IP Briefing: Decision of the High Court in the case of Re Nortel Networks UK Ltd and other companies [2016] EWHC 2769 (Ch)

The Factual Background

This case concerned an application to court by administrators for approval of a settlement agreement. The Nortel group operated through more than 130 subsidiaries located in more than 100 countries including Canadian companies, US companies and Europe, Middle East and Africa companies (“EMEA companies”). Following the administration of the Nortel group, the largest creditors were pension funds in the UK and United States. Realisations amounted to around US$7.3 billion (“Funds”). The numerous group companies were unable to agree the distribution of the Funds despite extensive negotiations and several mediations. As such, the US and Canadian courts were tasked with determining how the Funds should be distributed. Their judgments received a mixed response. In particular, the EMEA companies, other than a French company (“NNSA”), decided not to appeal and a conflict administrator was duly appointed to make an appeal on behalf of NNSA. The US companies and NNSA sought and were refused permission to appeal the Canadian judgment. The Ontario Court of Appeal stated that these insolvency proceedings had been going on for more than seven years during which more than 6,800 former Nortel employees or pensioners had died and over $1billion had been incurred in costs; an appeal would achieve nothing but more delay, greater expenses and an erosion of creditor recoveries. As such, a further mediation was held and a Global Settlement reached. The administrators of the EMEA companies and the conflict administrator made an application to the High Court for approval of the Global Settlement.

The Decision of the High Court

Snowden J held that administrators have power to enter settlements and compromise in terms of paragraph 60 of schedule B1 and paragraph 18 of schedule 1 of the Insolvency Act 1986 without recourse to the courts, however, given the exceptional circumstances of this case, and having regard to the particularly momentous nature of the decision, he would approve and authorise the Global Settlement. Snowden J set out when the court will provide directions to an administrator in relation to the power to settle or compromise as follows:

  1. In commercial matters, an administrator is generally expected to exercise his own judgement without seeking approval from the court, however, when exercising the power to settle or compromise an administrator can seek directions from the court if there is a particular reason for doing so.
  2. One such reason is where an administrator has exercised his own judgment and decided a settlement or compromise is in the best interests of creditors, however, he may apply to court for approval of the settlement or compromise if it is a particularly momentous decision.
  3. The proposed course of action must be within the administrator’s power.
  4. The administrator genuinely holds the view that what is proposed will be for the benefit of the company and its creditors.
  5. The administrator is acting rationally and without being affected by a conflict of interest in reaching his view.
  6. The court will not give its approval if it is left in any doubt as to the propriety of the proposed course of action because approval will prevent subsequent challenge by a creditor. As such, an administrator must produce all relevant material to the court, including a statement of his reasons.
  7. The court should not withhold its approval on the basis that it would not have exercised the power in the way proposed.

Advice for Insolvency Practitioners

This case confirms what we already knew, that an administrator has power to enter into settlement agreements and compromises without recourse to the court. However, an administrator may seek approval from the court of a particularly momentous decision and this case sets out the factors which will be considered by the court before providing approval. 

BBM Solicitors specialise in advising IP’s in both contentious and non-contentious matters (including transactional work). Contact: Eric Baijal (emb [AT] bbmsolicitors [DOT] co [DOT] uk) or Sheana Campbell (smc@bbmsolicitors.co.uk). This briefing note is current as at 29 May 2017 and is our understanding of the position described at that date. Legal advice ought to be taken before relying on its terms (particularly to ensure the law has not changed).

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