As a result of the landmark rulings issued simultaneously by the Delaware Bankruptcy Court and the Supreme Court of Ontario on 12 May, 33,000 UK creditors will receive a pro rata share in the fallen giant Nortel Group’s residual assets of $7.3billion.
The dispute between creditors over the distribution of the funds, which was heard by way of joint trial before both courts and which was linked using ground-breaking videoconferencing technology, finally came to a head after six years of intensive (and costly) litigation proceedings and found in favour of the approach put forward by Nortel Networks UK Pension Trust Limited and the Pension Protection Fund.
The Nortel Group, which was founded in 1895 as Bell Telephone Company of Canada, was a global supplier of telecommunications and computer networking solutions, with subsidiaries in the US, Europe, the Middle East and Africa.
Following the tumultuous changes in market conditions and economic upheaval, in 2009 Nortel Networks Corporation, the parent company of the Nortel Group, filed an application for creditor protection under the Companies’ Creditors Arrangement Act in Canada.
At the same time, various other group companies in a number of jurisdictions entered into insolvency proceedings. Nortel Networks S.A. entered into administration on 14 January 2009 by an order of the High Court of Justice of England and Wales, following an application made by the company’s directors.
The purpose of filing for insolvency was to allow for a restructuring of the various group companies’ financial obligations. However, this did not go to plan and in June 2009 business ceased to operate.
The Group’s joint assets, including patents and wireless technology, were sold off. The sale of key assets was done on a joint global basis by the administrators of the various group companies, who recognised the extremely integrated nature of the group’s business and the difficulties of realising the assets on a country by country basis. As no agreement could be made as to how the residual proceeds of $7.3 billion were to be distributed among the insolvent Group companies, the proceeds were placed
in an escrow account until a decision could be reached. The Delaware and Ontario Courts agreed that the allocation dispute should be determined by way of joint trial before both courts.
Among the Group’s creditors was a benefits pension scheme, of which Nortel’s UK-based company, Nortel Networks UK Limited was the sponsoring employer. At the time when the Nortel group folded, the pension scheme had a buy-out deficit of approximately £2.1 billion. There are approximately 33,000 remaining British members of the pension scheme.
On 12 May 2015, the Judges agreed that the proceeds should be shared among the insolvent companies rateably in proportion to the creditor claims which exist against each company. This approach was favoured as a matter of fairness and given the highly integrated nature of the Nortel Group’s business and assets while also recognising the corporate separateness of the individual entities.
In choosing the pro rata approach, the judges rejected the US and Canadian insolvent companies’ competing theories, which would have resulted in a large bulk of the proceeds going to the US and Canada respectively. Instead, the UK insolvent companies will be on an equal footing with their North American counterparts. It is reported that this is likely to result in UK creditors, including the 33,000 pensioners, receiving an approximate 71% return of their claims.
While the prospect of appeal by disappointed stakeholders cannot be ruled out, the unprecedented decision, believed to be the first of its kind, is a welcome result for Nortel’s ex-employees and marks an important precedent as to how future cross-border insolvencies involving integrated multinational enterprises should be resolved.
If you would like more information or advice please contact Tim Cooper, Partner, Corporate Recovery at TCooper@hbjgateley.com