The Court of Appeal has confirmed that where the Pensions Regulator (Regulator) exercises its anti-avoidance powers against a company during insolvency, the liability ranks as an expense in the insolvency process.  The 14 October 2011 judgment, in a case involving the Nortel and Lehman Brothers groups, upheld the High Court's landmark decision of last year.

Recently, the Court of Appeal upheld the High Court's decision in the Nortel Networks and Lehman Brothers disputes. The judgment confirms that liabilities under Financial Support Directions (FSDs) and Contribution Notices (CNs), which are issued by the Pensions Regulator, will rank ahead of almost all other claims when a company becomes insolvent. The discussions in the case focused on whether FSDs and CNs are classed as 'provable debts', expenses of the insolvency or, indeed, neither.

The Court of Appeal handed down its judgment on 14 October 2011 unanimously upholding the first instance decision that a Financial Support Direction (FSD) issued by the Pensions Regulator to an entity after it has commenced insolvency proceedings will rank as an expense of the administration, therefore affording it super-priority over floating charge holders and other unsecured creditors. This decisions has significant implications for lenders to groups with UK defined benefit pension plans if any of their security is taken as a floating charge.

The story of the restructuring of carpet-maker, Brintons has featured in the press recently, with emphasis on the role of Carlyle, one of the world's biggest private equity firms. The facts are similar to the Silentnight pre-pack which we featured in a previous bulletin. In each case, the Pensions Regulator is said to be considering using its anti-avoidance powers under the Pensions Act 2004 to compel senior debt holders to pay towards the deficit of the defined benefit pension scheme operated by the company.

The Pensions Regulator announced this week that it will not  pursue action to impose a Financial Support Direction against US company, Chemtura Corporation and members of its group after a funding settlement, involving the payment of expedited contributions to the pension scheme of its UK subsidiary, was reached with the scheme's trustees.

The UK Pensions Regulator (the Regulator) has just announced that it has reached a settlement with the intended target of its first Contribution Notice (CN), with the result that the CN has been issued, but for a far lower amount than the Regulator originally sought. This case gives important guidance on the situations in which the Regulator believes it will be justified in issuing a CN, and on the potential liabilities targets may face.

The Moral Hazard Powers

Section 75 of the Pensions Act 1995 has the potential to mean that, as a result of corporate restructuring (including on employee and TUPE transfers), an employer that participates in a defined benefit occupational pension scheme could have to make a one-off payment (a debt) to the scheme. The debt reflects the difference between the scheme funds that are available and the estimated cost of securing all scheme benefits in the form of annuity policies.

When an employer leaves a multi-employer defined benefit pension scheme, an employer debt - a section 75 debt - may arise if the scheme was underfunded.

A section 75 debt is a debt due from an employer in a multi-employer defined benefit pension scheme to the trustees of the scheme.

The much awaited court decision on the status of Financial Support Directions (“FSDs”) and Contribution Notices (“CNs”) * issued by the Pensions Regulator against target companies after the commencement of English insolvency processes in respect of such targets was handed down by the court on Friday 10 December 2010. The reluctant decision of Mr Justice Briggs that FSDs and CNs in these circumstances were not provable debts but ranked as expenses of the insolvency process, taking precedence ahead of unsecured creditors, has caused dismay in the restructuring community.