The U.K. Supreme Court on Tuesday began hearing parallel cases challenging whether pension funds of insolvent companies have priority claim over other creditors. Lower court rulings in the cases, which involve up to £2.25 billion ($3.4 billion) in liabilities for the U.K. pension plans of Lehman Brothers and Nortel Networks, have supported that claim.
Following the bankruptcies of New York-based Lehman Brothers Holdings Inc. in 2008 and Toronto-based Nortel Networks Corp. in 2009, the U.K.'s Pensions Regulator in 2010 issued financial support directions ordering Nortel to pay up to £2.1 billion to its underfunded pension plan, and for Lehman Brothers' European unit to contribute £148 million to its pension plan.
Administrators of 20 creditor companies challenged the validity of the Pensions Regulator's orders in cases of insolvency, but both the High Court of Justice and the Court of Appeal upheld them, ruling that the pension liabilities were an expense of the liquidation.
In a statement issued after the appeals court decision, Stephen Soper, the Pensions Regulator executive director for defined benefit funding, sought to allay concerns that such directives would make it more difficult for companies in the process of restructuring to get financing.
“We recognize the importance of the U.K. having an effective restructuring and rescue process, and have no intention of frustrating its proper workings,” Mr. Soper said.
Supreme Court arguments are scheduled to last three days.
Nortel and its affiliates filed for Chapter 11 bankruptcy protection in the U.S., Canada and the U.K. in January 2009. In July 2009, the Pension Benefit Guaranty Corp. took over Nortel's U.S. defined benefit pension plan, which was 58% funded at the time with $716 million in assets and $1.23 billion in liabilities.