Company

Administration order - Administrator - Costs of administration

Re Nortel GMBH (in administration) and other companies; Re Lehman Brothers International (Europe) (in administration) and other companies: Court of Appeal, Civil Division (Lords Justice Laws, Lloyd and Rimer): 14 October 2011

Nortel Networks UK Ltd (Nortel) went into administration. The Lehman group of companies (Lehman) crashed and became insolvent. The occupational pension scheme shortfall under section 75 of the Pensions Act 2004 (2004 act) was, in the case of Nortel, estimated to be £2.1bn and in the case of Lehman was £125m. The Pensions Regulator issued a Warning Notice to a number of Nortel companies to the effect that it was considering exercising its power to issue a financial support direction (FSD) under the 2004 act.

After the appropriate statutory process, the Determination Panel of the Pensions Regulator (the panel) gave notice that it had concluded that a an FSD should be issued. The recipient companies, which were parties to the instant appeal, referred the matter to the Upper Tribunal (Tax and Chancery Chamber) (the upper tribunal). The question of an FSD being issued to Nortel remained in suspense at the time of the instant proceedings. In respect of Lehman, a Warning Notice was issued. The panel determined that a FSD should be issued. That process was suspended pending a reference to the upper tribunal.

The administrators of 20 companies in the Lehman and Nortel groups of companies applied for directions, all of which raised the same common question as to the effect of the FSD regime upon companies in administration or insolvent liquidation. The question for determination was whether, in circumstances where an FSD or a contribution notice (CN) was first issued after the target company had gone into administration or liquidation, it imposed any, and if so what, obligation on the target company and its office-holders.

The critical issue was whether the cost of complying with an FSD, or the monetary obligation imposed by a CN, ranked in the administration or liquidation of the target as a provable debt, or as an expense, or neither of those, so that it was recoverable only in the very unlikely event that there was a surplus otherwise available for distribution to members after all creditors had been paid in full. The matter was heard in the Chancery Division. The court considered circumstances where the company did not go into liquidation at all so that the rights of creditors were to be determined only by reference to the administration regime and where the company went into liquidation but an FSD was not issued until after that had happened. The judge held that, in those circumstances, the liability could not be the subject of proof but that it was payable as an expense in the administration (see [34] of the judgment). That decision was appealed.

The Nortel administrators submitted that the liability created a provable debt under rule 13.12 of the Insolvency Rules 1986, SI 1986/1925 (the rules) whereas the Lehman administrators contended that it would not be payable at all except insofar as the other creditors had been paid in full. In determining whether a payment of the liability under a CN issued during an administration fell within the class of expenses incurred in the course of the liquidation or administration, consideration was given to rules 4.218(3) and 2.67(1) of the rules, the Lundy-Granite principle as set out in Lundy Granite Co, Re, ex p Heavan ((1871) 6 Ch App 462) and Toshoku Finance UK plc, Re, Kahn v IRC ([2002] 3 All ER 961). The appeal would be dismissed.

(1) Rule 13.12(1) set out a clear distinction between two kinds of 'debt' or 'liability' in its two sub-paragraphs. It did not make sense to read the two parts of that cumulative definition as being subject to rule 13.12(3) so that both sub-paragraphs applied to contingent liabilities. Each element of rule��13.12 was self-sufficient, except insofar as the rule itself stated otherwise and as applying to other provisions of the rules, not to other parts of rule 13.12 itself except as so stated.

Accordingly, the question was whether the liability under a CN issued after the start of the relevant insolvency process was one to which, as at that start date, the company might become subject by reason of an obligation incurred before that date. Without a pre-existing legal obligation such as that referred to in rule 13.12(1)(b) a liability did not qualify as a contingent liability so as to be provable under that provision.

Even on the basis that the circumstances which might give rise to the use of the FSD regime by the Pensions Regulator existed at a date before the inception of any relevant insolvency proceedings, and that the look-back date for the purposes of those provisions would be before that inception, nevertheless there was at that stage no more than the possibility that the regime would be invoked at all or, if it were, then in relation to which particular target company or companies. It was not sufficient to say that, if the circumstances on the basis of which the discretion to issue a FSD was exercised were looked at, as they were at the time of its exercise, and it could be said that it could have been exercised (had the facts been known and the process already invoked) immediately before the start of the insolvency, that showed that the obligation arose before the outset of the insolvency process. 

