Regulator appeals ruling in Nortel case

The Pensions Regulator was surprised by the decisions of the US and Canadian courts at the end of February. We have filed our motion for leave to appeal in Canada where the regulator is a party to the case. On the basis of the order made, we believe that the Pensions Regulator's Financial Support Direction (FSD) process has been misinterpreted as a judicial process which creates a new claim.

The February rulings do not prevent the regulator from pursuing an FSD against Nortel companies. The regulator believes an FSD is appropriate in this case given the deficit of the UK pension scheme of some £2.1bn and other factors in the case. Pursuing the FSD is in accordance with the regulator's statutory objectives under UK pensions law, including protecting the benefits of scheme members.

The FSD will allow the trustees of the Nortel Networks UK Pension Plan, or the Pension Protection Fund (PPF) on their behalf, to claim as creditors in the insolvencies of other members of the Nortel Group. The regulator believes other members of the Group benefited from the operations of Nortel Networks UK Ltd, and the FSD allows the trustees and PPF to continue to claim financial support for the pension scheme. Without such support there is a greater chance the scheme will enter the PPF, in which case members' benefits will be reduced to PPF levels. The trustees and PPF have participated in the insolvency process of Nortel's Canadian and US companies in accordance with Canadian and US rules, and submitted their claims by the deadline of 30 September 2009.

The FSD process provides the trustees, PPF, courts (in the UK and overseas), and those supervising Nortel insolvencies, with a determination relating to financial support in respect of pension deficiencies. This is a UK regulatory process and is wholly separate from the bankruptcy procedure in Canada. The FSD process is not an enforcement procedure in any way designed to operate outside the scope of insolvency processes.

BACKGROUND TO THE RULINGS

In January 2009, Nortel Networks Corporation and several subsidiary companies were placed into various creditor protection or administration procedures around the world. This included administration in the UK; the Companies' Creditors Arrangement Act (“CCAA”) process in Canada; and the Chapter 11 process in the US.

Each insolvency process imposed a moratorium or “stay” on legal proceedings and on actions against property of the Nortel Group. The purpose behind this is to ensure creditors make their claims within the insolvency process in question, rather than by e.g. bailiffs executing against a company's property.

In the Ontario Superior Court of Justice Judge Geoff Morawetz has declared that the UK FSD process breaches the “stay” and ordered that any outcome of it will be null and void in the Canadian insolvency process. It is unusual for a court to declare the actions of a regulator outside its jurisdiction null and void.

In the US Bankruptcy Court for the District of Delaware Judge Kevin Gross has made an order against the trustees and PPF declaring that their participation in the regulator's proceedings (in respect of Nortel US entities involved in the Chapter 11 process) would breach the stay. The trustees and PPF have filed a leave to appeal.

BACKGROUND TO THE FSD

The Canadian and US processes called for all creditors, including overseas creditors, to submit claims by 30 September 2009. Before the deadline, the trustees of the Nortel Networks UK Pension Plan (the 'UK Pension Plan') and the PPF jointly filed contingent claims for the estimated £2.1bn ^[1] deficit in the UK Pension Plan. A third claim for a part of the deficit was also made based on guarantees given to the UK Pension Plan by Nortel Networks UK's Canadian parent Nortel Networks Limited.

The contingent claims will be made certain and quantified by processes undertaken by both the Pensions Regulator and the regulator's Determinations Panel ^[2]. This panel will, if appropriate, issue a FSD against Nortel companies which it considers should help support the UK Pension Plan. This may be because of the benefit they have received from UK employees, benefit from other UK activities, or for other reasons. This is a fundamental part of the UK regulatory process and falls under the Pensions Regulator's functions under UK pensions law.

Consistent with this process, the Pensions Regulator issued a warning notice on 11 January, 2010 (“the Warning Notice”) setting out the regulator's case for a FSD against certain members of the Nortel group of companies. The regulator has requested representations from affected parties and target companies are made by 15 March 2010.

The Determinations Panel will determine whether to issue an FSD after considering the Warning Notice and representations from affected parties at a hearing before 30 June, 2010.

^{[1]  As estimated by the Scheme Actuary to the UK Pension Plan as at 13 January 2009 and in accordance with s.75 of the Pensions Act 2004
[2]  The Determinations Panel is a panel of individuals set up under the Pensions Act 2004. Its role is to decide whether the regulator should take certain serious regulatory acts. It carries out this role in a fair, open and impartial manner at arm's length from the regulator's case teams, and after receiving representations from parties affected by the proposed acts. It is a regulatory rather than judicial process.}

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