Bankruptcy includes liabilities that exist before the date of bankruptcy.
Summary
Companies in the Lehman and Nortel groups entered administration.
During the administration process, the Pensions Regulator ordered companies within the two groups to provide financial support to their respective pension schemes, which were underfunded.
The Supreme Court held that the liability to provide financial support was a contingent liability and a provable debt.
Background
The Lehman Group was an international banking group which collapsed in September 2008. The Nortel Group ran an international telecom, computer network and software business which collapsed in January 2009.
Both groups operated pension schemes for companies and employees based in the UK.
The Pensions Act 1995 introduced a minimum funding requirement for employee pension schemes. The Pensions Act 2004 introduced a financial support direction (FSD) regime, under which the Pensions Regulator could force groups of companies to contribute to an underfunded pension scheme.
Direction to pay into pension funds
When the Lehman and Nortel groups went into administration, there were significant shortfalls in their pension funds.
The Pension Regulator issued directions to Lehman and Nortel to pay into the pension funds. The administrators asked the court where these payments should rank, compared to their expenses and debts to the companies' creditors.
The High Court and Court of Appeal held that the liability to pay into the pension funds was an expense of the administrators. It would be paid ahead of any unsecured creditors.
The administrators appealed to the Supreme Court.
The court's decision
The Supreme Court held that a company's liability to contribute to an underfunded pension scheme under the FSD regime is a contingent liability in the event of insolvency.
It does not matter if the Pensions Regulator issues the FSD after the company has gone into administration. The liability exists under the statutory scheme.
Comments
Although this case concerned company insolvency, it confirmed that a bankruptcy debt includes all liabilities that arise from a 'statutory or contractual relationship that existed before the date of the bankruptcy.'
These are contingent liabilities and are therefore provable debts in bankruptcy. Other examples include the liability to pay the current year's council tax and guarantees.
Read more about contingent debts in insolvency on Shelter Legal.
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