Administrators to two insolvent companies on Wednesday launched a legal case challenging the ability of the UK Pension Regulator to claim a share of assets.

Legal experts say the case goes to the heart of the regulator’s ability to protect promises made to retired workers.

Lehman Brothers’ European division, which is in administration, and Nortel Networks, which has filed for bankruptcy protection, have brought the lawsuit.

They are disputing that they should have to pay a total of £2.25bn ($3.55bn) to the pensions regulator.

The pensions regulator has issued a rarely used measure – a Financial Support Direction (FSD) – against the two companies.

This orders a parent company or other companies within the group to provide financial support to the underfunded scheme of a subsidiary.

The trustees to Nortel’s UK pension scheme, represented by legal advisers Hogan Lovells, are arguing that insolvent companies have been legally required to pay off their shortfalls in full in insolvency since legislation was passed in 1995.

“Shortly stated, the issue is whether a company can ignore the regulatory obligations contained in an FSD simply because the company has placed itself, or has been placed, into an insolvency process,” the trustees have argued in written submissions to the High Court.

The pensions regulator is seeking £148m from Lehman and £2.1bn from Nortel.

The Pensions Act of 2004, which created the regulator and the Pension Protection Fund, was passed after it became apparent most UK schemes were underfunded.

By the time of its passage, more than 125,000 workers had lost all or part of their retirement savings because their employer had collapsed.

On Wednesday, William Trower QC, acting for Nortel Networks, told the High Court at the start of the hearing that the existing legislation allowing the pensions regulator to issue so-called FSDs “was intended to be imposed on solvent entities” rather than on insolvent companies.

However, the regulator argued that if that interpretation was correct, it amounted to “a windfall” to other creditors of an insolvent company that put off making contributions to its pension scheme while it was still solvent.

Mr Trower also told the court the key issue centred on whether financial support directions should be complied with by administrators and whether an FSD “gave rise to a liability of an insolvent company in administration – either as an expense or a claim”.

“If parliament had intended an FSD to be treated as an administrative expense, parliament would have required the pensions regulator to take into account the consequences of the FSD on the administration,” he told the court.

The court was told there was a distinction between Lehman, which was classed as a “service company”, and Nortel, where it was seen as being “insufficiently resourced” because it had affiliates in Canada and the US.

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