Strand, London, WC2A 2LL
B e f o r e :
(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 LIMITED
(1) ANTHONY VICTOR LOMAS
(2) STEVEN ANTHONY PEARSON
(3) MICHAEL JOHN ANDREW JERVIS
(4) DAN YORAM SCHWARZMANN
(5) DEREK ANTHONY HOWELL
|- and -
(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 (formerly Lehman Brothers Asset Management (Europe) Limited)
Mr William Trower QC, Mr Tom Smith and Mr Andrew Mold (instructed by Herbert Smith LLP) for the Nortel Administrators
Mr Robin Dicker QC, Mr Paul Newman QC and Mr Daniel Bayfield (instructed by Linklaters LLP) for the Lehman Administrators
Ms Raquel Agnello QC, Mr Jonathan Hilliard and Mr Thomas Robinson (instructed by The Pensions Regulator)
Mr Richard Sheldon QC, Mr Michael Tennet QC, Ms Felicity Toube and Mr Edward Sawyer (instructed by Hogan Lovells International LLP) for Nortel Networks UK Pension Trust Limited and the Board of the Pension Protection Fund)
Mr Gabriel Moss QC, Mr Nicolas Stallworthy and Mr David Allison (instructed by Travers Smith LLP) for the Trustees of the Lehman Brothers Pension Scheme and the Board of the Pension Protection Fund
Mr Barry Isaacs and Mr Richard Hitchcock (instructed by Weil, Gotshal & Manges) for Lehman Brothers Holdings Incorporated and Lehman Brothers Asset Management (Europe) Limited
Hearing dates: 24th, 25th, 26th, 29th & 30th November 2010
Crown Copyright ©
Mr Justice Briggs:
THE FSD REGIME
"(a) to protect the benefits under occupational pension schemes of, or in respect of, members of such schemes,
(b) to protect the benefits under personal pension schemes of, or in respect of, members of such schemes within subsection (2),
(c) to reduce the risk of situations arising which may lead to compensation being payable from the Pension Protection Fund (see Part 2).
(d) to promote, and to improve understanding of, the good administration of work-based pension schemes."
Financial Support Directions - FSDs
"(2) The Regulator may issue a financial support direction under this section in relation to such a scheme if the Regulator is of the opinion that the employer in relation to the scheme—
(a) is a service company, or
(b) is insufficiently resourced,
at a time determined by the Regulator which falls within subsection (9) "(the relevant time)."
By subsection (9) and the FSD Regulations, the relevant time is defined as any time within a period of two years before the date of the determination of the Regulator to issue the FSD in question. I shall adopt the jargon which refers to that time as "the look-back date".
"(3) A financial support direction in relation to a scheme is a direction which requires the person or persons to whom it is issued to secure—
(a) that financial support for the scheme is put in place within the period specified in the direction,
(b) that thereafter that financial support or other financial support remains in place while the scheme is in existence, and
(c) that the Regulator is notified in writing of prescribed events in respect of the financial support as soon as reasonably practicable after the event occurs."
The phrase "prescribed events" in subsection (3)(c) includes insolvency events affecting the employer and any target, and any failure to comply with arrangements put in place pursuant to the FSD: see FSD Regulation 4.
"(1) For the purposes of section 43 (financial support directions), "financial support" for a scheme means one or more of the arrangements falling within subsection (2) the details of which are approved in a notice issued by the Regulator.
(2) The arrangements falling within this subsection are—
(a) an arrangement whereby, at any time when the employer is a member of a group of companies, all the members of the group are jointly and severally liable for the whole or part of the employer's pension liabilities in relation to the scheme;
(b) an arrangement whereby, at any time when the employer is a member of a group of companies, a company (within the meaning of section 1159 of the Companies Act 2006 (c. 6)) which meets prescribed requirements and is the holding company of the group is liable for the whole or part of the employer's pension liabilities in relation to the scheme;
(c) an arrangement which meets prescribed requirements and whereby additional financial resources are provided to the scheme;
(d) such other arrangements as may be prescribed.
(3) The Regulator may not issue a notice under subsection (1) approving the details of one or more arrangements falling within subsection (2) unless it is satisfied that the arrangement is, or the arrangements are, reasonable in the circumstances."
