company.
The critical issue was whether the cost of complying with an FSD, or the monetary obligation imposed by a CN, ranked in the administration or liquidation of the target company as a provable debt under rule 12.3 of the Insolvency Rules 1986, SI 1986/1925 (the Rules), or as an expense of the administration or liquidation within rules 12.2, 2.67(11)(f) and 4.218(3)(m) of the Rules, or neither of those. The matter was heard in the Chancery Division, which held that the liability could not be the subject of proof but was payable as an expense in the administration. The Court of Appeal upheld that conclusion, finding that the liability that arose on a FSD ranked as an expense of the administration or liquidation. The decision was appealed.
The issue that fell to be determined was whether the liability under a FSD issued after a target company had gone into administration or liquidation, namely, after an insolvent event, was a provable debt under rule 12.3 of the Rules or an expense of the administration or liquidation within rules 12.2, 2.67(11)(f) and 4.218(3)(m) of the Rules. In that regard, it was necessary to determine whether the potential liability under a FSD issued after an insolvency event was capable of being a ‘liability’ falling with the ambit of rule 13.12(1) of the Rules, and, in particular, as there was no doubt that the liability which was imposed on a target on the issuing of a FSD after the commencement of its administration or liquidation was a liability for the purposes of rule 13.12(1)(b) of the Rules, because it was a ‘liability under an enactment’ within rule 13.12(4) of the Rules, the question was whether a potential obligation under a FSD was a liability which arose ‘by reason of any obligation incurred before’ the insolvency event pursuant to rule 13.12(1)(b) of the Rules.
The court ruled: (1) Normally, in order for a company to have incurred a relevant ‘obligation’ under rule 13.12(1)(b) of the Rules, it had to have been taken, or been subjected to, some step or combination of steps which (a) had some legal effect (such as putting it under some legal duty or into some legal relationship), and which (b) resulted in it being vulnerable to the specific liability in question, such that there would be a real prospect of that liability being incurred. If those two requirements were satisfied, it was also relevant to consider (c) whether it would be consistent with the regime under which the liability was imposed to conclude that the step or combination of steps gave rise to an obligation under rule 13.12.(1)(b) of the Rules (see  of the judgment).
In the instant cases, as to the first requirement, on the date that they went into administration, each of the target companies had become a member of a group of companies, and had been such a member for the whole of the preceding two years, which was the crucial ‘look-back’ period under section 43(9) of the 2004 act. Membership of a group of companies was undoubtedly a significant relationship in terms of law; it carried with it many rights and obligations in revenue, company and common law.
As to the second requirement, by the date they went into administration, the group concerned had included either a service company with a pension scheme, or an insufficiently resourced company with a pension scheme, and that had been the position for more than two years. Accordingly, the target companies were precisely the type of entities who were intended to be rendered liable under the FSD regime. Given that the group in each case was in very serious financial difficulties at the time the target went into administration, that position had been particularly telling.
In other words, the target companies were not in the sunlight, free of the FSD regime, but were well inside the penumbra of the regime, even though they were not in the full shadow of the receipt of the FSD, let alone in the darkness of the receipt of a CN. In those circumstances, the potential liabilities of the target companies had satisfied the requirements of being an ‘obligation’ under rule 13.12(1)(b) of the Rules and were therefore a provable debt within rule 12.3 of the Rules (see -,  of the judgment).
Accordingly, the appeals would be dismissed to the extent that the administrators were bound to meet the liabilities of the target companies under the FSD regime, but the appeals would be allowed to the extent that those liabilities were to be treated as provable debts (see , ,  of the judgment). T & N Ltd, Re  3 All ER 697 applied; Haine v Day  2 BCLC 517 approved; Bluck, Re, ex p Bluck (1887) 56 LJQB 607 disapproved; British Gold Fields of West Africa Ltd, Re  2 Ch 7 disapproved; Debtor (No 68 of 1911), Re  2 KB 652 disapproved; Pitchford, Re  All ER Rep 649 disapproved; Winter v IRC  3 All ER 855 considered; Glenister v Rowe  3 All ER 452 disapproved.
Per curiam: ‘…a potential liability under a FSD or a liability under a CN does not fall within the scope of expenses of an administration within rule 12.2 or rule 2.67(1)(f). First, there is no question of such a liability resulting from any act or decision taken by or on behalf of the administrator or any act or decision taken during the administration. The liability self-evidently arises out of events which occurred before the insolvency event … Secondly, I do not consider that the terms of the 2004 act, properly interpreted, mean that a liability under a CN would be an expense of the administration, if it was not a provable debt under rule 13.12… I therefore would conclude that, if the liability in these cases did not rank as a provable debt, it would not count as an expense of the administration.’ (Per Lord Neuberger P , ,  of the judgment). Decision of Court of Appeal  1 All ER 1455 reversed.
William Trower QC, Andrew Mold and Tom Smith (instructed by Herbert Smith LLP) for the Nortel administrators; Robin Dicker QC, Paul Newman QC and Daniel Bayfield (instructed by Linklaters LLP) for the Lehman administrators; Mark Phillips QC, Stephen Robins and James Walmsley (instructed by Linklaters LLP) for the Lehman administrators; Gabriel Moss QC, Nicolas Stallworthy QC and David Allison (instructed by Travers Smith LLP) for the Lehman pension fund trustees and the Board of the Pension Protection Fund; Richard Sheldon QC, Michael Tennet QC and Felicity Toube QC (instructed by Hogan Lovells International LLP) for Nortel Networks UK Pension Trust Ltd and the Board of the Pension Protection Fund; Raquel Agnello QC, Jonathan Hilliard and Thomas Robinson (instructed by the Pensions Regulator) for the Pensions Regulator; Barry Isaacs QC (instructed by Weil Gotshal & Manges LLP) for Lehman Brothers Holdings Inc and for Neuberger Berman Europe Ltd.