The High Court judgment of Mr Justice Briggs was issued on 10 December 2010 in relation to the Nortel and Lehman administrators' applications for directions. They had asked how to deal with the potential obligations to be imposed by the Pensions Regulator on various companies within the groups to contribute to the pension schemes of their associated companies under the moral hazard provisions of the Pensions Act 2004.

The query related to whether such liabilities were capable of being provable debts in the liquidation of an insolvent company where the Pensions Regulator took steps to impose liability after the commencement of insolvency proceedings, after the statutory cut-off date for a provable debt to arise.

The High Court held that the potential pension liabilities were not provable debts if incurred after the statutory cut-off date. Instead, rather than not being payable at all by the insolvent company, they should be met as expenses of the administration from the assets of the insolvent company prior to any distribution to unsecured creditors.

Secured creditors will not be left unscathed either, since the proceeds of floating charge assets are available to meet administration expenses before discharging the secured debt.

Although counsel to the Pensions Regulator suggested that it would not be the case that an associated company would be required to meet the whole of the deficit to a scheme, the amount of any contribution is determined at the discretion of the Regulator and could potentially be substantial.

The decision will undoubtedly cause alarm to lenders to groups with substantial occupational pension schemes. Where an employer is liable to contribute to its occupational pension scheme under a so-called section 75 debt triggered by its insolvency, this is deemed by legislation to have arisen prior to the commencement of the insolvency and hence qualifies as a provable debt. The bizarre effect of this decision is that it will be potentially more beneficial for the Pensions Regulator to pursue an insolvent company associated to an employer under an occupational scheme where the claim will rank as a priority expense rather than ranking with all other unsecured creditors when claiming against the insolvent employer.

The case is expected to be taken to appeal. If the appeal reaches the Supreme Court and the decision is not reversed then there is clearly a case for legislation to follow to put the employer and target companies back on a level playing field. In the interim, it leaves rescues of businesses by way of the administration procedure a less viable option for any company within a group where there is an occupational pension scheme with any form of substantial deficit.