Subsection (4) explains that the phrase in subsection (2) "the employer's pension liabilities" includes, although it is not limited to, the employer's section 75 debt.
"(a) the interests of the generality of the members of the scheme to which the exercise of the function relates, and
(b) the interests of such persons as appear to the Regulator to be directly affected by the exercise."
"(7) The Regulator, when deciding for the purposes of subsection (5)(b) whether it is reasonable to impose the requirements of a financial support direction on a particular person, must have regard to such matters as the Regulator considers relevant including, where relevant, the following matters—
(a) the relationship which the person has or has had with the employer (including, where the employer is a company within the meaning of subsection (11) of section 435 of the Insolvency Act 1986 (c. 45), whether the person has or had had control of the employer within the meaning of subsection (10) of that section),
(b) in the case of a person falling within subsection (6)(b) or (c), the value of any benefits received directly or indirectly by that person from the employer,
(c) any connection or involvement which the person has or has had with the scheme,
(d) the financial circumstances of the person, and
(e) such other matters as may be prescribed."
No "other matters" have been prescribed under sub-subsection (e) thus far. Since the decision whether or not to issue an FSD is another function of the Regulator, the general requirement to have regard to the interests of both the employees and the target is also engaged.
"(a) the employer in relation to the scheme would not be a service company for the purposes of section 43,
(b) the employer in relation to the scheme would not be insufficiently resourced for the purposes of that section, or
(c) it would not be reasonable to impose the requirements of a financial support direction, in relation to the scheme, on the applicant."
Once issued, such a clearance statement binds the Regulator in relation to the power to issue an FSD unless there has been a relevant change of circumstances from those described in the application. I was told that a large number of such clearance statements have been applied for and given, although the applications to which these proceedings relate concern only the second and third occasions upon which an FSD has either been issued, or is imminent.
Contribution Notices - CNs
"(a) whether the person has taken reasonable steps to secure compliance with the financial support direction,
(d) the relationship which the person has or has had with the parties to any arrangements put in place in accordance with the direction (including, where any of those parties is a company within the meaning of subsection (11) of section 435 of the Insolvency Act 1986, whether the person has or has had control of that company within the meaning of subsection (10) of that section."
"The sum specified in the notice is to be treated as a debt due from the person to the trustees or managers of the scheme."
Provision is then made for the Regulator or, in specified circumstances, the Board of the PPF, to exercise any powers of the trustees or managers to recover the debt. Further provision is made for the issue of CNs to two or more targets, in such a way as to create joint and several liability for a specified amount. Section 50 enables the Regulator to restrain the trustees or managers of the scheme from pursuing recovery of the section 75 debt while, at the same time, a CN is being enforced and ensures that any payments under a CN are treated as reducing the amount of the section 75 debt. Finally, section 50(9) enables the Regulator, on application, to reduce the amount specified in a CN where, for example, there have in the meantime been payments of part of the section 75 debt, or payments by other targets under CNs in respect of the same FSD.
"(a) the giving of notice to such persons as it appears to the Regulator would be directly affected by the regulatory action under consideration (a "warning notice"),
(b) those persons to have an opportunity to make representations,
(c) the consideration of any such representations and the determination whether to take the regulatory action under consideration,
(d) giving of notice of the determination to such persons as appear to the Regulator to be directly effected by it (a "determination notice"),
(e) the determination notice to contain details of the right of referral to the Tribunal …."
The issue of an FSD and a CN must each be subjected separately to this procedure. The Tribunal in question is now the Upper Tribunal (Tax and Chancery Chamber), from which an appeal lies to the Court of Appeal. By section 103(4) the Tribunal must, on a reference, "determine what (if any) is the appropriate action for the Regulator to take in relation to the matter referred to it". It is common ground that the result of that phraseology is to require the Tribunal to approach the matter afresh rather than by way of review or appeal so that, in practice, the Tribunal procedure begins with a requirement upon the Regulator to state its case.
A. That the cost of complying with an FSD or a CN was an expense of the administration or liquidation.
B. That the cost of compliance was a provable debt within the administration or liquidation.
C. That the court should direct compliance by the relevant office-holders under the principle in ex parte James (1874) 9 Ch App at 609.
