> Pension Funds Insider> Kodak bankruptcy might mark beginning of UK pension battle
Iconic photography firm Kodak has filed for bankruptcy protection in the US, leaving its UK pension scheme facing an uncertain future
The struggling firm, which confirmed it was in major trouble on 19 January, had previously promised its UK pension scheme an $800m cash injection over the next decade.
Given the complexity of matters involving pension responsibilities towards overseas subsidiaries, it now remains unclear as to what will happen to its heavily underfunded UK scheme (it had a £442m deficit at the end of 2010) and how the Pension Regulator might seek to have the parent company fulfil its responsibilities towards its British pensioners.
Kodak has been struggling for years as it tried to keep up with the influx of innovations in the digital age. Although digital photography entered the market with Kodak, the firm was too slow moving away from film and last year it warned investors that in order to stay afloat it needed to sell off some of its patents and businesses. But it failed to do so and its new business ventures have failed to calm investors' fears.
The UK subsidiary of Kodak is still running on a 'business as usual' basis because bankruptcy was only filed in the United States, but the UK pension trustees or regulator may try to exert power in the U.S. by seeking legal authority under UK law (Pensions Act of 2004) to take aim beyond its borders. This so-called Financial Support Direction (FSD) or 'moral hazard' power would mean a scenario in which UK pension interests could be a major factor in any Kodak restructuring.
Kodak first guaranteed to shore up its UK fund in 2007. Then in its 2010 annual report, it made a new promise to pour $830m in total into the UK pension plan from 2011 through to 2022.
Normally pension obligations are an unsecured claim, which means the scheme would be the last of the creditors to get paid anything but in recent years UK pension fund trustees and the regulator have increasingly tried, with some success, to manoeuvre U.S. companies into paying more into underfunded UK plans. This has already been carried out in cases such as the bankruptcies of Lehman Brothers, Nortel and Visteon.
Currently Lehman and Nortel's overseas counterparts are involved in a UK case that addresses whether pension fund claims can get priority over other claims in the U.S., Reuters reports.
In the first ever such a case, Sea Containers, which found itself in a similar situation to Kodak in 2007, negotiated an agreement which saw the pension scheme being marked as a 'substantial creditor' after a UK court confirmed the Bermuda-based firm's responsibility towards the UK pension scheme. The case demonstrated the potential use of the FSD power, or the issuance of an FSD, can significantly strengthen the pension scheme's position during negotiations involving a foreign parent and be influential in bringing about a satisfactory outcome for the pension scheme.
In practice, the FSD power requires parties subject to regulatory action to bring forward proposals for reasonable financial support for an occupational pension scheme. The form of support is not prescribed and allows significant flexibility.
A spokesperson for The Pensions Regulator could not confirm that any action was to be taken and said: "We are aware that the U.S. parent company, Eastman Kodak Company, has filed for Chapter 11 bankruptcy protection. We are in contact with the UK pension fund trustees."
The Kodak UK pension trustees and Hogan Lovells LLP, the trustees' legal advisors were unable to comment on the situation .
Read the full statement from Eastman Kodak here.
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