The Corporate Insolvency and Governance Act 2020 (the "Act") obtained Royal Assent on 25 June 2020 and came into effect on 26 June 2020.
The Act is intended to offer protection to businesses that are having difficulties trading due to the current economic downturn and beyond, and generally marks a shift towards a more debtor-friendly regime. The provisions will be relevant to occupational pension schemes.
The Corporate Insolvency and Governance Act 2020 (the "Act") obtained Royal Assent on 25 June 2020 and came into effect on 26 June 2020.
The Act is intended to offer protection to businesses that are having difficulties trading due to the current economic downturn and beyond, and generally marks a shift towards a more debtor-friendly regime. The provisions will be relevant to occupational pension schemes.
Key points
1. A shift in the insolvency regime
The Act represents a significant change to the insolvency regime.
2. Protection for businesses during current economic downturn
The Act aims to offer protection to businesses that are having difficulties trading due to the current economic downturn, and going forward, and this raises a number of questions for trustees of occupational pension schemes.
3. Statutory moratorium period introduced
One of the headline-grabbing features of the Act is the proposed introduction of a moratorium period for companies that would otherwise become insolvent, and the resultant (temporary) protection from their creditors. For scheme employers, this could mean the difference between being able to survive as a going concern in the longer term and insolvency.
4. Concerns for trustees of occupational pension schemes
Pension schemes may benefit if a moratorium enables a viable sponsor to emerge from the moratorium which is able to resume its obligations to the scheme in the longer term. In the short-term, however, the Act reduces the ability of trustees to negotiate the best possible outcome for members. This may cause undesirable outcomes for trustees whose sponsoring employers are in short-term danger of insolvency.
The Act
Of particular interest in a pensions context are the provisions of the Act which introduce a statutory moratorium process. This applies to companies that are (or are likely to become) unable to pay their debts, but where a moratorium period (during which creditors cannot take legal action against the company or enforce debts) would be likely to result in the company being rescued as a going concern. The initial moratorium period will be 20 business days and this can be extended for another 20 business days by the company's directors. Any further extensions to the moratorium period are subject to the consent of the company's creditors or the permission of the courts.
During this period, the company directors remain in control of the company, although a "monitor" (a licensed insolvency practitioner) will be appointed to oversee compliance with the moratorium requirements. Significantly, the Act provides for a payment holiday during any period of moratorium in respect of any "pre-moratorium debt", even if the request to pay that debt arises after the start of the moratorium. "Pre-moratorium debt" is defined as a debt that has fallen due before the moratorium or that falls due during the moratorium (subject to certain specified exceptions).
This moratorium regime is designed to provide space for company directors to consider options for rescue, such as restructuring or securing new investment, whilst offering temporary protection from creditors.
The Act and occupational pension schemes
So how does this affect occupational pension schemes? We consider a number of issues below.
Contributions
The Act lists a number of debts that must still be paid in the moratorium period and this includes "wages and salary arising under a contract of employment". Contributions to an occupational pension scheme are specifically included in the definition of "wages and salary". However, what is not clear is whether this means only ongoing contributions (i.e. those covering future service) or whether it also includes deficit repair contributions payable under a recovery plan (i.e. covering past service). We think the latter are not covered under "wages and salary" and would therefore be subject to a payment holiday during any period of moratorium.
Contribution notices (CNs) and financial support directions (FSDs)
The Explanatory Notes to the bill that was originally published state that the intention of the legislation is that pension liabilities such as CNs and FSDs issued pursuant to the Pensions Act 2004 cannot be enforced and would not be payable during a moratorium period, even if the request to pay them arises after the moratorium period has started. This follows the approach taken by the Supreme Court in Re Nortel GmbH [2013] UKSC 52.
Restructuring plans
As explained above, the Act also allows a struggling company to develop a restructuring plan to ensure its survival as a going concern in the longer term (this will be one of the exit routes from a moratorium). Any such plan would then be voted on by classes of affected creditors. Once the restructuring plan receives the court's approval, it will be binding on all creditors (even those who dissented, including a class of creditors who did not approve by the necessary majority), provided certain conditions are satisfied and the court is satisfied that it is fair and reasonable.