D. That an FSD or a CN created a non-provable claim against the target company, payable (if at all) only out of any surplus available after payment in full of all unsecured creditors.
THE INSOLVENCY LEGISLATION
"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 Toshoku analysis has been applied to companies in administration, mainly because of the creation after that decision of a similar expenses regime for such companies: see Exeter City Council v. Bairstow  BCC 236.
The Priority Issues
i) Nothing in the FSD regime excluded companies in an insolvency process from being made targets for the purposes of an FSD or a CN. The criteria for liability were insolvency neutral. Therefore Parliament intended that liabilities arising from an FSD and a CN should be paid by such companies.
ii) Financial liabilities triggered by an FSD or a CN issued after the insolvency cut-off date are not provable debts.
iii) Therefore, since Parliament nonetheless intended that they should be paid, they must rank as expenses under the Toshoku principle. Otherwise they would fall into a black hole.
i) Although they shrank from suggesting that the FSD regime was wholly inapplicable to a company in administration or liquidation, they submitted that the regime was primarily aimed at solvent corporate targets, that the statutory language made no express reference to targets in an insolvency process, and that Parliament cannot have intended that the priority to be afforded to an FSD or CN liability in the target's insolvency should be higher than the ordinary provable debt priority afforded to the section 75 debt in the insolvency of the employer. To give super-priority to such potentially large and uncertain liabilities would be fatal to the rescue culture.
ii) But they acknowledged, and indeed asserted, that liabilities arising from FSDs or CNs issued after the insolvency cut-off date could not be provable debts.
iii) They submitted that the Toshoku principle was not so inflexible as to require every non-provable statutory liability to be recoverable as an expense. Rather, they submitted, the true principle to be derived from Toshoku was that a statutory liability was an expense if, but only if, Parliament intended that it was not merely a liability of a company in an insolvency process, but a liability which the office-holder was obliged to discharge.
iv) Since for a variety of reasons Parliament could not have intended FSD liabilities to have the super-priority of being expenses, it must have been content for them to be payable only after all provable debts had been paid in full.
"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."
"In determining for the purposes of any provision of the Act or the Rules about winding up, whether any liability in tort is a debt provable in the winding up, the company is deemed to become subject to that liability by reason of an obligation incurred at the time when the cause of action accrued."
The result in T & N was that the claims of those who had suffered actionable damage from asbestosis only after the cut-off date could not prove in T & N's liquidation, even though the alleged negligence which gave rise to their exposure to that condition occurred many years previously. Their common law claims fell, however tragically, down a black hole.
i) A conclusion that a non-statutory liability of a company was not provable in its liquidation left open only the prospect of its payment out of any surplus otherwise available for shareholders: paragraphs 106 to 107. It was not suggested that the common law liability was an expense.
ii) Although the conclusion that a debt was not provable risked a greater injustice to the creditors of companies than to the creditors of individuals, that did not justify a different interpretation of provable debts in corporate insolvency from that laid down by the authorities on provable debts in bankruptcy: see in particular paragraphs 140 to 141.
iii) Contingent liabilities were a creature of Rule 13.12(1)(b) rather than (a). In this respect the judge followed Glenister v. Rowe.
iv) While the negligence of the company might have given rise to a relevant obligation under Rule 13.12(1)(b), sub-rule (2) in its then form conclusively postponed the incurring of any obligation in tort until the accrual of the cause of action.
"7 Although the problem arises in the context of insolvency, it is essentially one of employment law, and particularly employment law in the context of an EU Directive. It seems that before Sir Donald the case was argued primarily as a technical problem of insolvency law rather than in the context of legislation intended to implement an EU Directive. Had the case been argued before him in the way in which it was argued before us, we think it at the lowest possible and, in reality probable, that he would have reached a different conclusion."
