Coronavirus - Make (insolvency) law in haste, repent at leisure? - UK

• United Kingdom

• Coronavirus
• Pensions
• Restructuring and insolvency

29-06-2020

The law that applies in UK corporate insolvencies has changed materially as a result of The Corporate Insolvency and Governance Act coming into force.

This new Act was fast-tracked through parliament to help companies struggling in the wake of COVID-19, attracting significant debate and newspaper headlines along the way. The aim is to help companies in financial difficulty restructure and survive. Where this is achieved, this is clearly good news for pension schemes.

However, has the haste to get this new law onto the books led to issues and uncertainty over how it will work in a pensions context?

What does the new law do?

The Act passed through parliament in less than 40 days. It contains permanent measures to promote a ‘rescue culture’ and some temporary measures in response to the current COVID-related crisis.

The permanent changes to insolvency law were the subject of Government consultations in 2016 and 2018 and insolvency professionals had lobbied for them to be added to the toolkit for some time. However, the haste to get these changes into law has led to some real concerns that pensions issues were not resolved properly when the new law was being debated by Parliament.

New ”breathing space” for companies to resolve issues

Companies can now enter a ‘moratorium’ (i.e. breathing space) for up to 40 business days initially without needing creditor or court agreement. This can be extended for up to a year with creditor agreement (and for even longer with court approval). Companies don’t need to be declared insolvent before using this moratorium.

The moratorium is intended to offer companies breathing space to resolve their financial difficulties, restructure and emerge solvent. It prevents creditors from taking steps to enforce their debts, enforce security or wind the company up. It is only available where an insolvency practitioner believes that the moratorium is likely to result in the company being rescued. We expect this to be a high bar.

For an overview of the restrictions, please read our briefing: Coronavirus – Corporate Governance and Insolvency Bill.

Payment holiday

During the moratorium, the company takes a payment holiday from a wide range of debts. This includes any payments imposed by the Pensions Regulator using its moral hazard powers. It also appears to include deficit repair contributions (“DRCs”) and any “section 75 debts” (a debt to the scheme payable on the solvency or “buy-out” basis) that may have become payable.

In what may be a drafting error, companies in a moratorium have to continue paying active member contributions to “occupational pension schemes” (i.e. schemes set up by the employer) but not to personal pension schemes (such as GPPs).

The new moratorium is potentially both good and bad news for pension schemes and members. If a moratorium successfully allows the employer to continue as a going concern when it might otherwise have gone insolvent, this is good news. However, if the moratorium ends with the employer still going insolvent, a DB scheme may have missed out on valuable DRCs and opportunities to take steps to enforce any guarantees or security it may have.

Companies can now agree a compromise with creditors

Where a company encounters difficulties that are likely to affect its ability to carry on as a going concern, it can agree a new form of restructuring plan where it proposes a compromise with its creditors.

Every creditor is eligible to participate in a meeting and vote on the proposals. A majority of creditors (or class of creditors), with at least 75% by value of the debt, must approve the proposals and the court must sanction them.

It remains unclear whether trustees and employers could use the new restructuring plan to compromise a section 75 debt.

PPF and Pensions Regulator involvement

The government appears to be planning to pass regulations to give the PPF a decision-making role in both the restructuring plan and the moratorium, although it is not yet clear whether those PPF rights will be in addition to, or instead of, the trustees’ rights.

This could increase trustees’ negotiating power (as the PPF would negotiate on the scheme’s behalf). On the other hand it may also limit the types of deals schemes will be able to agree, as the PPF is likely to have set parameters and redlines.

In addition, the Act contains requirements for information to be given to the Pensions Regulator where the employer has participated in a DB scheme.

Could this impact trustee decision-making on other matters?

Yes. In the wake of the COVID-19 crisis, many employers have approached DB scheme trustees to ask for a temporary suspension of their scheduled DRCs. Others will be looking for an element of “back-end loading” of payments, when agreeing revised recovery plans under triennial valuations, or will seek to agree contingent assets (such as guarantees or security packages) in place of cash payments.

The knowledge that employers could enter a moratorium will be an additional consideration for trustees to factor into their funding discussions and potentially further complicates the difficult balance to be struck between supporting the employer and securing benefits for members.

Trustees currently revisiting their funding contingency plans in light of COVID-19 should be aware that any unilateral steps they might have been able to take where there is a deteriorating covenant may be constrained by a moratorium. They should consider their covenant monitoring triggers in this light.

Clash with the Pension Schemes Bill?

The direction of travel behind the new insolvency law appears to conflict with that behind the Pension Schemes Bill (which seeks to increase the protection of schemes by widening Regulator powers).

Companies entering into a moratorium and agreeing a restructuring plan with their scheme trustees and creditors would be well advised to consider how their decisions will be viewed with the benefit of hindsight if the steps taken do not avert an insolvency. This is a live issue now, as the Regulator’s wider powers may have retrospective effect. Viewed in that context, PPF involvement in any restructuring plan involving an underfunded DB scheme may be a welcome layer of defence.