Nortel at first instance (Briggs J)

This judgment determines the statutory interaction between the Financial Support Direction (FSD) regime in the Pensions Act 2004 (sections 43–51 and related regulations) and the insolvency code (principally Rule 13.12 of the Insolvency Rules 1986 and the expenses regimes). The court held that the FSD regime is capable of applying to companies which are already in administration or liquidation and that Parliament did not in the 2004 Act in express terms alter insolvency priority rules.

As a result, a Contribution Notice (CN) issued to a target company while it remains in administration will create a liability that ranks as an administration expense under the Toshoku analysis. If, however, an FSD is issued while a target is in administration and the target subsequently passes into liquidation before a CN is issued, a CN issued in that liquidation will be a provable debt in the liquidation (because the FSD gives rise to a pre-liquidation legal obligation for Rule 13.12(1)(b) purposes). The court also concluded the court may make prospective orders altering the order of payment of administration expenses where justice and the rescue objective require it.

The decision rests on detailed statutory construction of the FSD regime (notably sections 43–45 and 47–50), the definition of provable debts in Rule 13.12, and the house of Lords' Toshoku principle on liquidation/administration expenses, balanced against concerns for the rescue culture and the Pension Protection Fund's objectives.

This is an application by administrators of multiple Nortel and Lehman group companies for directions on the legal effect, in insolvency, of the Pensions Act 2004 Financial Support Direction (FSD) regime.

• Nature of the application: directions on whether the financial consequences of an FSD, or of a Contribution Notice (CN) issued after non-compliance with an FSD, create (a) administration or liquidation expenses, (b) provable debts, or (c) neither (so recoverable only if a surplus remains after all creditors are paid).
• Key statutory provisions engaged: Pensions Act 2004 (notably sections 43–51, section 46 clearance procedure, section 100 duty to have regard to affected persons, section 103 Tribunal referral), Pensions Regulator (Financial Support Directions etc) Regulations 2005, Pensions Act 1995 section 75 (section 75 debt), Insolvency Rules 1986 Rule 13.12 (definition of provable debt), and insolvency expenses rules (administration and winding-up expenses).

The court analysed: (i) the FSD regime mechanics (look-back date, "employer" and "target" tests, the reasonableness condition, the Regulator's discretions and procedural safeguards), (ii) the provable debt rule (Rule 13.12) and authorities on contingent liabilities and discretions (Glenister v Rowe; R (Steele) v Birmingham City Council; Haine v Day; Re T&N (No 2); Unite v Nortel), and (iii) the Toshoku principle on non-provable statutory liabilities becoming insolvency expenses.

The judge concluded that the FSD regime does apply to companies in administration or liquidation and, taken with the insolvency code, this generally produces the outcome that:

1. where a CN is issued while the company is in administration the CN liability is an administration expense (Toshoku principle),
2. where an FSD is issued while a company is in administration and the company then goes into liquidation before a CN is issued, a CN issued in that liquidation will normally be a provable debt in the liquidation because the FSD imposes the pre-liquidation obligation required by Rule 13.12(1)(b),
3. an FSD issued after the cut-off date does not of itself create an immediate payable sum but creates a legal obligation to secure reasonable financial support which may give rise to various types of liabilities depending on the form of support, and
4. the court has power to make prospective priority orders as to the payment of administration expenses (Rule 2.67 and equivalent) to prevent administrative paralysis and to protect the rescue objective where appropriate.

The judge weighed competing policy considerations: protecting pension scheme members and the PPF against the pari passu principle for unsecured creditors and the rescue culture. He accepted administrators' concerns that expense ranking could hinder rescue operations, but concluded the correct statutory construction and existing insolvency authorities require the outcome described above. He recommended that Parliament or the Insolvency Service might consider legislative change if the policy balance needs adjusting.

Issues determined. The court held that (a) the FSD regime can be applied to companies already in administration or liquidation; (b) financial liabilities arising from a CN issued while a target remains in administration rank as administration expenses under the Toshoku principle; (c) where an FSD is issued while in administration and the company is later wound up, a CN issued in the subsequent liquidation will be a provable debt in that liquidation because the FSD creates the pre-liquidation legal obligation necessary for Rule 13.12(1)(b); and (d) the court may make prospective orders altering the order of payment of administration expenses to protect the rescue objective and avoid administrative paralysis. The court’s reasoning relied on detailed construction of the Pensions Act 2004 (sections 43–51), the Insolvency Rules 1986 r.13.12 and the Toshoku authorities, and a balancing of insolvency policy and pension-protection objectives.