ON APPEAL FROM THE HIGH COURT OF JUSTICE
MR JUSTICE BRIGGS
Strand, London, WC2A 2LL
B e f o r e :
LORD JUSTICE LLOYD
LORD JUSTICE RIMER
| IN THE MATTER OF NORTEL GMBH (IN ADMINISTRATION) AND OTHER COMPANIES (Appeal 2011/0062)
IN THE MATTER OF LEHMAN BROTHERS INTERNATIONAL (EUROPE) (IN ADMINISTRATION) AND OTHER COMPANIES (Appeal 2011/0103)
(1) ALAN ROBERT BLOOM (2) ALAN MICHAEL HUDSON (3) CHRISTOPHER JOHN WILKINSON HILL (4) STEPHEN JOHN HARRIS (5) DAVID MARTIN HUGHES
|- and -
|(1) THE PENSIONS REGULATOR
(2) BOARD OF THE PENSION PROTECTION FUND
(3) NORTEL NETWORKS UK PENSION TRUST LTD
|(1) ANTHONY VICTOR LOMAS (2) STEVEN ANTHONY PEARSON (3) MICHAEL JOHN ANDREW JERVIS (4) DAN YORAM SCHWARZMANN (5) DEREK ANTHONY HOWELL
|(1) THE PENSIONS REGULATOR
(2) BOARD OF THE PENSION PROTECTION FUND
(3) PETER ANTHONY GAMESTER (4) BRIAN SEWARD (5) PETER SHERRATT (6) THOMAS PAUL BOLLAND
(7) LEHMAN BROTHERS HOLDINGS INCORPORATED (8) NEUBERGER BERMAN EUROPE LIMITED
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Robin Dicker Q.C., Paul Newman Q.C. and Daniel Bayfield (instructed by Linklaters LLP) for the Lehman Administrators, appellants in appeal 2011/0103
Raquel Agnello Q.C., Jonathan Hilliard and Thomas Robinson (instructed by the Pensions Regulator) for the Pensions Regulator, respondent in both appeals
Richard Sheldon Q.C., Michael Tennet Q.C. and Felicity Toube Q.C. (instructed by Hogan Lovells International LLP) for Nortel Networks UK Pension Trust Ltd and for the Board of the Pension Protection Fund, respondents in appeal 2011/0062
Gabriel Moss Q.C., Nicolas Stallworthy Q.C. and David Allison (instructed by Travers Smith LLP) for the Lehman pension fund trustees and for the Board of the Pension Protection Fund, respondents in appeal 2011/0103
Barry Isaacs Q.C. (instructed by Weil Gotshal & Manges LLP) for the seventh and eighth respondents in appeal 2011/0103
Hearing dates: 26 to 29 July 2011
Crown Copyright ©
Lord Justice Lloyd:
Financial support directions and contribution notices under the Pensions Act 2004
"It is on any view a novel and unusual regime, giving rise to legal obligations of a type with which (if applicable to targets in an insolvency process) the existing rules as to priority in insolvency have not previously had to contend."
i) An employer is a service company at the relevant time if it is a company, and a member of a group of companies, and its turnover, as shown in its latest individual statutory accounts, is solely or principally derived from amounts charged for the provision of the services of its employees to other members of the group.
ii) An employer is insufficiently resourced at the relevant time if its resources are less than a prescribed proportion of the estimated section 75 debt in relation to the scheme (currently 50%), and if one or more of its associates have resources which (in the case of a single associate, on its own, or if there is more than one, then in aggregate) are not less than the difference between the value of the employer's resources and 50% of the estimated section 75 debt. The target of a financial support direction does not have to be the associate, or any of the associates, of the employer whose assets at the relevant time enable this test to be satisfied.
The financial support direction procedure and insolvent companies: general
Payments to creditors in insolvency processes – general
"There would be little point in a statute which specifically imposed liabilities upon a company in liquidation if they were payable only in the rare case in which it emerged with all other creditors having been paid."
The issues in the appeals and the parties' positions
Is the liability a provable debt?
