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FSD determination in Nortel case

Ref: PN10-13
Thursday 8 July 2010

The Pensions Regulator has published a determination to issue a Financial Support Direction (FSD) against 25 companies in the Nortel group in Canada, the US, Europe and Africa.

 

The Pensions Regulator’s Determinations Panel (DP) found that it would be reasonable to impose the requirements of an FSD on the target companies after the employer of the Nortel Networks UK Pension Plan was found to be 'insufficiently resourced'.

The FSD would require those companies within the group to provide financial support for the scheme. The employer, Nortel Networks UK Limited (NNUK) entered administration in January 2009, together with several other entities worldwide.

Under UK pension law, the FSD requires the target companies to provide financial support up to £2.1 billion - the shortfall on the section 75 buy out basis.

The Determination Notice (PDF) and the Reasons of the Determinations Panel (PDF), set out that from about 1991 the Nortel Group operated increasingly as a single entity and the distinction between corporate legal entities was largely ignored.

NNUK was effectively controlled by the Canadian parent entities - Nortel Networks Corporation (NNC) and Nortel Networks Limited (NNL).

The DP found that the Canadian parent entities’ control over NNUK’s financial position included whether, and in what sum, it contributed to the pension plan.

For some 12 years prior to 2002, the Nortel group benefited by paying little or no contributions to the scheme. The group also benefited from the controlling parent companies’ failure to adequately address the deficit from 2002 onwards.

The DP agreed with the regulator’s evidence that Nortel group companies derived benefit from NNUK’s research and development and sales and marketing activities, for which NNUK was not adequately compensated.

The Nortel group further benefited from a growing interest-free loan drawn against NNUK. This balance came about at the behest of the Canadian parent. NNUK effectively had no choice as to the making of the loan or the terms. At its peak in 2007 the amount of the loan reached £467 million.

June Mulroy, The Pensions Regulator’s executive director for delivery, said:
“The panel’s decision is obviously welcome. It makes clear that companies within the Nortel group benefited from both the activities of Nortel Networks UK - and from the failure by the controlling Canadian companies to allow the UK company to repair the sizeable pension deficit.

“The FSD enables the scheme to have a voice in the insolvency proceedings of the target companies. The FSD is a UK regulatory process and is not an attempt to enforce outside of the Canadian or US insolvency processes. It provides certainty over the size of the pension debt for the courts and those supervising the Nortel insolvencies.

“We will continue to strive for the best result for the 42,000 members of the Nortel Networks UK Pension Plan and to limit calls on the Pension Protection Fund.”

Editor's notes

BACKGROUND

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. Pursuing the FSD is in accordance with the regulator’s statutory objectives under UK pension law, including protecting the benefits of scheme members.
 
In January 2009, Nortel Networks Corporation and several subsidiary companies were placed into various creditor protection and 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 the property of the Nortel Group. The purpose behind this is to ensure creditors make their claims within the insolvency process in question, rather than e.g. bailiffs executing against a company’s property.

The CCAA and Chapter 11 processes called for all creditors, including overseas creditors, to submit claims (including “contingent” claims yet to be quantified) by 30 September 2009. The trustees of the Nortel Networks UK Pension Plan and the PPF jointly filed contingent claims for £2.1bn – the estimated pension shortfall on the section 75 buy-out basis. The regulator’s view is that the FSD is a means of quantifying the contingent claim, and should assist the various insolvency processes. It is not an enforcement procedure intended to operate outside the scope of any of the Nortel insolvencies.

During January 2010 The Pensions Regulator’s case team sent a Warning Notice to 29 target companies within the Nortel group. All parties had the opportunity to make representations during February and early March. This deadline was extended to early May following a request by some of the European target companies. The case was then heard by the regulator’s Determinations Panel (DP) on 02 June 2010.

At the end of February 2010 in the Ontario Superior Court of Justice Judge Geoff Morawetz declared the UK FSD process breaches the CCAA stay and ordered that any outcome of it will be null and void in the Canadian insolvency process.

While the Court of Appeal for Ontario has recently dismissed the regulator’s appeal against Judge Morawetz’s ruling, it has stated that this should not operate to preclude the trustee and/or PPF from asserting a claim in the CCAA process.

Also at the end of February 2010 in the US Bankruptcy Court of 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 Chapter 11 stay. The trustees and PPF have filed an appeal, though the matter has yet to reach the hearing stage.

The regulator presented its case to the DP at the hearing on 02 June 2010. The target Canadian, US, European and African entities chose not to participate in writing or at the oral hearing. The DP released its determination with reasons to all parties on 25 June 2010.

The parties have 28 days from the date of the determination to appeal by making a reference to the Tax and Chancery Chamber of the Upper Tribunal.

The FSD will be issued 28 days after the date of the Determination Notice if no reference is made.

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