A landmark decision has been handed down in the UK courts, which has changed the order of priorities for creditors in UK insolvencies and which threatens to undermine the whole basis on which banks lend to UK corporates, especially those in distress.
The decision clarifies the status of a Financial Support Direction ("FSD") issued by the UK Pensions Regulator against insolvent companies. An FSD is an order requiring a company to put in place financial support measures to underpin deficits in UK pension schemes. Typically, an FSD orders a company to make additional contributions into the pension scheme. The effect of the decision, granted in favour of the Trustees of the Lehman Pension Scheme in the UK and against the Lehman Administrators in the UK is that the liabilities created by an FSD which is issued after the commencement of the insolvency must be paid out by the Administrators as an expense of the Administration, rather than as an unsecured claim. This is good news for those who are members of UK pensions schemes, but not for anyone else concerned with business rescue.
This puts the FSD claim ahead of all creditors and also ahead of the Administrators' own fees and expenses. This is of obvious concern to insolvency practitioners, since in many cases, the FSD liabilities will be of such a magnitude that it would absorb the whole realisations in a case, leaving nothing to pay their fees or costs. Fortunately, Mr Justice Briggs softened the blow by concluding that the Court did have jurisdiction to order that an insolvency practitioner's fees should be paid ahead of the FSD liabilities, but deep uncertainty remains. It is clear that the law needs clarifying in this respect.
The position for unsecured creditors and any bank holding a floating charge over the company's assets is probably the most worrying outcome of this judgement. Banks and other lenders may be unwilling to support companies, especially those facing financial difficulties, if they feel that there is a risk of having their security leap-frogged by massive claims from the Pensions Regulator over which they have no control. In the present shaky recovery in the UK, this is the last thing that the business community needs.
The decision is going to appeal and the outcome will be eagerly but nervously awaited by all interested parties and the whole UK banking sector and the insolvency profession.
We will be delighted to provide answers to any questions you may have, or to refer you for specialist advice if you or your clients have any immediate issues with this potentially unpleasant and unexpected decision.
Julie is a law graduate who qualified with Price Waterhouse in 1994. Julie joined Smith & Williamson in 1997 and became a partner in 2001. With Mike Stevenson, Julie set up Middleton Partners offices in Salisbury and Southampton, both of which are now part of Begbies Traynor.
Julie is a member of the Insolvency Practitioners Association and is a Fellow of The Association of Business Recovery Professionals. Julie deals with all aspects of Corporate Recovery and turnaround work and takes all form of personal insolvency appointments.