Corporate Insolvency and Governance Act 2020: implications for Defined Benefit Pensions
23rd July 2020
Introduction and points for consideration by trustees
The Corporate Insolvency and Governance Act 2020 was given Royal Assent on 25 June and most provisions came into force on 26 June. As is well known, it is intended to help companies in financial difficulties to find a way to recover and introduces two new options for them: a free-standing moratorium (broadly a 'payments holiday' for an initial period of 20 business days), similar to an administration moratorium, and a restructuring plan, similar to a scheme of arrangement. Trustees of defined benefit pension schemes will need to consider carefully the implications for their scheme if a sponsoring employer were to take advantage of either option, and may well be advised to take updated covenant advice. Possible areas where they should consider taking other advice include:
- potential conflicts of interest for company directors who are trustees
- whether the trustees have the power to wind up the scheme before a moratorium starts
- does their information-sharing protocol (if any) require the company to notify them before deciding on a moratorium or restructuring plan?
- does a moratorium or restructuring plan trigger scheme winding-up?
- would a moratorium impact their cashflow such as to require a change in investment strategy?
- should they review their risk register, including items around deficit repair contributions, security and winding-up triggers?
- should they take a different view now of a company request to defer deficit repair contributions?
- is their expectation around recovery of debt on insolvency still realistic?
A moratorium allows the company’s directors to continue to run the business but they will be monitored by the 'monitor' (an insolvency practitioner) who must be satisfied that it is likely that the moratorium would result in the rescue of the company as a going concern. During this period, in broad terms, the company has a payment holiday from debts and liabilities that existed before the start of the moratorium and creditors cannot enforce security or serve a winding-up petition.
Particular concerns for trustees around a moratorium are likely to be:
- there is no requirement for creditor consent or court approval, so trustees may not have any leverage against an employer filing for a moratorium
- the generally accepted view is that deficit repair contributions will not be payable during the moratorium, though the Act isn’t clear on this, nor is it entirely clear which categories of contributions in respect of ongoing accrual will be payable
- if the employer usually pays expenses, ensuring continuity of services to the scheme and managing cashflow
- the moratorium may be extended by a further 20 business days without creditor consent or, with the consent of certain creditors, up to a maximum period for the moratorium of 12 months, or by the court for an unlimited period
- during the moratorium, subject to certain exceptions, trustees will not be able to enforce security, take legal action against the employer or serve a winding up petition against it
- as a moratorium does not count as an insolvency event, neither a debt on the employer under section 75 of the Pensions Act 1995 nor a Pensions Protection Fund assessment period is triggered
- if the employer is wound up or goes into administration within 12 weeks of the moratorium period coming to an end, certain debts are given super-priority, and would therefore take precedence over the trustees’ unsecured debt (and any debt under a floating charge). The super-priority does not however extend to debt accelerated in the moratorium period, e.g. bank lending, following a late amendment to the Act.
A restructuring plan does require court consent and creditor approval; it is broadly a compromise between a company and its creditors and/or members. The purpose of the plan is to eliminate or reduce the effect of financial difficulties that impede the company’s ability to carry on as a going concern. The concept of 'cross-class cram down' allows the court to sanction the plan even where the requisite 75 per cent in value of creditors (or classes of creditor) has not given approval, provided in its view (amongst other conditions) none of the dissenting class would be worse off than in the event of any 'relevant alternative' to the plan.
From the perspective of DB scheme trustees, a restructuring plan would need to be approached with care, to ensure that there is no compromise of a section 75 debt that would prevent eligibility for entry into the PPF. They would also need to consider, in the absence of section 75 being triggered, whether they would be a creditor and if so to what extent. The potential for ‘cross-class cram down’ would be of concern.
PPF and Pensions Regulator
Regulations made under the Act provide in certain circumstances for the PPF to take over DB scheme trustees’ creditor rights in relation to a moratorium; to have the same creditor rights as the trustees in relation to a proposal for a restructuring plan; and to exercise voting rights in relation to a restructuring plan to the exclusion of the trustees.
In relation to a moratorium, the PPF and Pensions Regulator have to be notified by the monitor of certain events, including the entry into the moratorium, its extension or its end or a change in the monitor. The PPF can also (after consulting the trustees) challenge the monitor or company directors in relation to the employer of a PPF-eligible scheme if they believe the interests of the scheme are being unfairly harmed. The PPF may also exercise the rights of DB scheme trustees in the moratorium process. Where a restructuring is proposed in relation to the employer of a DB scheme, the PPF and Regulator have to be given the same documents as are sent to creditors; and in relation to a PPF-eligible scheme the PPF will have the same creditor rights as the trustees and will exercise the trustees’ voting rights on any compromise arrangement (to the exclusion of the trustees). The Regulator has issued guidance for monitors and companies regarding their requirement to notify the Regulator; and the PPF likewise provides guidance on its website about restructuring plans and moratoria.
The objective of the Act is undoubtedly valid: the recovery of a sponsor that is struggling to remain a going concern in principle has to be in the interests of pension scheme trustees. But, there is undoubtedly scope too for trustees of DB pension schemes to be made worse off, for example if deficit repair contributions are not paid during a moratorium and other debts gain super-priority over pension debts. It remains to be seen whether the PPF will assign a lower value to contingent assets for levy purposes, or more immediately whether trustees will be advised that their employer covenant has been weakened, as a consequence of the Act. The new super-priority does not impact fixed charge security, and reinforces this as the best form of security for pension trustees.
The Act also includes other temporary provisions linked to the COVID-19 crisis, and permanent protections in relation to contracts for goods and services, which we would be happy to discuss.
This article was first published on the Burges Salmon website on 21 July 2020.