There had been no obligation as at that date, and there had been far too many contingencies and variables, including decisions to be made, above all by the Pensions Regulator, on a discretionary basis, for it to have been possible to say that the existence of the situation as a result of which the obligation might be imposed of itself amounted to the existence of the obligation, even on a contingent basis.

The existence, before the onset of the insolvency, of the FSD regime and of the facts on which it could be invoked did not show that any company which might be made the subject of an eventual FSD or CN was then under a legal obligation for the purposes of rule 13.12(1)(b) (see [47]-[50], [73]-[76] of the judgment).

The judge had not erred in holding that a liability under a CN would not be a provable debt in the administration of any of the companies in the instant case since no relevant event had occurred before the company had entered administration (see [81] of the judgment).

Glenister v Rowe [1999] 3 All ER 452 considered; R (on the application of Steele) v Birmingham City Council [2007] 1 All ER 73 considered; Foots v Southern Cross Mine Management Pty Ltd [2007] BPIR 1498 considered; Haine v Day [2008] 2 BCLC 517 applied; Unite the Union v Nortel Networks UK Ltd (in administration) [2010] 2 BCLC 674 approved.

(2) In general, and subject to the Lundy-Granite principle, if a liability was provable then it would not be an expense because it would arise from a pre-insolvency obligation. It was, therefore, proper to ask first whether the liability was provable as a debt and only if it was not provable, subject to Lundy-Granite, to ask whether it was payable as an expense according to the statutory test relevant to that issue.

A statutory liability which was imposed for the first time, thus where no issue of provability arose, on a company which was undergoing an insolvency process was at any rate likely to be found to be one which was binding on the company and with which it was the obligation of the relevant office-holder to comply, to the extent that the assets and other claims with prior or equal ranking on those assets allowed, or to procure that the company complied. The obligation imposed by an FSD and, if it was not complied with, the liability created by a CN was created by statute and was not a provable debt, nor was it an expense under any other sub-paragraph in the expenses regime for liquidation and administration.

Parliament had, therefore, imposed a financial liability on a company in an insolvency process which constituted a necessary disbursement of the liquidator or administrator within the principle expounded by Toshoku Finance UK plc, Re, Kahn v IRC (see [100]-[101], [110] of the judgment).

The judge had not erred in holding that the effect of Toshoku Finance UK plc, Re, Kahn v IRC established a general rule that where by statute parliament had imposed a financial liability which was not a provable debt on a company in an insolvency process then, unless it constituted an expense under any other sub-paragraph in the twin expenses regimes for liquidation and administration, it constituted a necessary disbursement of the liquidator or administrator. (see [96], [99] of the judgment). The liability that would arise on an FSD being served on a company in administration would rank as an expense of the administration (see [125], [129]-[130] of the judgment).

Toshoku Finance UK plc, Re, Kahn v IRC [2002] 3 All ER 961 applied; Exeter City Council v Bairstow [2007] 4 All ER 437 approved; Lundy Granite Co, Re, ex p Heavan (1871) 6 Ch App 462 considered; Oak Pitts Colliery Co, Re [1881-5] All ER Rep 1157 considered; Atlantic Computer Systems plc, Re [1992] 1 All ER 476 considered; Kentish Homes Ltd, Re [1993] BCLC 1375 considered. Decision of Briggs J [2010] All ER (D) 168 (Dec affirmed).

William Trower QC, Andrew Mold and Tom Smith (instructed by Herbert Smith LLP) for the Nortel Administrators; Robin Dicker QC, Paul Newman QC and Daniel Bayfield (instructed by Linklaters LLP) for the Lehman administrators; Raquel Agnello QC, Jonathan Hilliard and Thomas Robinson (instructed by the Pensions Regulator) for the Pensions Regulator; Richard Sheldon QC, Michael Tennet QC and Felicity Toube QC (instructed by Hogan Lovells International LLP) for Nortel Networks UK Pension Trust Ltd and for the Board of the Pension Protection Fund; Gabriel Moss QC, Nicolas Stallworthy QC and David Allison (instructed by Travers Smith LLP) for the Lehman pension fund trustees and for the Board of the Pension Protection Fund; Barry Isaacs QC (instructed by Weil Gotshal & Manges LLP) for Lehman Brothers Holdings Incorporated and for Neuberger Berman Europe Ltd.