"13.12 "Debt", "liability" (winding up)
(1) "Debt" in relation to the winding up of a company, means (subject to the next paragraph) any of the following
(a) any debt or liability to which the company is subject at the date on which it goes into liquidation;
(b) any debt or liability to which the company may become subject after that date by reason of any obligation incurred before that date; and
(c) any interest provable as mentioned in Rule 4.93(1).
(2) For the purposes of any provision of the Act or the Rules about winding up, any liability in tort is a debt provable in the winding up, if either
(a) the cause of action has accrued at the date on which the company goes into liquidation; or
(b) all the elements necessary to establish the cause of action exist at that date except for actionable damage.
(3) For the purposes of reference in any provision of the Act or the Rules about winding up to a debt or liability, it is immaterial whether the debt or liability is present or future, whether it is certain or contingent, or whether its amount is fixed or liquidated, or is capable of being ascertained by fixed rules or as a matter of opinion; and references in any such provision to owing a debt are to be read accordingly.
(4) In any provision of the Act or the Rules about winding up, except in so far as the context otherwise requires, "liability" means (subject to paragraph (3) above) a liability to pay money or money's worth, including any liability under an enactment, any liability for breach of trust, any liability in contract, tort or bailment, and any liability arising out of an obligation to make restitution.
(5) This Rule shall apply where a company is in administration and shall be read as if references to winding-up were a reference to administration."
"That was a case on the substantially identical language of section 37 of the Bankruptcy Act 1883. The debtor became bankrupt after entering into an arbitration agreement with the creditor which provided that the costs of the arbitration were to be in the discretion of the arbitrator. After the debtor became bankrupt, the arbitrator made an award, including a costs award, in favour of the creditor. The Divisional Court held, reversing the County Court judge, that the costs award was provable in the bankruptcy, identifying the contractual submission of the debtor to the arbitrator's costs discretion as a sufficient pre-cut-off date legal obligation."
"(1) Costs of legal proceedings are in the discretion of the court. Until an order for payment of costs is made there is no obligation or liability to pay them and there is no right to recover them.
(2) Once legal proceedings have been commenced there is always a possibility or a risk that an order for costs may be made against a party and, in certain circumstances, even against a non-party or the representative of a party. I would accept that an order for costs is a "contingency" which may or may not happen at some stage during or at the conclusion of the proceedings.
(3) The fact that an order for costs (a) creates an obligation to pay money and (b) is a contingency in legal proceedings is not sufficient, however, to make a claim that the court should exercise its discretion to make such an order a "contingent liability" of the person against whom such an order may ultimately be made. It is accepted that before an order is made there is no present liability to pay. Nor can there be a future liability: there is no certainty that the court will exercise its discretion to make such an order. If, as some of the authorities hold, a contingent liability must arise out of an existing or underlying liability, no such liability can exist simply by reason of a claim for costs made in a writ, summons, application or notice of appeal to the judge or to the Court of Appeal."
"(5) It is true that the language of the Act of 1986 differs from that of the earlier insolvency legislation, particularly in the definition of "liability" to include a liability to pay money. That is wide enough to include an order for costs when it is made. But it is not wide enough to embrace a possibility that the court may exercise its discretion to make a costs order. Further, the reference to liability "under an enactment" is open to the same comment. The Supreme Court Act 1981 as amended, confers a wide power on the court to make orders as to costs, but the liability to pay costs is created not under the Act but under the specific order made by the court in each particular case in the exercise of the general power conferred on the court by the Act."
"Of course when his client issued his strike-out application he exposed himself to the risk of a liability for costs contingent on the future exercise of the court's discretion when determining the pending application. The element of contingency is certainly satisfied but, in my judgment, the element of liability is not. The future exercise of the court's discretion might eliminate that risk of liability. Equally it might elevate the risk of liability into an actual liability, either present, in diem, or subject to taxation. This essential distinction between incurring a liability and exposing oneself to the risk of liability should not be undermined."
"If a liability may be described as a contingent debt for the purposes of section 382 even though at the date of the bankruptcy order there is no legal obligation, then the range of liabilities which are provable in a bankruptcy is enlarged. Such liabilities would include the case where a party is exposed to a risk of an order for costs because he is involved in litigation but has not yet become subject to a liability to pay costs because the court has not made an order for costs against him. This was the situation in Glenister v Rowe …, where, as Sir Martin Nourse has explained, this court held that the risk of an order for costs did not give rise to a contingent liability for the purposes of section 382, the very provision with which we are concerned on this appeal."
