Re Nortel Networks UK Limited

The court granted the administrators the relief they sought to enable a formal claims determination and distribution process for the EMEA Nortel companies so that those companies could participate in the allocation of the global sale proceeds held in the IFSA "lockbox". Key statutory provisions considered included paragraph 65(3) of Schedule B1 to the Insolvency Act 1986 (permission required for distributions to unsecured non-preferential creditors) and the proof and dividend provisions in Chapter 10 of Part 2 of the Insolvency Rules 1986 (in particular Rules 2.95 and 2.97(2)).

Material grounds for the orders were that it was in the interests of creditors as a whole that (i) NNUK be permitted to trigger a proof process and make distributions (a modest interim distribution and a bar date of 31 October 2015 was fixed to encourage claims), (ii) the administrators be allowed, subject to full provision for disputed proofs, to declare interim dividends notwithstanding pending applications under Rule 2.97(2), and (iii) for the other EMEA companies (other than NNSA) the administrators be authorised to promulgate company voluntary arrangements to give effect to assurances previously given to local creditors and to avoid secondary proceedings under Articles 3(2) and 27 of the EC Regulation.

For NNSA (the French company) the court required that the issues created by the French secondary proceedings and the ECJ ruling (case C-649/13) as to the determination of which assets fall within the effects of secondary proceedings be addressed before distributions were made in England; the administrators were nonetheless permitted to promulgate a CVA to protect NNSA's participation in the Lockbox allocation. The court emphasised that statutory insolvency provisions could not be displaced except by proper statutory mechanism (citing Re Nortel GmbH (Bloom v Pensions Regulator) [2014] AC 209 (SC)).

This was an application by the joint administrators of the EMEA Nortel companies seeking directions to enable the commencement of formal claims processes and the making of distributions so that the EMEA companies could be allocated their shares of the monies in the Lockbox established by the IFSA following global asset sales.

Background and parties

• The EMEA companies formed part of the worldwide Nortel Group. The Canadian parent and certain Canadian subsidiaries entered protection under the Companies' Creditors Arrangement Act and US subsidiaries filed Chapter 11 on 14 January 2009; the EMEA companies were placed into administration in England the same day.
• The IFSA required sale proceeds (approximately US$7.3 billion) to be held in escrow (the "Lockbox") until allocation among debtor estates could be agreed or determined by courts. The US and Ontario courts conducted joint allocation proceedings, producing judgments of 12 May 2015 (modified on 6 July 2015). Appeals against those allocation judgments were pending.
• The administrators applied to this court for orders to enable claims processes and distributions in relation to (i) NNUK, (ii) the other EMEA companies (except NNSA), and (iii) NNSA (subject to issues raised by French secondary proceedings).

Nature of the relief sought

• Permission under paragraph 65(3) of Schedule B1 to permit the administrators of NNUK to make distributions to unsecured non-preferential creditors and to trigger the proof process under Chapter 10 of the Insolvency Rules 1986.
• Permission under Rule 2.97(2) to allow the administrators to declare interim dividends notwithstanding pending applications to reverse or vary a decision of the administrators on a proof, so long as full provision is made for disputed proofs.
• Liberty for the administrators of the other EMEA companies (excluding NNUK and NNSA) to promulgate company voluntary arrangements to implement the assurances previously given to local creditors and to set up claim-adjudication and distribution mechanisms consistent with local law for secondary-proceedings assets.
• Liberty for the administrators of NNSA to promulgate a CVA dealing with a claims determination mechanism for NNSA, subject to the issues created by secondary French proceedings and the ECJ ruling on concurrent jurisdiction and the definition of assets within secondary proceedings.

Issues framed by the court

• Whether the court should exercise its discretion under paragraph 65(3) to permit distributions by administrators of NNUK.
• How to reconcile the statutory proof and dividend regime in the Insolvency Rules and Schedule B1 with the administrators' prior assurances to local creditors and the risk of secondary proceedings under the EC Regulation.
• Whether the administrators could lawfully adopt CVAs to permit a modified claims and distribution regime for the other EMEA companies and for NNSA given the existence of French secondary proceedings and the ECJ ruling.

Court's reasoning and conclusions

• On NNUK the court held permission under paragraph 65(3) was appropriate: distributing NNUK's share of the Lockbox funds and putting in place a claims determination mechanism was in the interests of creditors as a whole; NNUK had no secured creditors and preferential creditors had been paid in full; liquidation would be disproportionate to achieve the same result. The court fixed a bar date for proofs of 31 October 2015 and approved a modest interim distribution within two months, subject to provision for disputed proofs.
• The court granted permission under Rule 2.97(2) on the ongoing basis sought, provided full provision was made for disputed proofs so that a pari passu distribution could be achieved ultimately.
• For the other EMEA companies (other than NNSA) the court accepted that paragraph 66 of Schedule B1 and the prior directions given on appointment permitted administrators to give assurances and make payments consistent with local law to avoid secondary proceedings; but the statutory proof and distribution scheme could only be modified if creditors approved CVAs or schemes of arrangement. The court therefore authorised the administrators to promulgate CVAs containing a claims adjudication mechanism, an appeals process (including court appeals for larger claims and arbitration/expert determination for smaller claims), and a distribution mechanism distinguishing Main Proceedings and Secondary Proceedings assets.
• For NNSA the ECJ decision (C-649/13) required that the courts determine which assets fell within the effects of the French liquidation. The administrators were therefore not yet in a position to seek permission to distribute under paragraph 65(3) pending resolution of those issues, but were permitted to promulgate a CVA for the English main proceedings to protect participation in the Lockbox allocation.
• The court emphasised that the statutory insolvency regime could not be displaced save by the appropriate statutory processes (for example, by creditor approval of a CVA or scheme) and cited authorities to that effect.

The application was granted and the court made the Orders sought. Specifically, the court (i) granted permission under paragraph 65(3) of Schedule B1 for the administrators of NNUK to make distributions and to trigger the Rule 2.95 proof process with a bar date of 31 October 2015 and an approved modest interim distribution; (ii) granted permission under Rule 2.97(2) to declare interim dividends despite pending applications, provided full provision is made for disputed proofs; (iii) authorised the administrators (other than for NNUK and NNSA) to promulgate company voluntary arrangements to implement a claims determination and distribution mechanism consistent with assurances and to distinguish Main and Secondary Proceedings assets; and (iv) authorised the administrators of NNSA to promulgate a CVA for the English main proceedings but declined to permit distributions in England for NNSA until the allocation of assets between French secondary proceedings and English main proceedings is resolved (in light of the ECJ ruling). The rationale was that these steps were in the interests of creditors as a whole and necessary to protect the EMEA companies' participation in the Lockbox allocation, subject to legal constraints in the insolvency statute and rules.

The administration of the EMEA companies began on 14 January 2009 (appointment of administrators by order of Mr Justice Blackburne). An IFSA dated 9 June 2009 created a Lockbox for sale proceeds. Allocation of the Lockbox was determined by concurrent proceedings and judgments in Delaware and Ontario following a joint trial (judgments delivered 12 May 2015 and varied 6 July 2015; Ontario judgment reported as Re Nortel Networks Corporation [2015] ONSC 2987). Appeals against those allocation judgments were pending. Separately, proceedings in France concerning NNSA led to a reference to the European Court of Justice, which delivered its judgment in case C-649/13 (Comité d’enterprise de Nortel Networks SA v. Cosme Rogeau and others) on 11 June 2015. The Chancellor nominated Mr Justice Snowden as supervisory judge for the EMEA administrations and this application was determined in the High Court (Chancery Division) by Mr Justice Snowden on 27 August 2015.