Bankrupt parent companies based outside of the U.K. can be held financially responsible for the funding shortfalls in their U.K. subsidiaries' defined benefit plans, a London court ruled last week.
The unprecedented decision — which combined two separate cases before the U.K.'s High Court of Justice involving Lehman Brothers Holdings Inc. and Nortel Networks Corp. — also placed the priority of the pension liabilities imposed by government regulators before all unsecured creditors and some secured creditors.
“Other multinational companies will be looking with interest at the outcome here,” said David Blake, director of the Pensions Institute at City University's Cass Business School in London. “What is interesting about the Nortel and Lehman Brothers cases is that these companies are headquartered outside the U.K.”
Sources familiar with the cases said the decision is likely to be appealed by both companies.
Under U.K. law, The Pensions Regulator — the government agency responsible for regulating occupational pension plans — can issue a financial support direction or a contribution notice to companies with pension deficits. A support direction requires a company to have a plan to cover pension shortfalls within a certain period; a contribution notice under certain circumstances could constitute a one-off contribution to the pension fund.
Though rarely exercised, FSDs were implemented against the U.K. and overseas subsidiaries of Lehman Brothers and Nortel following their parents' bankruptcy filings in September 2008 and January 2009, respectively. The regulator required the companies to support Nortel's U.K. pension deficit totaling £2.1 billion ($3.3 billion) and Lehman's £148 million shortfall, according to data provided by the regulator.
“The Pensions Regulator welcomes the judgment. It confirms an FSD is valid if issued after an insolvency event. In particular, it supports the claims of the Nortel and Lehman pension trustees in their respective administration processes,” according to a statement published on its website following the ruling. Ben Lloyd, spokesman for the regulator, said agency officials had no further comment beyond what was published.
Attorneys at Linklaters LLP, which is representing Lehman Brothers, declined to comment. Attorneys at Herbert Smith LLP, which represents Nortel, could not be reached for comment by press time.
Other sources familiar with the matter said both companies had argued that they are not required to comply with the FSDs because the orders were issued after the date of the bankruptcy filings and that the assets of overseas subsidiaries cannot be used to reduce U.K. pension deficits.