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IPE special report May 2018

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The UK regulator has got its teeth back

Champagne corks were popping back in August near the UK’s south coast when Brighton-based UK Pensions Regulator (TPR) ended a six-year legal battle with the insolvent Lehman Brothers.

When the US bank filed for Chapter 11 protection on 15 September 2008 and triggered the world’s largest insolvency, global financial markets entered a prolonged and disastrous meltdown. The UK arm left a hefty deficit for a pension scheme gearing up for entry into the Pension Protection Fund (PPF).

However, TPR, together with trustees at the scheme, sought financial redress from the remaining solvent Lehman businesses through financial support directives (FSDs), thereby kicking off a game of legal cat and mouse.

The pensions watchdog issued six FSDs to different Lehman subsidiaries in the hope of recovering £119m (€150m) and allowing the scheme to stand alone or enter the PPF with a reduced burden. Eventually, after passing through the High Court in London, the Court of Appeal and the Supreme Court, with lawyers wrangling over every detail, the case was settled, and Lehman Brothers handed over £184m to secure a full buyout.

While this agreement can be seen as a great success story for the under-resourced regulator, it does have wider implications for ongoing legal battles, future insolvencies and trustee-sponsor relationships. The regulator is in a three-way tug of war over Nortel Networks, the world’s second-largest insolvency, fighting to secure funding for a £2.1bn deficit in Nortel’s UK defined benefit scheme, joining the company’s Canadian pension plan and US bondholders in challenging administrators for assets.

While the basic premise echoes that of the Lehman case, the additional legal challenges, and complications in both the US and Canada, make the Nortel case significantly more complex.

Marcus Laughton, an in-house lawyer for TPR, says the regulator is less in control in the Nortel case than with Lehman. “Lehmans is not an exact analogy but it certainly cannot harm the case,” he says. “There is a US and a Canadian judge trying to resolve the second-biggest insolvency in the world. I’m trying to understand how two judges can make a ruling that won’t be appealed. We are hoping for a settlement.”

To see how the Lehman victory might help the regulator it is important to understand how the result was achieved. Laughton describes the win as “a stonking good result” but stresses the difficulty the watchdog had in achieving it.

TPR first fought a legal battle to secure the rights of an FSD against an insolvent firm, and then to ensure it ranked well enough to be taken seriously. In the end, as Lehman Brothers’ administrator, PwC, finalised the European insolvency process, the firm eventually decided to settle. “I think they thought they might lose in the upper tribunal,” Laughton says. “They had thrown everything at us but were forced to deal in the end.” 

It also came down to what Laughton says was “a knife-edge decision” by the High Court to allow TPR to secure additional funding above the section 75 debt created at insolvency, which hit the Lehman side hard.

Meanwhile, Laughton says the Lehman result and the regulator’s persistency has already had a positive impact on other legal cases. Aside from Nortel, TPR has domestic issues at hand, including warning notices for subsidiaries in the Guinness Peat Group.

“What is the point of fighting if you are going to lose – you might as well just settle,” Laughton says. “I have seen evidence of this approach now. Administrators and target parties will have a more realistic attitude.”

With the Lehman case, the regulator’s approach and FSDs hung on the result – it would have been detrimental to its credibility to have lost, according to Laughton. “Every case has to be determined on its facts,” he says. “But, if we can get through six years of very, very aggressive litigation in the biggest insolvency in the world, with different jurisdictions and nearly 40 targets, then other cases will be less challenging. As a legacy case, it should be helpful to the regulator.”

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