The UK's highest court has overturned a ruling that would have placed occupational pension schemes ahead of most other creditors in the event a company goes bust.
The Supreme Court ruled financial support directions (FSDs) made by The Pensions Regulator were debts which rank alongside the claims of other unsecured creditors. This overturned a previous ruling which named them as ‘expenses of the administration' and therefore boosted their priority.
The ruling in the long-running Nortel/Lehman case - concerned with the liabilities of the occupational pension schemes of both firms - was handed down this morning.
Linklaters global head of restructuring and insolvency Tony Bugg, who advised the Lehman administrators, said the decision was "highly significant" and a "victory for common sense".
He said: "It will be welcomed by unsecured creditors and the lending community alike, as these sorts of pension liabilities would swamp most insolvency estates leaving nothing for creditors.
"It also lays down principles which will govern how other statutory liabilities will rank in an insolvency - while something to be determined on a case by case basis, the Supreme Court's judgement is clear that they will ordinarily simply rank with other unsecured creditors."
The case was brought by administrators for 20 companies in the Nortel and Lehman groups who had sought a direction that the liabilities were neither a provable debt nor an expense.
This would have moved the regulator's claim behind other creditors and meant the FSD had "no effect whatsoever in insolvency", according to TPR.
The original rulings had been welcomed by the regulator but led to disquiet in the insolvency profession and warnings that companies with defined benefit liabilities could struggle to get finance.
Lawyers also warned that the "super priority" status granted to FSDs would mean it could trump the claims of former employees who were owed redundancy pay or wages.
Bugg said: "An insolvency pits employees, pensioners, suppliers and other creditors against one another each fighting for a share of a limited pool of funds. The Supreme Court rightly decided that only the clearest of legislative intent should enable one group of creditors to claim priority over another.
"In the context of an insolvency regime which already gives some creditors preferential treatment, it is right that these decisions should be for Parliament to decide."
TPR also welcomed today's ruling.
Executive director for defined benefit funding Stephen Soper said: "We are pleased that the Supreme Court has decided that an FSD issued against an insolvent target is effective. This will be welcome news for many thousands of pension scheme members and will provide clarity to insolvency practitioners on how to treat a pension scheme liability.
"In this case, the regulator was forced to defend against arguments that an FSD issued against an insolvent company would be ineffective and disappear down a 'black hole'. Such an outcome would have had serious consequences for our efforts to protect members' benefits and the Pension Protection Fund (PPF).
"Since the challenge was first made, we have made clear that we have no intention of frustrating the proper workings of the administration process."
More than £167,000 raised
Beware ‘temporary’ vulnerability
Celtic WM and Active Wealth