Pension funds cannot jump creditor queue in bankruptcy - UK court

LONDON Wed Jul 24, 2013 4:37pm BST

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LONDON (Reuters) - Pension scheme members cannot jump ahead of other creditors when a company or bank goes bust, the Supreme Court said on Wednesday in a landmark ruling that clarifies the ranking of creditors in an insolvency.

The ruling was the result of a case brought by the administrators of the UK divisions of investment bank Lehman Brothers and Canadian telecoms company Nortel, which filed for bankruptcy protection in 2008 and 2009 respectively.

Britain's pensions watchdog The Pensions Regulator had submitted a claim when Nortel and Lehman went into insolvency asking for pension members to be paid ahead of other claims.

But the Supreme Court said pension fund members should not be ranked above other unsecured creditors in an insolvency.

The court decision clarifies the position of corporate lenders (banks) in the creditor queue.

"The banks should ... be more comfortable lending after today's decision, as they would have demanded more favourable terms or even refused funding if this judgment had gone the other way," said Devi Shah, a partner at law firm Mayer Brown.

The case also provides more clarity on how to handle the pension deficits of insolvent companies. Lehman's deficit stood at 148 million pounds ($227 million) when it filed for bankruptcy, and Nortel's at 2.1 billion pounds.

Paying off sums of this magnitude first would have meant there might not have been enough money to pay off all other creditors.

"Scheme members have the protection of the Pension Protection Fund (PPF), which other creditors don't," Jennifer Marshall, restructuring partner at Allen & Overy, said.

The Nortel and Lehman Brothers pension schemes are both in the PPF, which was launched in 2005 to take over the assets and liabilities of UK-based defined benefit pension schemes if an employer goes bust.

($1 = 0.6508 British pounds)

(Editing by Jane Merriman)

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