The Corporate Insolvency and Governance Bill was recently introduced into Parliament. While the effects of some of the changes proposed are intended to be only temporary, they have potential consequences for pension schemes.
Changes of particular relevance are as follows:
- Restrictions on the use of statutory demands for winding up petitions.
- New Moratorium process
- Court approved corporate restructuring plan
The Bill received its second and third readings on 3 June 2020 and will now go to the House of Lords for consideration.
Restrictions on the use of statutory demands and winding up petitions
Creditors will be prevented from relying on non-payment of a statutory demand served on or after 1 March 2020 as the grounds for presenting a winding up petition. Further detail can be found in the this article. It is intended that this provision will apply for a limited period of time from 1 March 2020 to one month after the Bill is enacted.
In addition, there is a blanket prohibition preventing presentation of a winding up petition on the grounds of a company’s inability to pay debts, unless there are reasonable grounds for believing that coronavirus has not had a financial effect on the debtor company or there is an unpaid debt which would have been there notwithstanding the effects of the virus.
In relation to pension schemes, a trustee may be facing unpaid employer contributions relating to pre-pandemic time periods. A Trustee in this situation would now, at least temporarily, be unable to proceed to obtaining a winding up petition following a statutory demand for unpaid contributions and would find it difficult to obtain an order for more general inability of the company to pay its debts. While obtaining a winding up petition against a scheme sponsor is an extreme solution for pension scheme trustees to take, not least because it could ultimately result in that scheme entering the Pension Protection Fund (PPF), there may be times when all other avenues have been exhausted. It cannot always be assumed that trustees will be amenable to suspension of contributions.
New Moratorium process
Companies can apply for a Moratorium resulting in a temporary restriction on creditor enforcement activities. The effect of the Moratorium is that creditors will not be able to exercise their enforcement rights against the company without permission of the court and will not be able to commence insolvency proceedings. In addition, certain restrictions will apply so that security cannot generally be granted without court permission, legal processes against a company cannot start without court permission and floating charge holders cannot give notice to crystallise any floating charge.
The intention behind a Moratorium is to give a company some breathing space while the directors consider what steps should be taken next and whether a compromise with creditors can be reached or other steps under insolvency legislation should be taken. The process can only be commenced and maintained with the purpose of rescuing the company as a going concern (not the “business”, you will note) so it is envisaged it will only be used where solvent rescue is the aim.
Corporate restructuring – Part 26A proceedings
A new corporate Restructuring Plan will be introduced similar to a scheme of arrangement but exclusively for companies experiencing “financial difficulty” and with the express aim of eliminating, reducing, preventing or mitigating the effect of any of the financial difficulties the company is experiencing. A detailed look at the Restructuring Plan process is beyond the scope of this note. Of note, however, is the fact that the procedure introduces the concept of “cross-class cram down”. Essentially this prevents dissenting classes of creditors or shareholders obstructing a restructuring plan which is otherwise in the company’s and creditors’ interests. Under the new process, the court can sanction a Restructuring Plan provided that the classes voting against the plan will be no worse off than they would be in the relevant alternative, requiring the court to consider what would most likely occur in relation to the company if the Restructuring Plan were not sanctioned. In addition, the court has absolute discretion whether or not to sanction a restructuring plan even where approval from all stakeholders has been obtained.
From the pensions perspective, it should be noted that the new Restructuring Plan does not appear to be a qualifying insolvency event, meaning that a PPF assessment period would not be triggered when a plan is proposed or approved. Industry commentary suggests that it may be easier to get approval of a proposal if the supporter of a key creditor such as a pension scheme trustee is obtained. In addition, where a key stakeholder is not supportive of the proposal, the ability for the court to override the dissenting view, means that company rescues may be easier to approve resulting in the continued survival of companies which might not otherwise have survived.
Pensions Regulator activity
What is not clear is how the Moratorium and Restructuring Plan procedures link into potential regulatory activity by the Pensions Regulator. It may be that associated activity falls within the existing notifiable events regime but we have not at the date of publication seen any detail from the Pensions Regulator or from the Pension Protection Fund on their view of how the new provisions may impact on pension schemes.
Within the Moratorium process, the draft legislation defines the term “pre-moratorium debt” as any debt or other liability to which the company has become or may become subject during the Moratorium by reason of any obligation incurred before the Moratorium comes into force. As a result of the Supreme Pensions Regulator Activity judgment in the Nortel cases (which related to the classification of contribution notices and financial support directions in administration), this is likely to mean contribution notices and financial support directions issued during the Moratorium will be classed as pre-Moratorium debts and will be subject to a payment holiday while the Moratorium is in place.
Action for trustees and employers
Trustees need to ensure that they continue to keep close to scheme sponsors and monitor the continuing financial position. An open dialogue between employers and trustees should be maintained ensuring that the trustees take their seat at the table alongside other creditors. This should assist trustees in considering the appropriate steps to be taken to ensure that members’ interests are not prejudiced.