UPDATE ON RECENT ACTIONS IN THE US AND CANADIAN COURTS

Background

It may be helpful to summarise the various claims that have been made by the Trustee/PPF on behalf of members of the Nortel Networks UK Pension Plan (Plan) since NNUK went into Administration in January 2009.

Most of the claims arise directly from the fact that the Plan does not have sufficient funds to be able to purchase annuities to provide full Plan benefits for all members from an insurance company. This shortfall has been estimated at £2.1B and we will refer to it as the Deficit.

1. The Plan is a creditor of NNUK and a claim has been lodged with NNUK Administrators for the Deficit. The Plan represents over 90% of total creditor claims against NNUK. We will refer to this as the NNUK Claim.
2. The Plan had two guarantees underwritten by Nortel Networks Limited in Canada – one was in support of the 2006 Funding Agreement (approximately £490M) and the other arose from the restructuring of certain European Nortel entities ($150M). Claims for these guarantees were submitted in Canada by the Trustee/PPF. We will refer to these as the Guarantee Claims.
3. The Trustee/PPF submitted claims for the Deficit against a number of Nortel entities in the US, Canada and Europe. These claims were made in advance of the Pensions Regulator (tPR) exercising its powers under the Pensions Act 2004 to decide whether it would be reasonable to pursue Nortel companies for financial support resulting from the shortfall in Plan funds. These powers relate to the possible issue of a Financial Support Direction (FSD) by tPR. We will refer to these as the FSD Claims.

Note that the FSD Claims and the Guarantee Claims were submitted with regard to insolvency procedures in the relevant countries - for example, the US and Canada claims were submitted prior to the September 30, 2009 deadline (Bar date) set by the courts in those countries.

Although there are multiple claims for the Deficit plus the Guarantee Claims, Plan members will appreciate that total recoveries can never exceed the Deficit.

On January 11, 2010 tPR issued a ‘Warning Notice’ against various Nortel entities worldwide (the Companies) – mainly in Europe and North America. This was the first step in the FSD procedure. The Warning Notice sets out tPR’s case for issue of an FSD and invites the Companies (and Trustee/PPF as "directly affected parties") to make representations with regard to the Warning Notice.

The FSD procedure will culminate in either an oral hearing or a review of the papers by the Determinations Panel (DP) which was established under the Pensions Act 2004. Any hearing/review will need to take place by the end of June 2010 irrespective of USA/Canada court actions described below. The DP will consider any representations before deciding which Companies (if any) will be the subject of a FSD. Note that decisions of the DP can be appealed first through the Pensions Regulator Tribunal and then through higher UK courts.

If an FSD is issued but not complied with, this could lead to a section 47 Contribution Notice being issued against some or all of the Companies by the DP. This is an entirely separate procedure. The Trustee/PPF would then seek to enforce claims in the amounts crystallised by any Contribution Notice by taking steps to prove its debt in accordance with the claims allowance process established in the respective insolvencies of the Companies concerned, using the Contribution Notice as evidence of the claim.

Court Action in USA/Canada

Note that the NNUK Claim, the Guarantee Claims and the FSD Claims for Companies other than Canadian or US Companies continue.

The Companies’ Creditors Arrangement Act (CCAA) in Canada and the Chapter 11 procedure in the US both have the concept of a ‘stay’ or moratorium on legal action to prohibit creditors from attempting to enforce claims or seize assets outside of the bankruptcy procedure.

Following motions submitted by Nortel (formally, Debtors in US and the Monitor in Canada) hearings were held on February 25 (Canada) and 26 (US), 2010. This resulted in the Ontario Superior Court of Justice ruling that tPR had breached the ‘stay’ in Canada by serving the Warning Notice in Canada and declared it null and void in the CCAA procedure. Similarly, the US Bankruptcy Court in Delaware ruled that Nortel entities in the US would breach the ‘stay’ if they participated in the FSD procedure.

The Bankruptcy Court ruled that the FSD process was not a regulatory procedure but rather was designed to obtain a recovery for a private party, here the Trustee, and therefore was prohibited by the moratorium that came into effect when the US Debtors filed for bankruptcy. We note that the FSD procedure has not previously been considered in Canada.

The PPF/Trustee has filed an appeal from the US Order. The PPF/Trustee has also filed an emergency motion seeking to stay the US Order pending appeal and to expedite the appeal, such that the PPF/Trustee will be permitted to participate in the procedure before the DP. No date has been scheduled yet for a hearing on the PPF/Trustee's motion.

tPR has filed an application for permission to appeal in Canada and the PPF/Trustee has also filed an application for permission to appeal.

The Trustee will keep Plan members advised of developments in the US/Canada and the general progress of claims on a periodic basis.

Whatever the outcome of the various activities described herein, we take this opportunity to assure Plan members that their pension benefits are protected to at least PPF levels of compensation. However, it is worth repeating statements in our Q&A that it is not possible or appropriate at this stage to comment on the likelihood of making sufficient recoveries to enable the Trustee to secure benefits for Plan members that are better than available within the PPF.