Nortel Networks UK Ltd & Ors, Re Insolvency Act 1986

Where administrators have power to enter a particularly momentous settlement, the court may give directions or liberty to proceed without taking over their discretion. The court’s role is limited. It must be satisfied that the proposed exercise of power is lawful, rational and honestly reached, and that the administrators properly considered all relevant matters in the interests of the companies and their creditors. The court need not decide whether it would have made the same commercial decision. Full and frank disclosure is required, and the court must not act as a rubber stamp. On that basis, liberty was granted to perform a substantial cross-border settlement of claims.

The joint administrators of 19 Nortel entities applied under paragraph 63 of Schedule B1 to the Insolvency Act 1986 for directions permitting them to perform a settlement of claims against Canadian Nortel companies. The settlement provided for the withdrawal and release of claims and counterclaims in return for admitted claims of approximately US$100 million, potentially increasing to approximately US$125 million if specified French conditions were met.

The administrators had power to enter into the agreement but sought the court’s sanction because of its significance to the administrations. The UK Pensions Interests did not oppose the application but reserved issues concerning allocation of assets, liabilities, costs and benefits. The central question was whether the administrators had reasonably and honestly concluded, on proper grounds and after considering all relevant matters, that the settlement benefited each company and its creditors.

1. The administrators had power to enter into and perform the Settlement Agreement under section 42 and paragraph 18 of Schedule 1 to the Insolvency Act 1986. The application therefore concerned the second category of case identified in The Public Trustee v Cooper and discussed in MF Global UK Ltd, namely a momentous decision within the administrators’ powers where court approval is sought without surrendering their discretion.

2. The court’s function was limited. It had to be satisfied that the proposed exercise was lawful and within power, that the administrators had acted as ordinary, reasonable and prudent office-holders, and that they had properly considered the relevant factors without improper, irrelevant or irrational considerations. The court did not have to be satisfied that it would itself have entered into the settlement.

3. The administrators had to be able properly to form the view that the settlement was for the benefit of each company and its creditors, and had in fact formed that view. Full and frank disclosure of the relevant facts, circumstances and reasons was required. The court was not a rubber stamp.

4. The evidence showed that the administrators had considered the factual and legal complexity of the claims, litigation and costs risks, counterclaims, uncertainty of outcome, advice from English and Canadian lawyers, and the benefits of certainty. They genuinely and properly considered the settlement to be in the interests of each company and its creditors. Liberty was therefore granted under paragraph 63 of Schedule B1 to perform and procure performance of the agreement.

5. The UK Pensions Interests’ rights to raise arguments concerning the Purchase Price Allocation, including the incidence of costs and benefits under the Settlement Agreement, were reserved. The administrators’ costs, and the UK Pensions Interests’ costs, were ordered to be paid as expenses of the administrations. Inspection of the confidential witness statement and exhibit was restricted under Insolvency Rule 7.31(5).