UPDATE 2-Reader's Digest to delay bankruptcy emergence

* UK pension regulator won't approve pension application

* Cites British pension regulator decision for delay

* Expects to emerge "within the next few weeks"

(Adds details about denied pension plan and possible insolvency proceeding of RDA UK; adds details on efforts to escrow proceeds from sale of new senior bonds)

By Chelsea Emery

NEW YORK, Feb 1 (Reuters) - Reader's Digest Association Inc [RPPLER.UL] said on Monday it would delay its emergence from bankruptcy after Britain's pension regulator said it would not approve a pension fund agreement related to the U.S. publisher's British subsidiary.

Reader's Digest Association Ltd, the British entity, had reached an agreement with the trustees of its pension plan and the British Pension Protection Fund to resolve its pension fund deficit. The agreement was contingent on approval from Britain's pensions regulator, which said it will not approve the pension application.

The issue is specific to the British entity and does not involve any other RDA company, Reader's Digest said.

"RDA has elected to temporarily delay its emergence from Chapter 11 to address an issue involving the pension program," the company said in a statement. "RDA expects to emerge within the next few weeks."

RDA UK INSOLVENCY?

RDA UK is required to pay $7.4 million in pension obligations annually, but did not generate enough free cash flow to make the payments, Reader's Digest said in court documents.

To help avoid a liquidation of the British subsidiary, Reader's Digest proposed a one-time payment of about $17.6 million and agreed to issue 33 percent of the equity of its British entity, subject to a five-year call-back option to buy back the equity for about $3 million.

Now that the regulator has denied the plan, "the board of directors of RDA UK is likely to authorize the prompt commencement of insolvency proceedings," the company said in a court document.

NEW NOTES

Reader's Digest has also asked a bankruptcy court to approve the company's request to place the proceeds from the sale of new senior secured notes to refinance debt obligations upon emerging from bankruptcy, according to court documents. A related story can be found here at [nIFR1RQuI].

On Jan. 15, a New York bankruptcy court approved the company's reorganization plan, clearing the way for the publishing company to emerge from bankruptcy. The court approval enables Reader's Digest to choose its date for emergence.

The case is Re Reader's Digest Association Inc, U.S. Bankruptcy Court, Southern District of New York, No. 09-23259. (Reporting by Chelsea Emery; editing by Maureen Bavdek and Andre Grenon)