"The cases of Glenister and Steele, though inevitably based on their own facts, established a consistent principle of general application that where a court or tribunal has a discretion whether or not to make an award, any sum awarded in the exercise of that discretion does not exist as a debt or liability until the award is made. That principle was not affected by the decision of the Court of Appeal in Haine. The Court of Appeal in that case was concerned that principles of EU law in relation to collective redundancies should be implemented by the law of the UK. It considered it unreal to describe the making of a protective award in the circumstances of that case as depending on the exercise of a judicial discretion. The Court of Appeal carefully distinguished the cases of Glenister and Steele, and left untouched the general principle emerging from those cases to which I have referred."
"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 (above) Steele (above) and Casson (above) 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."
"The broad purview of this Act is, that the bankrupt is to be a freed man – freed not only from debts, but from contracts, liabilities, engagements and contingencies of every kind. On the other hand, all the persons from whose claims, and from liability to whom he is so freed are to come in with the other creditors and share in the distribution of the assets."
i) In relation to that subsequent liquidation, the issue of the FSD would impose a pre-cut-off date legal obligation on the target.
ii) A CN issued after the commencement of that subsequent liquidation would be a means of enforcement of that obligation on a recalcitrant FSD target.
iii) Therefore a CN debt created after the liquidation cut-off date would be a contingent liability as at the cut-off date itself, under Rule 13.12(1)(b).
iv) Nothing in Rule 13.12, in the form applicable to any subsequent liquidation of the applicant targets would have effect such that the cut-off date for those liquidations was any earlier than the onset of those liquidations.
v) The post April 5th 2010 version of Rule 13.12 would have precisely that effect, but the transitional provisions in Schedule 4 to the Insolvency (Amendment) Rules 2010/686 provide at paragraph 1(7) that they do not apply to a liquidation occurring after April 2010, even if it is immediately preceded by an administration taking effect prior to that date.
"As a result of the changes made to the law on administration by the Enterprise Act 2002 (c.40) a company can move between liquidation and administration or between administration and liquidation. Both of these procedures enable creditors to prove their debts at the date of the administration or liquidation respectively. By way of clarification of the existing rules, the amendments provide that the relevant date is the date of the first insolvency procedure commenced. The Rules affected are:-
• Rules 2.86, 2.87, 2.88, 2.89, 4.91, 4.92, 4.93 and 4.94"
Part 2 of the Rules concerns administration procedure. Part 4 concerns winding up. Rules 2.86 and 4.91 both concern the debts in foreign currency, and provide for conversion into sterling on the relevant cut-off date. Rules 2.87 and 4.92 concern periodic payments, which are provable in relation to amounts due and unpaid up to the relevant cut-off date. Rules 2.88 and 4.93 concern interest, and prohibits proof of interest in respect of any period after the relevant cut-off date. Rules 2.89 and 4.94 concern future debts, and enable a creditor to prove for such a debt even if not due on the relevant cut-off date. In each case, the amendments introduced in 2005 do, as the Explanatory Note states, provide that, in relation to any proof of debt in an insolvency process (be it liquidation or administration) which is immediately preceded by the other type of insolvency process (administration or liquidation) the cut-off date is that applicable to the first of those two consecutive insolvency processes.
"It has long been established that the role of the courts in construing legislation is not confined to resolving ambiguities in statutory language. The court must be able to correct obvious drafting errors. In suitable cases, in discharging its interpretative function the court will add words, or omit words or substitute words. Some notable instances are given in Professor Sir Rupert Cross's admirable opuscule, Statutory Interpretation, 3rd ed. (1995), pp. 93-105. He comments, at p. 103:
"In omitting or inserting words the judge is not really engaged in a hypothetical reconstruction of the intentions of the drafter or the legislature, but is simply making as much sense as he can of the text of the statutory provision read in its appropriate context and within the limits of the judicial role."
This power is confined to plain cases of drafting mistakes. The courts are ever mindful that their constitutional role in this field is interpretative. They must abstain from any course which might have the appearance of judicial legislation. A statute is expressed in language approved and enacted by the legislature. So the courts exercise considerable caution before adding or omitting or substituting words. Before interpreting a statute in this way the court must be abundantly sure of three matters: (1) the intended purpose of the statute or provision in question.; (2) that by inadvertence the draftsman and Parliament failed to give effect to that purpose in the provision in question; and (3) the substance of the provision Parliament would have made, although not necessarily the precise words Parliament would have used, had the error in the Bill been noticed. The third of these conditions is of crucial importance. Otherwise any attempt to determine the meaning of the enactment would cross the boundary between construction and legislation: see per Lord Diplock in Jones v. Wrotham Park Settled Estates  A.C. 74, 105-106. In the present case these three conditions are fulfilled.
