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Corporate Insolvency and Governance Act 2020

Corporate Insolvency and Governance Act 2020
  • United Kingdom
  • Pensions

12-08-2020

The Corporate Insolvency and Governance Act 2020 has been heralded by many as the most significant insolvency reform for a generation. It introduces new restructuring tools – the moratorium and the restructuring plan – which have far reaching, in some cases negative, consequences for defined benefit (DB) pension schemes.

This briefing looks at what steps DB trustees can take now to assess and help protect their position in light of these changes.

What are the new tools? A quick recap

The restructuring plan: a tool (with court involvement) that’s largely based on an existing restructuring tool, the scheme of arrangement, but with some notable differences. It allows a company to agree a compromise with its creditors and the court can bind creditors even if they don’t vote in favour, so long as certain tests are met.

The moratorium: during which companies only have to pay certain creditors. A moratorium could potentially last for a year with creditor agreement and even longer with court approval. Certain pension debts such as deficit reduction contributions and scheme expenses due from the employer are probably not payable. The trustees may also be left with fewer options to recover debts to the scheme and to enforce security. Meanwhile, debt payments which aren’t subject to the payment holiday effectively get ‘super priority’ on any company insolvency within 12 weeks after the moratorium.

Neither restructuring tool will, by itself, trigger a Pension Protection Fund (PPF) assessment period or a ‘section 75’ debt, unlike a company voluntary arrangement or entry into administration. So, accrual of benefits, if any, will not cease and no buy-out basis debt will become due to the trustees.

There is more information on these new tools in our speedbrief.

What actions could DB trustees take to protect their position?

Action What does it involve? When?
1 Monitoring / information sharing Consider revising risk registers and information sharing agreements in light of the Act. In particular:
  • trustees may want to receive different types of (or more frequent) information from the employer
  • trustees could also build into information sharing agreements with the company (formal or informal) a commitment to inform and/or consult the trustees before entering into a moratorium or restructuring plan
 Now
2 Covenant monitoring and contingency planning for employer financial difficulties Some considerations are:
  • how would benefits and expenses be paid during a moratorium (particularly an extended moratorium)?
  • would the scheme have cash or readily realisable assets?
  • could contingent assets be called upon (see below)?
  • what are the implications under the scheme rules of a moratorium or restructuring plan? For example, would either event trigger a wind-up and what would they mean for the trustees’ other powers?
  • do the scheme’s covenant monitoring triggers remain appropriate in view of these new restructuring tools, or should trigger points be adjusted to allow the trustees to take steps earlier (e.g. to use any unilateral powers they may have)?
 Now
3 Factor into discussions on contribution changes or deferrals Many employers are requesting contribution changes in light of COVID-19. These include payment deferrals, ‘back end loading’ of recovery plans and replacing contributions with contingent assets.

The new restructuring tools need to be factored into trustee considerations in relation to these types of requested changes.

See also information below on contingent assets.

 When considering contribution changes or deferrals (e.g. on a valuation or COVID-19 related changes)
4 Contingent assets Check how contingent assets work on a moratorium, for example:
  • will the security ‘kick in’ if the underlying employer contribution obligation is subject to the moratorium? This depends on how the payment obligation is defined
  • if ‘no’, what does this mean for the security’s ‘value’ to the scheme?
  • if ‘yes’, can it be enforced in a moratorium and, if not, would the security ‘lapse’?

Consider the type of security the scheme has:

  • would it trump the ‘super-priority’ of other creditors discussed above? Fixed charges would, whereas guarantees wouldn’t
  • who gives the guarantee? If this is another group company, it could also be subject to the moratorium. External guarantees and certain other security, such as escrows, wouldn’t be
 Now, or whenever considering contingent asset value (e.g. valuation, ongoing covenant monitoring, contingency planning) or putting in place a new contingent asset
5 Funding and covenant The possibility of the company using one of the new restructuring tools (possibly against the trustees’ or PPF’s wishes) should be factored into covenant and funding discussions. Valuations or any covenant discussions (including on transactions)

Emma King, Partner
Charlotte Cartwright, Legal Director
Julia Chirnside, Principal Associate

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