Home Knowledge The Nortel Pension Debacle

The Nortel Pension Debacle

February 28, 2012

Nortel Networks (Ireland) Limited is one of a number of Nortel Group companies which was placed in administration by an order of the English High Court in January 2009, the English court having found that the centre of main interests of that company (along with Nortel companies incorporated in 18 other jurisdictions in EMEA) was in England for the purposes of the EU Insolvency Regulation. At the same time as administrators were appointed to Nortel Ireland and the other EMEA companies in the Nortel Group, the Canadian and American companies sought protection under Canadian and American bankruptcy law. Since then, global sales have been conducted resulting in the disposal of the majority of the assets of the Group, although the allocation of the sale proceeds from these disposals among the legal entities in the Group has yet to be determined.

At the time the Nortel companies entered administration, the pension scheme of Nortel Networks (UK) Limited, which had been closed to new entrants, had a substantial funding deficit, estimated to be in the region of £2.1 billion.

Under UK pension legislation, the UK Pensions Regulator can impose a financial support direction (“FSD”) on companies which are said to be connected or associated with the sponsoring employers of UK pension schemes where (i) the scheme is in deficit; and (ii) the sponsoring employer is insufficiently resourced under the test set out in the UK Pensions Act 2004. In January 2010, the Pensions Regulator issued a warning notice to a number of the companies in the Nortel Group (including Nortel Ireland), to the effect that it was considering exercising its power to issue a FSD under the 2004 Act. After the appropriate statutory process, the Determination Panel of the Pensions Regulator concluded that an FSD should be issued. Nortel Ireland and the other Group companies targeted by this process have appealed against that decision and the appeal is still pending.

UK pension legislation is silent on the issue of how FSDs rank in the insolvency of a target company. Accordingly, the administrators applied to the English High Court for directions as to whether FSD’s issued by the Pensions Regulator to Nortel companies in administration or liquidation rank as ‘expenses’ (having super priority in the insolvency proceedings), or merely as provable debts ranking pari passu with other unsecured creditors of each company. In December 2010, Mr Justice Briggs held that any liability under a FSD issued to a company in administration or liquidation will amount to an expense of the administration or liquidation. The decision is now under appeal to the UK Supreme Court.

The provisions of UK pension law which enable an FSD to be imposed on a company connected with an employer whose pension scheme is in deficit are unique to English law and have no direct equivalent in Irish law, with the possible exception of section 140 of the Companies Act 1990 under which a company related to a company in liquidation can be ordered to contribute to the debts of the latter. However, if an Irish company were associated with an English company which, being a sponsoring employer under an occupational pension scheme, became insolvent with a significant pension deficit, the English legislation might be used by the UK Pensions Regulator to seek an FSD against the related Irish company.

It is by no means certain that an FSD would be recognised outside the UK, but if the Irish or other foreign related company had either its centre of main interests (COMI) or an establishment in England, it could be exposed to this potential liability.

Contributed by Maureen Daly.