Sometimes, even when these conditions are met, the court may find itself inhibited from interpreting the statutory provision in accordance with what it is satisfied was the underlying intention of Parliament. The alteration in language may be too far-reaching. In Western Bank Ltd v. Schindler  Ch 1, 18, Scarman L.J. observed that the insertion must not be too big, or too much at variance with the language used by the legislature. Or the subject matter may call for a strict interpretation of the statutory language, as in penal legislation."
THE TOSHOKU PRINCIPLE
"The statute expressly enacts that a company is chargeable to corporation tax on property of 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."
I consider that Lord Hoffmann used the expression "post-liquidation liability" as meaning a liability which, because it arose after the cut-off date, was not a provable debt within the meaning of Rule 13.12. Thus far, Lord Hoffmann's speech is consistent with either of the rival interpretations of it advanced before me.
"One which permits, on equitable grounds, the concept of a liability incurred as an expense of the liquidation to be expanded to include liabilities incurred before the liquidation in respect of property afterwards retained by the liquidator for the benefit of the insolvent estate."
He continued, in paragraph 30:
"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. 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 rates would have been an obligation incurred after the liquidation which (unlike the rent) was not provable and was therefore payable in full." (my underlining)
"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 (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 v. 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."
"The injustice, if any, does not arise because liabilities imposed upon a company in liquidation have priority as expenses of the liquidation, but because it may be unjust to impose certain liabilities upon companies in liquidation."
After reference to liabilities under environmental legislation, and by reference to Re Mineral Resources Limited  1 All ER 746, he concluded at paragraph 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."
"I do not consider that the statutory liabilities for redundancy payments or unfair dismissal claims would be "necessary disbursements" for the purposes of r.2.67(1)(f). First, it would be inconsistent with the scheme of the legislation if the payments referred to in Sch.6 were to be treated as preferential, and yet all other employee-related payments are to be paid as an expense of the administration. That would be to give the Sch.6 payments (which include protective awards) a lesser priority than other types of payments, when the policy appears to have been to give them a greater priority. Secondly, there is nothing in my judgment in Re Toshoku Finance (UK) plc  BCC 110;  1 WLR 671 which requires a different conclusion. It is not the ratio of that case that any liability imposed on a company which is not provable as a debt is thereby rendered a "necessary disbursement". The context in which Lord Hoffmann referred to the fact that certain debts could not be proved shows that he was justifying the treatment of certain debts as expenses, and not offering a definition of what liabilities were disbursements. Even if that were the crucial test for winding up, there would be no reason to apply it to administration. Although the current regime envisages a distribution to secured and preferential creditors without a subsequent liquidation, in the normal case of an administration which does not succeed in rescuing the company, the company will go into liquidation and the statutory payment obligation will be a provable debt under r. 13.12. Finally, a construction of r.2.67(1)(f) which applied it to statutory redundancy payment liabilities and other statutory liabilities would have such adverse policy consequences on the administration regime that it is impossible to see that such a result could have been intended."
"77 It appears to me that the principal basis of the decision was that because of the special treatment of certain categories of employment-related claims under para.99 and under Sch.6, it would be inconsistent to treat further categories as expenses under r.2.67. I concur with that analysis. I also concur with the view that it is not the ratio in Re Toshoku Finance (UK) Plc that any liability imposed on a company which is not provable as a debt is thereby rendered a necessary disbursement. Examples of liabilities which fall into neither category are liabilities in tort where the cause of action arises after the liquidation (see Re T&N Ltd  EWHC 2870;  1 WLR 1728, subject now to the limited exception in r.13.12(2)(b)) and, it would seem, orders for costs made after the commencement of liquidation in respect of pre-liquidation litigation (Glenister v Rowe (Costs)  Ch 76, a decision on the rules for proof in bankruptcy)."
