In December 2010, the High Court handed down an important judgment in joint proceedings brought by the Lehman Brothers and Nortel administrators and relating to the Pension Regulator's (the Regulator) power to issue financial support directions (FSDs) against companies after they have entered into insolvency (Bloom and ors v The Pensions Regulator and ors [2010] EWHC 3010 (Ch)) (see box "What is an FSD??").

It would be fair to say that the decision has caused some ripples in both pensions and insolvency circles.

In January 2009, Nortel Networks Corporation and several subsidiaries were placed into administration procedures in a number of jurisdictions, including the UK. The Regulator’s Determinations Panel (the Panel) heard the case and, in July 2010, the Regulator issued an FSD against 25 companies in the worldwide Nortel group on the grounds that the employer of the Nortel UK pension scheme was "insufficiently resourced" (see also News brief "“Moral hazard powers: Pensions Regulator on the warpath?”",).

In September 2010, the Panel then upheld the issue of FSDs against six Lehman Brothers group companies. Here, the FSDs were based on the other limb of the statutory test; namely, the pension scheme employer being a "service company". In its reasoning, the Panel said that the existence of insolvency proceedings did not go against the reasonableness of imposing an FSD; here, the complexity and multi-jurisdictional nature of the group meant that "if anything it is more reasonable to impose an FSD on an insolvent target."

The administrators in each case disagreed, bringing this joint challenge to the High Court.

The judge faced the unenviable decision as to whether, in principle, the costs of complying with an FSD issued after the commencement of administration:

The stakes were therefore high for all parties. In the end, the judge decided (with great reluctance) that the first option was the right answer on the law as it stands; indeed, he described the situation as "a legislative mess".

The decision has been described as giving FSDs "super priority" in insolvency. It is important to understand what this shorthand description actually means in practice.

The importance of timing. The case only concerned FSDs issued after the appointment of an administrator. If an FSD is made before the appointment, any amounts due would still be unsecured.

Fixed vs floating charges. A point not brought out in some reports of the case is that it has a different impact depending on whether creditors hold floating charges or fixed charges. While monies paid pursuant to an FSD rank above floating chargeholders (creating the prospect of administration expenses so large that floating chargeholders might receive no return at all), they rank behind fixed chargeholders, who can still enforce security over the charged assets.

A sensitive issue for administrators. Although administrators' costs rank among the administration expenses which are given priority, they are still at the foot of that list, unless the court orders otherwise. In any insolvency where there is even a small risk of Regulator intervention, administrators may seek additional comfort that their remuneration will be paid.

There is concern that the Regulator will be sorely tempted to concentrate on issuing FSDs to insolvent companies, especially given its statutory objective to protect the benefits of pension scheme members. It is worth noting, however, that in its statement welcoming the decision, the Regulator insisted that it would not approach FSDs any differently. In other words, it does not intend to prioritise unduly insolvency cases ahead of those relating to solvent companies, even though FSDs in such cases have (for now) been given additional power.

We understand that permission has been granted to appeal the case to the Court of Appeal, meaning that this decision could prove only the latest battle in an intriguing trench war between insolvency practitioners and the Regulator. Particularly in light of the judge’s somewhat despairing comments, there must also be a real possibility of the government deciding to change the relevant legislation so that "super priority" is not given to FSDs in insolvencies. The Insolvency Service has already indicated that it is considering the implications of the decision.

Until then, given the potential size of pension scheme deficits (the underfunding in relation to the Nortel schemes was £2.1 billion), the wider impact for restructurings and refinancings could be very significant. The message for insolvency practitioners, lenders and employers alike is plain: tread very carefully.