The Court held an FSD against an insolvent company would rank as a provable debt with other unsecured claims, overturning prior judgements which gave FSD claims super-priority status.
Administrators of both Lehman Brothers and Nortel Communications had applied to the Court for directions as to how a potential liability under a Financial Support Direction (‘FSD’) should be treated where the FSD is issued after the target had gone into administration.
Previously, the High Court and the Court of Appeal had concluded that a liability under an FSD issued after insolvency ranked as an ‘expense’, meaning it should be settled from the assets before any distributions to creditors. Therefore even though a Section 75 debt payable on insolvency would rank as an unsecured creditor, if the Pensions Regulator issued an FSD after an insolvency event, it would effectively move the FSD liability up the order of priority.
However the Supreme Court overturned the previous decisions and confirmed that an FSD issued after the insolvency event should be treated as a ‘provable debt’. That is, it would rank equally with other unsecured creditors.
TPR welcomed the clarity brought by the judgement, even though for a time it looked as though pension schemes might be treated more favourably on insolvency where an FSD could be issued. Stephen Soper, TPR’s executive director for defined benefit funding said:
“We are pleased that the Supreme Court has decided that an FSD issued against an insolvent target is effective. This will be welcome news for many thousands of pension scheme members and will provide clarity to insolvency practitioners on how to treat a pension scheme liability.”
Argyll comment: if the Supreme Court had upheld the previous judgements it would have improved pension schemes’ recoveries on insolvency where an FSD could be issued. However the prior judgements were controversial and would have disadvantaged other creditors considerably given the pension debt is often the largest creditor. It also seemed illogical that an FSD issued before insolvency would have a lower priority than one issued after the event. The outcome therefore seems fair even if for a short while pension schemes looked as though they might have been handed an advantage.