Secondly, after concluding in paragraph 83 that, both in liquidation and in administration, rates were payable by the company, he said, at paragraph 84:
"The observations on rates, as being necessary disbursements within r.4.218(1)(m), in Re Toshoku Finance (UK) Plc may, strictly speaking, be obiter but all members of the House of Lords concurred in Lord Hoffmann's speech and Mr Briggs did not suggest they were wrong. Just as rates are payable in a liquidation as a necessary disbursement, so in my judgment they are payable in an administration."
PRIORITY UNDER THE 2004 ACT
i) if the FSD was issued before the onset of the insolvency process, all financial consequences, both of the FSD and any subsequent CN would create debts provable in the insolvency of the target to which they were issued,
ii) if the FSD was issued after the onset of the insolvency process, the financial consequences of that FSD and any subsequent CN would not rank as provable debts in that insolvency process, so that, as a general rule,
iii) such liabilities would rank as necessary disbursements, and therefore expenses in that insolvency process, with a super-priority as against the claims of any unsecured creditors, and indeed floating charge holders, but that,
iv) if an FSD were issued to a company in one type of insolvency process (say, an administration) which was then followed immediately by another (say, liquidation), then a CN subsequently issued would rank as a provable debt rather than as an expense in the second process.
i) Does the FSD regime apply to target companies in an insolvency process, so as to make its financial consequences liabilities of the insolvent target?
ii) If so, does the 2004 Act make specific provision (by implication, since none is expressed) as to the priority within that insolvency process of any financial obligations thereby imposed on the insolvent target, or simply leave those questions to be decided by the technical provisions of the Insolvency Act and Rules?
I shall address each of those questions in turn.
1. Does the FSD regime apply so as to impose financial liabilities on target companies in an insolvency process?
2. Does the 2004 Act make specific provision as to the priority of the financial obligations imposed by the FSD regime on a target in an insolvency process, or leave that question to be decided by the Insolvency Act and Rules?
i) That, by leaving priority to be decided by the insolvency legislation, the financial obligations are expenses, save in the unusual case where, starting before April 2010, the order of events is administration, FSD, liquidation, CN.
ii) That the 2004 Act specifically prescribes that the financial obligations are an expense.
iii) That the 2004 Act specifically prescribes that the financial obligations are a provable debt.
iv) That the 2004 Act specifically prescribes that the financial obligations are none of those, so that they fall down a black hole.
Subject to the glitch where administration is immediately followed by liquidation, alternatives (i) and (ii) produce the same result, albeit by a different route.
i) Pending any decision by the Regulator as to quantum (either when considering whether to approve proposed arrangements or upon the issue of a CN) the administrators would be faced by a contingent liability with super-priority of an indeterminate but potentially crippling amount.
ii) That would in practice disable him from any informed judgment as to the choice between the alternative statutory objectives of administration, which would, in turn, disable him from the beneficial management of the company's business and affairs.
iii) An administrator would not know whether any dividend would be payable to unsecured creditors, nor even whether he would be able to discharge administration expenses in full.
iv) The uncertainty as to quantum, in the case of a substantial section 75 debt owed the employer, might make it impossible for the administrator of the target properly to determine that its business should continue to be traded.
v) Potential administrators might be put off from accepting office in relation to associated companies of an under-funded employer in a group with a pension scheme in substantial deficit, because of the propensity for FSD obligations to impinge upon his ability to pay either himself, or his employees, remuneration.
vi) The recent strengthening of the rescue culture by the EU Insolvency Regulation in relation to associated group companies with centres of main interests in the United Kingdom would be undermined if, in cases like Nortel, it was perceived that companies under an English insolvency process were uniquely, or particularly, prone to attrition by the financial consequences of the FSD regime.
Ex Parte James
CONCLUSION ON THE MAIN QUESTION
"The fact that a debt counts as an expense of the liquidation does not necessarily mean that the creditor should be allowed immediately to bring proceedings or levy execution. The order of priorities under Rule 4.218(1) may mean that if he is paid at once, the assets to satisfy prior expense claims may be insufficient. So the question of remedy is entirely a matter of discretion."
I can envisage no reason why that analysis is not fully applicable to a debt created by a CN under section 49(3) of the 2004 Act, although the point has not been argued.