The Corporate Insolvency and Governance Act 2020 is designed to provide businesses in financial difficulties with flexibility and breathing space to continue trading and/or to explore a potential rescue or restructuring. Both of which could, ultimately, benefit an associated defined benefit pension scheme.
The Act was fast-tracked through Parliament with little time for the pensions implications to be properly debated. This has resulted in a number of grey areas. So trustees of defined benefit pension schemes must ensure that they think carefully about the potential ramifications for their scheme. This will be particularly relevant when considering proposals for recovery plans and / or employer requests to reduce or suspend deficit repair contributions.
To enter the new moratorium a company must satisfy two conditions. Firstly, it must be, or be likely to become, unable to pay its debts. Secondly, in the view of an insolvency practitioner, it must be likely that a moratorium would result in the rescue of the company as a going concern. This second condition is temporarily modified to allow the monitor to disregard any worsening of the financial position of the company for reasons relating to Covid-19.
The directors continue to run the business whilst a moratorium is in force, subject to oversight from the monitor, and the company obtains a payment holiday for certain pre- moratorium debts.
Initially, the moratorium lasts for 20 business days, with an option to extend by a further 20 business days. Any extension beyond 40 business days then requires consent from certain creditors or a court order.
“Wages or salary arising under a contract of employment” are one of the exceptions to the payment holiday rule, and must still be paid during the moratorium. Helpfully, contributions “to an occupational pension scheme” are included within the definition of “wages or salary” for this purpose. However, there are real concerns that certain obligations in respect of defined benefit pension schemes will fall outside of the above pensions exception. These include deficit recovery contributions, and payments in respect of a debt under section 75 of the Pensions Act 1995.
A further issue in relation to the pensions exception is the apparent omission of payments to personal pension schemes. This places employers using such schemes for auto- enrolment purposes in danger of breaching their obligations under that legislation.
In addition, although the aim of the moratorium is to rescue the company, should this fail, certain debts are then given super-priority which could result in the worsening of a defined benefit scheme’s position.
Sitting alongside schemes of arrangement and a company voluntary arrangement, the new restructuring plan provides struggling companies with a third statutory mechanism for reaching a compromise or arrangement with their creditors.
The process for agreeing a restructuring plan is similar to that for a scheme of arrangement involving a creditors’ vote and sanction by the court. However, unlike with a scheme of arrangement, the court may permit a “cross-class cram down”. This means in certain circumstances it may sanction a proposal where the requisite 75 per cent in value of creditors or members, or classes thereof, do not agree to it. Whilst this feature could potentially limit the options available to trustees of defined benefit pension schemes, and their influence over any restructuring of the scheme sponsor, there may be circumstances where a sponsor of a defined benefit pension scheme might shape its proposal in a way that gets the pension scheme trustees’ support in order to help “cram down” potential dissent by other creditors. In addition, as the court’s job is to ensure that any dissenting class is not worse off, it seems that it must at least take into account the effect a restructuring package would have on any defined benefit pension scheme.
It should also be noted that if a restructuring plan were to include a compromise of a pension scheme’s section 75 debt this could jeopardise the scheme’s eligibility for PPF entry.
At first glance the provisions of the Act do not sit comfortably with those in the draft Pension Schemes Bill. On a literal reading, directors and trustees entering a restructuring plan could potentially fall foul of the criminal sanctions. This may yet be addressed by amendments to the Pension Schemes Bill but is a point to watch.