After being fast-tracked through Parliament, the Corporate Insolvency and Governance Act 2020 became law on 26 June 2020. The Act makes significant reforms to the insolvency regime, some permanent and others temporary responding specifically to the impact of Covid-19.
Of particular relevance to pension schemes are the two new processes introduced by the Act: moratorium periods and restructuring plans. Both new processes are designed to introduce "greater flexibility into the insolvency regime, allowing companies breathing space to explore options for rescue whilst supplies are protected."
The new moratorium process is available for companies that are, or are likely to become, unable to pay their debts, but where it is likely that a moratorium would result in the company being rescued as a going concern. The aim is to protect the company from creditor action and to give it breathing space to implement a turnaround.
The directors retain control of the company under the supervision of an insolvency practitioner who acts as a 'monitor'. The initial moratorium will last for 20 business days and can be extended by the directors for a further 20 business days and for up to a year with the creditor or courts consent.
If the moratorium achieves its objectives it’s likely to be good news for the employer’s pension scheme too. But trustees need to be aware of the effect on their employer’s pensions obligations during the moratorium and how any liabilities to the scheme could be affected on a subsequent insolvency.
During the moratorium, the company is granted a 'payment holiday' from 'pre-moratorium' debts, subject to certain exceptions. Pre-moratorium debts are those which fall due prior to the moratorium or which become due during the moratorium and relate to obligations incurred beforehand.
Creditors are unable to bring insolvency and legal proceedings against the company and are prevented from issuing winding-up petitions or enforcing security (subject to certain exceptions) during the moratorium. Floating charge holders may not give notice to crystallise a charge or restrict the disposal of floating charge assets.
Certain types of pre-moratorium debts are also granted super-priority if a winding-up or administration occurs within 12 weeks of a moratorium. Following House of Lords criticism and industry pressure, the provisions which would have granted super-priority status to unsecured banking and finance debt, if accelerated during a moratorium process, were removed before the Bill was finalised. If left in these provisions could have caused material detriment to the level of recovery for pension schemes as they would have ranked bank debt ahead of the scheme.
The new restructuring plan procedure allows companies to propose a compromise or arrangement with its creditors to "eliminate, reduce or prevent, or mitigate" financial difficulties where these difficulties affect "its ability to carry on business as a going concern". The new regime is largely modelled on schemes of arrangement which companies may already use to restructure debt.
Creditors and members will be split into classes based on the similarity of their rights. A court application for sanction of a plan can be made if 75% or more in value of creditors (or each class of creditors) present and voting agree to the plan.
Although similar to a scheme of arrangement, a significant difference is that the new procedure introduces a 'cross-class cram down' which is the ability for a company to bind classes of creditors even where all classes do not vote in favour of the plan.
Dissenting classes are only able to be crammed down if the court is satisfied that:
- they would be no worse off than in the likely 'relevant alternative', for example, an insolvency;
- and at least 75% in value of a class which would receive a payment or would have a genuine economic interest in the company, in the event of the relevant alternative, has voted in favour of the plan.
Are moratoria or restructuring plans insolvency events that would trigger section 75 debts and/or a PPF assessment period?
No. Although during debate in the House of Lords there were calls for a moratorium and a restructuring plan to be a qualifying insolvency event for the purposes of section 75 and a PPF assessment period this is not the case.
This is consistent with the policy that these processes are designed to give companies greater flexibility to avoid an otherwise inevitable insolvency.
Role of the Pensions Regulator (tPR) and the Pension Protection Fund (the PPF)
The Act provides both tPR and the PPF with information rights in respect of the moratorium and the PPF with the right to challenge the company directors or the monitor. Regulations have also been introduced which provide that the PPF has the right instead of the trustees to participate in decisions as to whether to extend a moratorium or to challenge a director's actions, although it must consult the trustees first.
Similarly, under a restructuring plan, tPR and the PPF have the same information and notification rights as other creditors. Regulations will allow the PPF to exercise certain voting rights in addition to or instead of the trustees, after consulting them first.
Value of the scheme as a creditor and compromise.
One of the key issues in a restructuring plan is will be how the value of the company’s liability to the scheme is calculated. The scheme will wish to see the full value of the debt being recognised. However, as noted above a restructuring plan is not a 'qualifying' insolvency event for the purposes of the section 75 debt legislation so a buyout debt would not be automatically triggered.
Entering into a legally enforceable agreement that has the effect of reducing a section 75 debt can result in a pension scheme permanently losing eligibility for entry to the PPF. Compromise of a section 75 debt can also lead to a review by tPR and the possibility of it using its moral hazard powers under the Pensions Act 2004. Trustees and employers will need to be cautious as regards the potential effects of any arrangement on the scheme.
At present, it remains to be seen how arrangements in respect of pension scheme obligations will be dealt with both in terms of valuing those obligations and any compromise that might be sought in respect of the deficit.
Interaction of the new insolvency regime and the Pension Schemes Bill
There has been much discussion regarding the extension of tPR's moral hazard powers under the Pension Schemes Bill. These are being enhanced to include, amongst other things, new criminal offences for those that avoid an employer debt or engage in conduct risking accrued scheme benefits.
Questions are being raised as to exactly how the new insolvency regime will interact with these extended powers and whether there is potential for conflict in a number of areas.
For example, would it be possible for action which is permissible under the Act to fall foul of the new anti-avoidance provisions? Companies will need to consider carefully how any action that they are contemplating taking under the new insolvency provisions might be viewed by tPR when its enhanced moral hazard powers have been brought into effect.
Another area of potential conflict is an apparent divergence between the policy intention of each piece of legislation. Giving companies breathing space from creditors could, of course, be key to a company's survival and suspending pension obligations during a moratorium is consistent with the Act's policy intention. However, is there a mismatch between this and the policy intention behind the Pension Schemes Bill, which is to improve protection for schemes by ensuring that employers stand behind their obligations?
The House of Lords has noted the importance of ensuring that the Act and the Pension Schemes Bill relate to and integrate with each other. Although, the need to address how this will happen has been signposted by Parliament quite how the two will integrate has yet to be clarified.