"Of major importance to both reasons is the underlying basis of a protective award – that it is to be a measure that enforces the obligation placed on the employer and the failure to comply with that obligation is backed by a penalty which is to be 'effective, proportionate and dissuasive'. That can only be so if it is visited on the employer. It is to our mind unrealistic to say it is not imposed 'by reason of an obligation incurred' before the liquidation."
"In these circumstances, and against this background, it seems to us unreal to describe the protective award as depending upon the exercise of a judicial discretion. The employment tribunal had no option but to make an award. If it had failed to do so its ruling would have been open to challenge as perverse. In our judgment, therefore, it is in no sense stretching the language of rule 13.12(1)(b) to describe the protective award as being 'a liability to which the company may become subject after it went into liquidation by reason of an obligation incurred before that date.' Indeed, we think that is precisely what it is."
"… we are of the view that there is a plain distinction between a prospective and discretionary award of costs (which is not only dependent upon outcome but upon a host of case specific factors and is wholly uncertain) and a liability for a protective award which has arisen directly from the breach of the duty to consult and which, based on the legislative scheme we have described, will be for the maximum period and will only be reduced if there are mitigating circumstances justifying a reduction."
"In Steele, the Secretary of State plainly had a discretion whether or not to make the determination referred to, and until he did so, no liability arose. However, and for the reasons we have already given, this is, in our judgment in no sense analogous to the 'discretion' which arises in the employment tribunal following a breach by employers of their duty to consult under section 188. Under the latter it is the employer's breach which triggers the procedure under sections 189 and 190, and rendered them liable both to the declaration and the protective award under section 189(2)."
"The breach of contract claim arose out of the obligation in each contract of employment, even though the breach occurred after the cut-off date. The claims for unfair dismissal and discrimination were analysed as claims based on statutory obligations imposed on NNUK in favour of each employee from the moment of the commencement of his or her employment, it being, again, irrelevant that the breaches of those statutory obligations all occurred after the cut-off date: see paragraph 25(b) to (d) inclusive. After a concise review of Glenister, Steele, Haine v. Day and [Casson v Law Society  EWHC 1943 (Admin)], the judge continued, at paragraph 33 as follows:
"I am not in any doubt about the matter: but if I were, I think the court should incline towards restricting the category of claims which are not provable. The consequence of the claims not being provable in bankruptcy in Glenister … Steele … and Casson … was that the claims could still be pursued against the discharged bankrupt. But a company does not survive its liquidation: so if a claim is not provable in the liquidation it is completely irrecoverable. It does not seem to me desirable (especially in relation to employees) to create a category of claim which cannot be dealt with in the insolvency process and is otherwise irrecoverable.""
"by no stretch of the imagination can the complex and sophisticated discretionary process created by the FSD regime be described as one in which the Regulator has no real discretion not to issue an FSD or a CN against a target."
An expense in the administration?
"All fees, costs, charges and other expenses incurred in the course of winding up, administration or bankruptcy proceedings are to be regarded as expenses of the winding up or the administration or, as the case may be, of the bankruptcy."
"When the liquidator retains property for the purpose of advantageously disposing of it, or when he continues to use it, the rent of it ought to be regarded as a debt contracted for the purposes of winding up the company, and ought to be paid in full like any other debt or expense properly incurred by the liquidator for the same purpose."
"My Lords, it is important to notice Lindley LJ was not saying that the liability to pay rent had been incurred as an expense of the winding up. It plainly had not. The liability had been incurred by the company before the winding up for the whole term of the lease. Lindley LJ was saying that it would be just and equitable, in the circumstances to which he refers, to treat the rent liability as if it were an expense of the winding up and to accord it the same priority. The conditions under which a pre-liquidation creditor would be allowed to be paid in full were cautiously stated. Lindley LJ said (at page 329) that the landlord "must shew why he should have such an advantage over the other creditors". It was not sufficient that the liquidator retained possession for the benefit of the estate if it was also for the benefit of the landlord. Not offering to surrender or simply doing nothing was not regarded as retaining possession for the benefit of the estate."
