Protecting the scheme in a distressed employer situation

Jason Coates: Good afternoon everyone and we will just leave it 30 seconds as people are logging in before we start.

OK I think we will make a start. A very good afternoon to everyone and a very warm welcome to this webinar. This is the second in our scheme sessions on 2 series. We are looking at a theme of how we can protect pension schemes and their members. Last week we looked at protecting pension schemes in the context of corporate takeover. In a couple of weeks we will be looking protecting pension schemes and their members in the context of risk transfer, but today's topic is how we protect schemes and members in a situation where the employer is in a distressed situation.

The webinar will be running for about 45 minutes to one hour. You will see on your screens that there is a Q&A button so that enables you to type in any questions you might have as we go along. We will try and take those questions as we come. Obviously, if we do not get through them all, we will pick up separately with you afterwards but we will try and take as many of those as we can.

I am delighted to welcome our two guests this afternoon to help us through this topic. First of all welcome Rachel Croft. Rachel is a very experienced director of the professional trustee firm, ITS, Independent Trustee Services representing the firm on a wide variety of scheme appointments, and Rachel has got some very real experience of guiding trustee boards through situations where the sponsor's in distress. She will be able to share some of the practical and tactical points that have come out of that experience so a warm welcome to Rachel.

And secondly, Tom Pringle is our other guest and Tom's a partner with me at Gowling. Tom leads the firm's London restructuring insolvency team and advising various parties at different stages on the distress curve. Again Tom has a wealth of experience to draw on and he will be helping us understand the legal and commercial drivers in these sorts of situations from the different perspectives of the all the parties so we are going to go through a couple of situations. In particular we are going to look at how trustees can address distress situations before there is an insolvency situation and then we will look a little bit at or what kind of insolvency situations can occur all insolvency situations and how trustees deal with that and then we are just going to come back to sort of what lessons we can learn having thought about those things in terms of maybe when times are better, what trustees might do to put themselves in a better position should things change and I am so sure with the experiences that we have got with Rachel and Tom that you will get some valuable insights.

OK so without any further ado, let's move on to the situation before a formal solvency process has started and I would like to open up with the you Rachel if I may, what are the warning signs that trustees should be looking out for? I mean is it when everything changes or are there specific things that you would be looking out or.

Rachel Croft: Thanks Jason and yes absolutely and of course the warning signs will be many and varied and will differ across the range of schemes and scenarios but a very obvious one of course would be a request from the sponsor to defer contributions to the scheme if any are being paid at the current time but that will not always be necessary or something that the sponsor will want to do and so it can be a bit more subtle than that. If you have the benefit of an information sharing protocol or regular covenant monitoring in place, then you will probably see that something like a decline in performance or a reduction in the cash position or headroom in borrowing facilities might be clear to you. You might even see signs of increased monitoring by the sponsor's lenders possibly even covenant waivers. If you do not have that in place or things are not so clear, then other signs will vary depending on the sector and the type of organisation, but potentially some examples might be loss of a key customer or a sudden change of senior personnel within the organisation. Perhaps new or different advisors being appointed or even frequent late payment of scheme supplier invoices could be a sign and prompt some questions.

Jason: Thanks Rachel. Really useful sort of things to look out for there. I mean Tom actually just to ask you in terms of that would sort of match up with other stakeholders and the kinds of things they are looking out for too.

Tome Pringle: Absolutely. I mean if you are a trade creditor, obviously you are keeping tabs on payments and payment patterns and if there is any change to payment patterns seeking to move from quarterly payments and advanced and monthly payments in advance for example. Also you will know as a trade creditor or as a lender to a certain business or certain sector which sectors are particularly struggling at the moment. Any energy hungry sectors at the moment, any sectors that have traditionally been heavily reliant on EU labour at the moment are particularly struggling so I think you need to have a general awareness of what the commercial pressures are in the sector than your sponsor operates in.

Jason: And Tom when you think about this then from the other side and you have got the actual sponsor company in terms of its board and they are working through a situation of times of difficulty. I think it would be helpful for many of the audience to understand what the duties are for that board and sort of when they flip from shareholders to creditors because largely on this webinar we have pensions people so I think it would be helpful to hear from you as to what is going on there.

Tom: OK well in normal times to the extent there have not been any normal times of late, all directors have to simple ensure that managing the company that they are a director of in accordance with the company's constitutional documents and ensuring they comply with their statutory obligations and they are subject to general statutory duties for the purpose of which is to protect those with the ultimate financial interest in the company and for a solvent company that would usually mean its shareholders or its wider group and those general duties are set out in the Companies Act in summary there to act for powers, promote the success of the company, exercise independent judgment and that remains vital throughout, exercise reasonable care and skill, avoid conflicts of interest, not to accept benefits from third parties and to declare an interest in any proposed transaction or arrangement. Now once a company is insolvent or of doubtful solvency in that there is a real risk arises that the interest of creditors could become prejudiced and the duties of directors change so that although that primary duty to those with a financial interest in the company switches from its shareholders to its creditors as you suggested Jason. In a group situation which we often deal with, this change can be particularly challenging as each group company within a structure can have its own common directors and the same four or five people can be directors of every company in the group and be used to when they are making a decision considering the interests of the group as a whole with various inter-group transfers and loans, an employee for this company really works for that company but as soon as the company becomes of doubtful solvency and then I entrust your creditors are engaged, each board must separately consider the interest of their own creditors and then the duties that I have listed must be seen through that prism. When those duties survive but with the shift of where that ultimate duty lies.

