Bloom & Ors v The Pensions Regulator (Nortel, Re)

The Financial Support Direction regime under the Pensions Act 2004 applies to companies already in administration or liquidation. Where an FSD is issued after the insolvency cut-off date, the resulting obligations are not provable debts. Under the Toshoku principle, they ordinarily rank as administration or liquidation expenses. A Contribution Notice issued during an administration likewise creates an administration expense. Where an FSD is issued during an administration and a Contribution Notice is issued after an immediately following liquidation, the Contribution Notice is provable in the liquidation under rule 13.12(1)(b) of the Insolvency Rules 1986. The court may make a prospective order varying the priority of FSD-related expenses to protect the conduct of an administration.

The administrators of companies in the Nortel and Lehman groups sought directions on the effect of the FSD and Contribution Notice regimes on companies in administration or liquidation. No FSD or Contribution Notice had yet been issued to the applicant companies, but the statutory interpretation questions were common and had practical importance for the Regulator, office-holders, pension trustees, scheme members and creditors.

The central questions were whether obligations arising from an FSD or Contribution Notice were expenses, provable debts, or neither, and whether the pre-2010 version of rule 13.12 could be construed as adopting an earlier insolvency cut-off date where administration was followed by liquidation.

1. Application of the regime. The FSD regime applies to target companies in an insolvency process. Its principal conditions depend on historical matters assessed at the look-back date and are insolvency-neutral. The target’s financial circumstances and the interests of its creditors remain relevant to the Regulator’s reasonableness decisions.
2. Provability. An FSD issued after the commencement of an administration does not create a provable debt in that administration. Before the FSD is issued, the target has no relevant legal obligation to provide financial support; the statutory scheme creates a legal obligation only when the FSD is issued. The Regulator’s discretion does not itself make the resulting obligation provable where the discretion creates the obligation.
3. Where an FSD is issued during an administration and a Contribution Notice is issued after an immediately following liquidation, the Contribution Notice is provable in the liquidation. The FSD creates the pre-existing legal obligation required by rule 13.12(1)(b), and the Contribution Notice addresses non-compliance with that obligation.
4. Toshoku principle. A statutory financial liability imposed on a company in an insolvency process which is not a provable debt is ordinarily a necessary disbursement and therefore an administration or liquidation expense, whether the statute refers expressly to insolvency or uses insolvency-neutral criteria. The court rejected a narrower interpretation of Re Toshoku Finance plc.
5. The 2004 Act does not specifically prescribe that FSD liabilities are provable debts. Parliament could have enacted a deeming provision like that used for the section 75 debt, but did not do so. Priority is therefore left to the technical insolvency legislation.
6. The pre-2010 version of rule 13.12 could not be judicially rewritten to adopt the 2010 cut-off-date amendments retrospectively. The omission in 2005 may have been a drafting mistake, but correcting it would require the insertion of an important new provision into an otherwise unambiguous technical code.
7. If a Contribution Notice is issued during the present administration, it is an administration expense. If it is issued after liquidation following an administration in which the FSD was issued, it is a provable debt. A payment proposed under an FSD is an administration expense, while contractual liabilities arising from arrangements entered into by administrators may engage section 99(4) of the Insolvency Act 1986.
8. The court may make a prospective priority order under rule 2.67(3) of the Insolvency Rules 1986, postponing FSD-related expenses until other administration expenses have been paid where necessary to preserve a beneficial administration.

First-instance directions were given on common statutory construction questions arising in the Nortel and Lehman administrations. The judgment records references to the Upper Tribunal concerning the Regulator’s determinations, but those proceedings were not appeals from the present decision.