In the recent case of Re Nortel Networks UK, the Companies Court considered administrator’s powers to agree to settle or compromise.
The Nortel Group was a multinational telecommunications and data networking equipment manufacturer with 130 subsidiaries in more than 100 countries. The group collapsed in 2009.
The collapse left the pension funds in the UK and the US as the two largest creditors. Realisations were made in the amount of US$7.3bn, however collectively the Group were unable to agree as to how the realisations were to be distributed.
There were numerous negotiations and several mediations before an agreement was made in the form of a global settlement agreement.
The global settlement had four principal features:
The settlement of the Lockbox allocation dispute.
The settlement of certain UK pension claims.
The settlement of various claims between the 19 companies in administration themselves.
The settlement of certain claims relating to one of the French entities.
The agreements had been executed but would not become effective until there was approval of the Court to implement.
The administrators of 19 entities within the Nortel group made an application for directions under paragraph 63 Schedule B1 Insolvency Act 1986. This application was filed in order for the Court to give the administrators liberty to implement the global settlement of the vast majority of the group’s claims.
The administrators set out that the benefits of the global settlement agreement were the avoidance of the litigation risk in relation the Lockbox dispute, the avoidance of risk that the US and Canadian courts may reach a deadlock in respect of allocation of the Lockbox monies, a good return for creditors and a return to creditors sooner than the continuation and conclusion of certain claims.
The Companies Court granted the application allowing the administrators to implement a global settlement of disputes arising from the collapse of the group. It was held that the settlement was in the best interest of the 19 companies as well as their respective creditors. In addition to allowing the application, the Companies Court stated that the administrators have the power to enter into settlements without recourse to the courts but that due to the exceptional circumstances of this case and the great nature of the decision, the Court decided to approve and authorise the global settlement agreement.
The Court set out that they will provide directions to an administrator in respect of the power to settle or compromise where:
There is a particular reason for doing so (as the administrator is generally expected to exercise his own judgment without seeking approval from the court).
An administrator has exercised his own judgment and has decided that a settlement or compromise is in the best interests of creditor but where the settlement or decision is a particularly momentous decision.
The proposed course of action is within the administrator’s powers but he requires approval of the court.
The administrator holds the view that the proposal will be for the benefit of the company and its creditors.
The administration is acting rationally and without any conflict of interest.
The Court also held that they would not give their approval if there is any doubt in the propriety of the proposed course of action as such approval would prevent a creditor challenging the decision. In this case, the administrator must produce all relevant material to the court alongside a statement of his reasons for the course of action.
The Court stated that it should not withhold its approval on the basis that it would not have exercised the power in the way proposed by the administrator.
The above case confirms that administrators have the power to enter into settlement agreements and compromises without recourse to the court but that where a decision is momentous, administrators have ability to reach out to the court for directions.
Administrators should already be aware of their own power to settle or compromise but this case provides welcome confirmation that the court is open and available to administrators should they need guidance on a particularly difficult, complex or large settlement.
For more information please contact Alexandra Withers.