In the matter of the Nortel Companies

A statutory liability arising after a company enters administration or liquidation is provable where it results from an obligation incurred beforehand. The earlier obligation need not be contractual. It may arise from a statutory legal relationship which made the company vulnerable to the specific liability and created a real prospect that the liability would arise.

Accordingly, liability under the financial support direction regime is an ordinary provable debt where the target company entered insolvency after becoming part of a group falling within that regime. It ranks equally with other unsecured debts and is not an administration expense. An insolvency court has no general discretion to override the statutory ranking of liabilities.

These conjoined appeals concerned companies in the Nortel and Lehman groups which had entered administration. Their groups included employers with substantially underfunded occupational pension schemes. After the administrations began, the Pensions Regulator commenced or continued procedures under the Pensions Act 2004 with a view to issuing financial support directions and, in the event of non-compliance, contribution notices against associated group companies.

Briggs J, in [2010] EWHC 3010 (Ch), [2011] Bus LR 766, and the Court of Appeal, in [2011] EWCA Civ 1124, [2012] Bus LR 818, held that a liability arising from a direction issued after administration was not a provable debt but was an administration expense. The central question was whether such liability instead arose from a pre-insolvency obligation within rule 13.12(1)(b) of the Insolvency Rules 1986.

1. The appeals were allowed unanimously. Lord Neuberger, with whom Lord Mance, Lord Clarke and Lord Toulson agreed, held that liability under the financial support direction regime arising from a direction issued after administration was a provable unsecured debt. It was not an administration expense. Lord Sumption agreed with the order and reasons, and added observations on the meaning of an obligation incurred before insolvency.

2. Rules 12.3 and 13.12 of the Insolvency Rules 1986 define provable debts broadly. Rule 13.12(1)(a) concerns liabilities to which the company is already subject when insolvency begins. Rule 13.12(1)(b) separately concerns liabilities arising afterwards by reason of an obligation incurred beforehand. The two provisions do not overlap.

3. An obligation under rule 13.12(1)(b) is the anterior source of the later liability. Normally, the company must have taken, or been subjected to, steps which had legal effect and made it vulnerable to the specific liability, with a real prospect that it would arise. Treating those steps as an obligation must also be consistent with the statutory regime imposing the liability. The obligation may arise by statute or another non-contractual legal relationship.

4. Before entering administration, each target had belonged throughout the relevant look-back period to a group containing a service company or insufficiently resourced employer with an underfunded pension scheme. That legally significant relationship placed the targets within the intended scope of the financial support direction regime. A subsequent direction and contribution notice therefore generated liabilities arising from pre-insolvency obligations within rule 13.12(1)(b).

5. The earlier authorities holding that costs ordered after insolvency were not provable although the proceedings began beforehand were overruled. A person who becomes party to litigation submits to a system of procedural rules carrying a contingent liability for costs. That pre-insolvency legal relationship supplies the relevant obligation.

6. Although unnecessary to the result, the court held that the pension liability would not have been an administration expense even if it were non-provable. An expense ordinarily arises from something done in the administration or from legislation which, expressly or by the nature of the liability, places payment on the office-holder as part of the administration. A debt arising merely during the administration does not satisfy that standard.

7. The court also rejected any residual power to promote a non-provable liability within the statutory order of priority. The powers in Schedule B1 and the equitable principle governing unfair reliance by office-holders on legal rights cannot authorise an administrator or court to contradict the statutory ranking and prejudice provable creditors.

1. United Kingdom Supreme Court: Allowed the appeals unanimously. It declared that liabilities arising under the financial support direction regime after administration ranked as provable debts and not as administration expenses: [2013] UKSC 52 .
2. Court of Appeal: Held that the liabilities were not provable debts and ranked as administration expenses: [2011] EWCA Civ 1124 , [2012] Bus LR 818.
3. High Court, Chancery Division: Briggs J reached the same conclusion as the Court of Appeal: [2010] EWHC 3010 (Ch) , [2011] Bus LR 766.