The Supreme Court found that liabilities under a financial support direction (FSD) issued against an insolvent company would rank as provable debt, and the judgement has been welcomed by The Pension Regulator (TPR).

The verdict overrules previous findings by the High Court and the Court of Appeal, where it was stated that the FSDs issued by TPR should only be ranked as an expense of the administration or liquidation.

FSDs are issued by TPR to ensure companies provide support to their defined benefit (DB) schemes, and the case was brought to court by the administrators for the Lehman Brothers and Nortel Networks in Canada.

TPR's executive director for defined benefit funding Stephen Soper said: "We are pleased that the Supreme Court has decided that an FSD issued against an insolvent target is effective."

He said that the news provides "clarity" to insolvency practitioners on how to treat a pension scheme liability.

Sopher said: "In this case, the regulator was forced to defend against arguments that an FSD issued against an insolvent company would be ineffective and disappear down a 'black hole'. Such an outcome would have had serious consequences for our efforts to protect members' benefits and the Pension Protection Fund (PPF)."

He added: "Since the challenge was first made, we have made clear that we have no intention of frustrating the proper workings of the administration process.

"[The] judgment will provide clarity to the UK's restructuring and rescue practitioners that FSD liabilities have to be recognised in insolvent situations but do not have priority over administration expenses or secured debts."

PricewaterhouseCoopers (PwC) has been acting as the financial adviser to the Nortel UK Pension Scheme since 2009.

PwC partner Jonathon Land said: "This ruling determines once and for all that FSDs will rank alongside other unsecured creditors in UK administrations. This is the fairest result and after three years of litigation UK pension schemes and insolvency practitioners will be thankful they finally have clarity on this issue."

Linklaters advised the Lehman administrators and its global head of restructuring and insolvency Tony Bugg said: "This decision is highly significant and a victory for common sense."

Bugg added: "The concern before today's decision was that TPR had the power to boost the ranking of its claim simply by waiting for a target company to enter administration. The Supreme Court unanimously agreed that Parliament cannot have intended such an unfair and arbitrary result."

Both Nortel and Lehman Brothers pension schemes are currently in the PPF assessment period.

Malcolm Weir, PPF head of restructuring and insolvency, said: "We welcome this decision as it clarifies the position on how FSD and CN liabilities are treated.

"We have always argued that, if FSD and CN liabilities were not administration expenses, they should be treated as provable debts.

"We will now look at the judgment to assess the implications for the Nortel and Lehman schemes and any future recoveries we may make as an unsecured creditor."

First published 25.07.2013

monique_simpson@wilmington.co.uk