A financial support direction (FSD) or contribution notice (CN) was issued by the Pensions Regulator to company which had entered into insolvent administration. Group Company B and Group Company C had final pension salaries in place for their employees. Both B and C had significant deficits (£120 million and £2.1 billion respectively) and so entered insolvent administration. Financial support was provided by target companies, by the issue of FSDs by the Pension Regulator. The FSDs were issued after the target companies had entered insolvency administration. The court considered whether liability imposed by the FSDs would be considered (1) as an expense of the target company’s administrator, given priority over preferential and unsecured creditors; (b) pari passu with other unsecured creditors as a provable debt; or (3) as neither.

The Court of Appeal opted for option (1), dismissing option (2) on the authority of previous case law. The subsequent appeal was partly permissible. The court deemed it illogical to place focus on when the FSD or CN was issued, considering it was based on events which occurred prior to insolvency. The previous case law relied upon was short of reasoning and reflected a period when the courts were less anxious for an insolvency to clear all the liabilities of a bankrupt. The court held the definition of "provable debt" under the Insolvency Rules 1986 r.12.3 was very broad, principally in conjunction with r.13.12 which defined "debt". Rule 13.12(1) (a) applied to liabilities to which the company "is subject" at the date of insolvency. Therefore, as the target companies were not subject to the FSD liability at the date of insolvency, it fell outside the scope of this provision.

The court held however that target companies' potential liabilities under the FSDs fell within r.13.12 (1) (b) even though the FSDs were not issued until after insolvency. The target companies were members of a group of companies and were in serious financial distress. The administrators were therefore bound to meet the liabilities of the target companies under the FSD and the liabilities should be regarded as provable debts. Such liabilities were not both provable debts and expenses. If they were not deemed provable debts they would not be considered expenses under r.12.2 and r.2.67 because a disbursement would fall under r.2.67 (1) (f) if it arose out of something done by or on behalf of the administrator in the administration.

In addition, a possible liability under an FSD did not result from any act by or on behalf of the administrator. The fact that an event took place during the administration which resulted in a debt on the part of the company was insufficient reason to conclude a payment of the debt was "an expense of the administration". Finally the court held it would be nonsensical if the CN had priority over other unsecured creditors when issued after insolvency administration but it would not have priority if issued before insolvency. http://bit.ly/11ftKdU