Trustees therefore need to be aware that this potential cross-class cramdown may limit their options as creditors and it also raises the question of how much influence or input they will have on the restructuring plan for their scheme sponsor. That said, it should also be remembered that the court will not sanction a restructuring plan unless it considers it fair and reasonable to do so and in our view it is unlikely in practice that a court would intentionally endorse a restructuring package that disproportionately affected the pension scheme as against other (unsecured) creditors.
Weakened creditor protection
Because the policy aim is to protect struggling businesses from their creditors, the corollary of that is that trustees of DB schemes with a deficit - who are creditors, and usually unsecured creditors - will find their options may be more limited and their exposure greater.
If the new process protects companies from aggressive action by competing creditors, and allows the company to survive the short-term liquidity issues (including but not limited to the shock of COVID-19), in order to survive for the long-term and to fund its long-term pensions obligations, then it may be beneficial to pension schemes. That may well be the case with employers that are in a position to recover strongly once the effect of COVID-19 on their business fades away.
However, many employers will remain vulnerable even with the Government support, and the outlook is less clear for trustees of pension schemes sponsored by such companies. Trustees and their advisers will need to be alert to the consequences of the Act for their own interests as creditors, which include both intended consequences and possible unintended consequences.
The biggest risk is that the company's position may deteriorate during the moratorium, when there is not much the trustees can do to protect the scheme's interests.
The new process also disturbs the priority order amongst creditors, potentially to trustees' detriment. Certain debts which the company is relieved from having to pay during the moratorium, together with debts incurred during the moratorium period take top priority (after creditors with fixed charge security) if the company goes into administration within 12 weeks of the moratorium ending.
Pension trustees may rely on security to back up the covenant of their sponsoring employers (for example, a fixed or floating charge) which is triggered by defined insolvency events. The new process may prevent or delay trustees from accessing such security (at least without the leave of the court). The ultimate protection for pension schemes is the Pension Protection Fund, and that too is triggered by an insolvency event.
Therefore, the new process of moratorium staving off insolvency, and then giving preference to certain debts over others, could materially limit trustees' abilities to obtain the best outcome for their members. It is the trustees of schemes sponsored by employers that may - despite the Government's efforts to save businesses - nevertheless fail anyway, that are particularly exposed.
Winding-up petitions
The Act provides for restrictions to be placed on a company's creditors as regards their ability to issue winding-up petitions (amongst other things) during a moratorium period. This means that trustees will not be able to issue winding-up petitions for unpaid pension scheme contributions. Trustees will also not be able to enforce fixed or floating charges, or obligations under guarantees (given by the company) during moratorium periods, without the leave of the court.
The position of the PPF and The Pensions Regulator
Responding to concerns raised by the pensions industry whilst the bill made its way through Parliament, the Act contains a number of provisions aimed at ensuring that the PPF and The Pensions Regulator are able to play a meaningful role in the restructuring or rescue of a scheme sponsor, thereby helping to safeguard the interests of scheme members in such cases. These include rights to receive notifications as if each were a creditor of the company during the moratorium process, and rights to challenge the conduct of directors and/or the appointed monitor.
Conclusion
For sponsors of occupational pension schemes who find themselves in financial difficulties, the provisions of the Act could be the difference between being able to survive as a going concern in the longer term and going into insolvency. For trustees, it is potentially more a mixed bag.
Trustees therefore need to consider, and take professional advice where necessary to help them understand, how the Act may affect their ability to enforce pension obligations against scheme sponsors who enter moratorium periods.
For our more general analysis of options that are available to trustees and employers in a distress scenario, please read our related article.
Footnotes
[] Note: whilst the temporary bar on winding-up petitions and certain other aspects of the Act are limited to COVID-related issues, most of the key changes are not and will be here to stay.