"It was not, however, a general test for deciding what counted as an expense of the liquidation. Expenses incurred after the liquidation date need no further equitable reason why they should be paid. Of course it will generally be true that such expenses will have been incurred by the liquidator for the purposes of the liquidation. It is not the business of the liquidator to incur expenses for any other purpose. But this is not at all the same thing as saying that the expenses will necessarily be for the benefit of the estate. They may simply be liabilities which, as liquidator, he has to pay. For example, there will be the fees payable to fund the Insolvency Service, ranking as paragraph (c) in rule 4.218(1), where the benefit to the estate may seem somewhat remote."
"41. The Court of Appeal said that they were driven to the conclusion that this case was wrongly decided. I respectfully agree. In the first place, the question of whether the community charge should count as an expense of the liquidation was not a matter for the judge's discretion. It depended upon whether it came within one of the paragraphs of rule 4.218. In my opinion if, as was common ground, the company was the chargeable person, it was a necessary expense which came within paragraph (m). If, therefore, the liquidator had sufficient assets after satisfying the liabilities coming within paragraphs (a) to (l), he was obliged to pay it. Secondly, the Lundy Granite Co principle had no relevance. The liability did not arise out of a pre-liquidation obligation. If it came within the language of paragraph (m), it was a liquidation expense.
42. I therefore respectfully adopt the simple approach of Brightman J in Re Mesco Properties Ltd  1 WLR 558 at 561. The statute expressly enacts that a company is chargeable to corporation tax on profits or gains arising in the winding up. It follows that the tax is a post-liquidation liability which the liquidator is bound to discharge and it is therefore a 'necessary disbursement' within the meaning of the Insolvency Rules."
"46. In my opinion, the question of whether such liabilities should be imposed upon companies in liquidation is a legislative decision which will depend upon the particular liability in question. It should not be ruled out by an illegitimate extension of the liquidation expenses principle, which was devised more than a century ago for an altogether different purpose."
"… my reading of Lord Hoffmann's speech is that, although on the particular facts in Toshoku the statutory liability was imposed expressly on a company in liquidation, he regarded the "necessary disbursements" category of liquidation expense as including all statutory liabilities imposed on a company in liquidation whether expressly, or by a criterion for liability (such as rateable occupation or property ownership) which made no distinction between companies which were, and were not, in liquidation."
"I therefore conclude that the Toshoku principle does indeed establish as a general rule that where by statute Parliament imposes a financial liability which is not a provable debt on a company in an insolvency process then, unless it constitutes an expense under any other sub-paragraph in the twin expenses regimes for liquidation and administration, it will constitute a necessary disbursement of the liquidator or administrator. That is the general rule, whether the statute expressly refers to companies in an insolvency process as being subject to the liability, or whether the statute achieves the same result by using a criterion for liability which is insolvency neutral. Any other conclusion would in my judgment attribute an excessive weight to the linguistic method by which different legislation achieved the same result, namely that the statutory obligation in question is a liability of a company in an insolvency process."
"The force of this point is, if anything, strengthened by the fact that the general description of the invariable requirements imposed by the issue of an FSD under section 44(3) are more readily applicable to a target which is a going concern, with a business future, than to a target which is in the death throes normally associated with being in an insolvency process. It is in that context no answer for the Regulator to point to the fact that, thus far, all cases of the implementation of the FSD regime have occurred after the collapse into insolvency of the target group. My reading of the FSD regime, taken as a whole, is that Parliament expected it to be applied, if possible, to targets which, because they were still trading, had some prospect of being able to provide ongoing support to the relevant pension scheme during the rest of the scheme's natural life. The fact that the Regulator's resources and access to relevant information may make that a difficult task in practice, does not significantly impinge upon the perception to be derived from section 43(3)."
"Notwithstanding that a provable debt solution is, to my mind, obviously fairer as between scheme members and unsecured creditors and preferable as a means of resolving the underlying policy clash, I find myself driven with reluctance to the conclusion that, when formulating the 2004 Act, Parliament did in fact choose to leave the priority questions which would inevitably flow from the application of the FSD regime to companies in an insolvency process to be resolved purely by the insolvency legislation. "
Conclusion and disposition
Lord Justice Rimer
Lord Justice Laws