In the matter of the Nortel Companies

The Supreme Court considered whether liabilities arising under the Pensions Regulator’s Financial Support Direction (FSD) regime (and consequential Contribution Notices (CNs)) issued after a company has entered administration are (i) provable debts for the purposes of the Insolvency Rules, or (ii) expenses of the administration. The court held that such liabilities, when they arise from circumstances existing before the insolvency event (for example where the target company was a member of a group meeting the statutory "employer" or "insufficiently resourced" conditions in the Pensions Act 2004), are contingent liabilities which fall within rule 13.12(1)(b) of the Insolvency Rules and are therefore provable debts under rule 12.3. The court further held that they do not rank as administration expenses under the Insolvency Rules. The court rejected a residual equitable power to require administrators to reclassify such liabilities so as to alter the statutory ranking.

This appeal concerned the interaction between the Pensions Act 2004 FSD/CN regime and the insolvency priority rules in the Insolvency Act 1986 and the Insolvency Rules 1986. The Nortel and Lehman groups had companies in administration; pension schemes in deficit gave rise to investigations by the Pensions Regulator under the FSD regime. The question was how a target company’s contingent exposure under a FSD (and any subsequent CN) should be treated for the purposes of the administrators’ distribution of the company’s assets where the FSD was issued after the company entered administration.

Nature of the proceedings: appeals to the Supreme Court from the Court of Appeal ([2011] EWCA Civ 1124) and earlier first instance proceedings (Briggs J: [2010] EWHC 3010 (Ch)). The administrators had treated the potential FSD/CN liabilities as expenses of the administration; the lower courts concluded that such liabilities were administration expenses and ranked ahead of unsecured creditors.

Issues framed:

• Whether a liability under a FSD/CN issued after an insolvency event is a "debt" or "liability" within rule 13.12 of the Insolvency Rules and therefore provable under rule 12.3;
• If not provable, whether such liabilities constitute "expenses" of the administration under rules such as rule 12.2 and rule 2.67(1)(f);
• Whether the court has any power to direct administrators to treat such liabilities differently to the effect of the statutory scheme.

Court’s reasoning: The court emphasised the wide scope of the definitions of "debt" and "provable claim" in the Insolvency Rules. It analysed rule 13.12(1)(a) and (b), concluding that contingent liabilities which arise after the insolvency date can be provable under paragraph (b) provided they arise "by reason of any obligation incurred before that date." The court adopted an approach grounded in established authority (notably In re Sutherland (dec'd) [1963] AC 235 and subsequent decisions) and held that an "obligation" for that purpose may be created by statute as well as by contract where, at the insolvency date, the company is already in the legal relationship or state of affairs that makes the contingent liability a real prospect (for example, membership of a group within the look-back period). Accordingly, potential FSD/CN liabilities grounded in pre-insolvency circumstances were contingent obligations incurred before the insolvency event and therefore provable.

The court further held that, if the liabilities were treated as not provable, they would not, on the correct interpretation of the Insolvency Rules and the 2004 Act, automatically count as administration expenses. The court rejected a generalised equitable or residual power to re-order statutory priorities to promote such liabilities where the statute does not provide for them to be expenses.

Remedy / result: the Supreme Court declared that a target company’s liability under the FSD regime, arising pursuant to a FSD issued after the company has gone into administration, is a provable debt and is not an expense of the administration; it declined to permit judicial reordering of statutory priorities.

Appeal allowed in part. The Supreme Court held that a target company’s contingent liability under the Pensions Act 2004 FSD/CN regime, where the factual state giving rise to liability existed prior to the company’s insolvency event, is a contingent "liability" for the purposes of rule 13.12(1)(b) and thus a provable debt under rule 12.3; such liabilities do not rank as expenses of the administration and the court will not exercise a residual power to reclassify them so as to alter statutory priority.

First instance: Briggs J, [2010] EWHC 3010 (Ch). Court of Appeal: [2011] EWCA Civ 1124 (Lloyd LJ). Appeal to the Supreme Court: [2013] UKSC 52 (this judgment).