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Friday, 7 January 2011

Nortel Networks and the Pensions Regulator: is CVA the answer?

In the recent case of Nortel Networks and the Pensions Regulator, Mr Justice Briggs has ruled that meeting Financial Support Directions (FSDs) and Contribution Notices (CNs) from the Pensions Regulator are an expense of the administration.

An FSD is a direction by the Pensions Regulator that a company within a group has to support the pension of another company in the group, if that company doesn't have the financial resource. The case is important as the company that was subject to the FSD went into administration.

This could mean that any company that is connected to another company with a defined employee benefit pension, that has a shortfall, could be in the event of becoming insolvent (and enterring administration) required to have that shortfall as an expense of the administration.

Time will tell if this ruling stands, or a different decision is reached on appeal.

What does this mean for the rescue culture and our preferred tool the company voluntary arrangement (CVA )?

As a CVA is not subject to the same rules in relation to expenses in administration, this ruling may make a CVA a more attractive insolvency procedure. An administrator may be reluctant to take on an administration if they felt that there was a risk of the liabilities of an FSD being paid as a cost of the administration, prior to their own fees.

So how should this potential liability be treated? Could it be a contingent creditor?

A contingent creditor would be allowed a vote at the creditors meeting worth £1 but what if, post CVA, the company was made subject to an FSD what would be the affect on the dividend? Given pension deficits can be substantial then the dividend could go from being 50p in the pound to 5p. There would then need to be another creditors meeting and the creditors may reach a different decision. Of course the Pension Trustees may also wish to support the revised CVA scheme and with a large vote this may see the CVA approved once again.

The question should also be asked as to why anyone would wish to issue an FSD to an insolvent company. However, it could still happen as in a large corporate group with some solvent and insolvent businesses the financial health of the parts might difficult for the pension regulator to establish.

In summary the ruling seems likely to make some rescues by administration much more difficult and the CVA, in our view could become the attractive option.

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