Judges say pensions get priority when firms go under

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The Court of Appeal has upheld a landmark ruling that gives priority to company pensioners – ahead of banks and bondholders – when companies become insolvent.

It is a victory for the Government’s Pensions Regulator.

But critics warned the ruling could deter lenders to businesses and “impact on corporate Britain’s ability to sustain any sort of recovery”.

The appeal was brought by administrators acting for the estates of two bankrupt firms.

The bank Lehman Brothers has pension scheme liabilities of £125m and the Canadian telecoms group Nortel Networks £2.1bn.

Appeal judges Lord Justice Laws, Lord Justice Lloyd and Lord Justice Rimer unanimously backed a ruling by Mr Justice Briggs in the High Court last December that UK law requires that the pensioners get paid before the banks who had lent the company money.

Lord Justice Lloyd said that “despite the oddities, anomalies and inconveniences” of the High Court decision, it was right not least because the only alternative would be that the pension scheme liabilities would “go into a black hole”.

The appeal judge said: “That cannot have been the intention of Parliament.”

The case may now go to the Supreme Court for a final ruling.

Under section 75 of the Pensions Act 1995, a company sponsoring a defined benefits pension scheme can be obliged to make up any shortfall between the scheme’s assets and its liabilities.

Lord Justice Lloyd said that, in the Lehman Brothers insolvency, the shortfall under section 75 was estimated to be about £125m.

In the case of Nortel Networks UK Ltd it was put at £2.1bn when the company went into administration in January 2009.

The appeal court upheld the High Court ruling that where a Financial Support Direction (FSD) was issued by the regulator against insolvent companies, like Nortel and Lehman, the costs of complying with it would rank as an “expense” of the administration or liquidation.

The judges all ruled that the administration expense must be paid before any distributions to preferred creditors, floating charges and unsecured creditors.

Stephen Soper, the Pensions Regulator’s executive director for defined benefit funding, welcomed the ruling.