So I suppose the question then is when am I insolvent or when am I of doubtful solvency, and then you have got to look at the two main tests of insolvency. You may trigger one but not the other if you are triggering one, you should prudently be acting in the interest of creditors so they are that the company cannot pay its debts as they fall due which is the liquidity of a cash-flow test and that the liabilities of the company and a complication is including contingent and perspective liabilities are in excess of its assets so you are looking at the balance sheet test there and the cash-flow test is usually pretty clear to reach a conclusion on, are you paying your creditors as they fall due or are you not, and it is that test that under general normal circumstances without this a lurking pension scheme problem is the main concern for most directors and creditors as long as they can continue to pay their debts and if they are looking vaguely profitable for the short to medium term, the it is usually the right decision to continue to crave. However, the balance sheet test is a particularly tricky test for a director to come to a conclusive view on given as I said the need to take those contingent and prospective liabilities into account. Contingent and prospective liabilities can emerge and fade and have not yet crystalized and they can fluctuate significantly in value but any deficit to a pension scheme is a prime example so at what point is your balance sheet test engaged? It is very tricky to say and will very much depend on the advice you get financial and legal advice at the time. There is no clear but answer from an objective perspective.

So where this general duty to creditors is triggered, there are two real main areas of concern for directors and I am leaving aside pensions and concerns for now. Firstly originally under the Insolvency Act will enable the Court on an application by an administrator or liquidator to order has to make a personal contribution to the company's assets and this is either for misfeasance for entering into transactions that should not have been entered into, preferring certain creditors above others, transactions at an undervalue, putting assets beyond the reach of creditors or those relating some times to fraudulent trading but more usually to wrongful trading. Wrongful trading, the issue there is engaged when there ceases to be a reasonable prospect of a company avoiding an insolvency and the company continues to trade anyway. Any deficit in the balance sheet or in the creditor position between that point, where there ceases to be a reasonable prospect of avoiding insolvency and the point you actually stop trading, the directors can be on the hook for that entire deficit for that period unless they take every step to minimize losses to creditors. So that is obviously something that will really focus directors' minds. It is something that was suspended during the pandemic but is very much back now and secondly directors can face disqualification for formation of a management of a company.

Then we are not going into the Pension Scheme Act duties and potential liabilities for contribution as a criminal liabilities in depth here but directors of sponsors that are weighing up this interest to creditors as a whole are not permitted to prefer any creditor over any other, other than for genuine commercial reasons have a real problem because they have that duty to act in the interest of creditors as a whole but they have the additional specific duties to specifically protect the pension scheme which could conflict with their general duties so there is a very difficult balancing act the directors of a company in this situation receive with threats of liability coming from all sorts of angles so we are looking from a trustee's perspective here the trustees will need to work to make sure they keep the scheme at the top of that list.

Jason: Tell me in that context when you have got the directors under that pressure so how would you advise trustees that they ought to engage with that or the board of their sponsor through that period?

Tom: I think they need to engagement in itself is the right thing to do. You need to get yourself a seat at the table and make yourself and make the scheme the pressing problem. It would be easy from a commercial perspective why directors, it can be whack a mole or putting out fires that threaten the existence of the company in the short term so if you have got the revenue threatening a winding up petition, essential suppliers threatening to pull their suppliers until you pay them. You have got payroll you have to make. You have got a bank who can pull funding of pull your overdraft at any point. You have got an awful lot of competing parties trying to put themselves at the top of the pile so you need to engage, make sure that those duties under the Pension Scheme Act are very much at the top of directors' mind and ensure that you are the problem that they have to solve today. The old adage of the squeaky wheel getting the grease is very much in play.

Jason: Thanks so Tom has just sort of been talking us through there, the way in which the directors of the board are having to act and how potentially that means the trustees need to relate to them and looking at it a bit more widely from the trustees' perspectives, how do you manage communication with the sponsor but also members, the Regulator through this challenging period.

Rachel: That is really good question Jason and from my perspective, stakeholder communications if I can call it that is probably one of the most important roles of the chair of trustees in the circumstances and it is continual and ongoing. At each development and there could be many and varied in a short space of time, it is important to consider which party or parties needs to be informed or consulted, made a request of or asked for a decision and it is an iterative process I think. Even in a fast paced situation I think it is important to plan these communications in advance even phone calls and even if you can just take five minutes before a conversation to sort of plan and perhaps strategise which areas are likely to be difficult to communicate and how this can be done objectively and in a straightforward way might sound obvious but it is aimed to stay calm and positive albeit realistic I think in this sort of scenario.

So in relation to the sponsor, hopefully there is already a good working relationship with the sponsor company as a starting point. If not that needs to be built fairly quickly. You mentioned the Pensions Regulator and I would also include the Pension Protection fund. It is important to inform them of the situation at the appropriate point and also what actions the trustees are taking in response to the situation. I would say the earlier the better for this an if you are in a situation where you are debating whether it is time to communicate with the Pensions Regulator and the Pension :Protection Fund then you are probably there already I would say. Keep them up to date, respond promptly to their questions and engage with Pension Protection Fund contingency planning and on this, there is some very helpful guidance on Pension Protection Fund's website, and also encourage the sponsor to communicate directly with the Pension Protection Fund and the Pensions Regulator where that is appropriate.

With regard to members, this is always a difficult one. You need to think carefully about when to communicate as well as what. Certainly if the situation becomes public, otherwise when there has been a concrete development but not every twist and turn along the way. It is important to strike the balance I think between openly informing members and not causing them undue concern.

Jason: Thanks Rachel. I think there is really important points and I think they cannot be under-estimated so we are going to come on in a moment to a bit more around sort of what legal levers trustees might have and some other levers, but I think those communication pieces from my experience are absolutely crucial through this kind of process and where I would like to just go next is to think a little bit more about what is it other parties in this scene are not doing so other creditors, banks, lenders for example and then we will look at what the trustees' levers are and how to Tom's point, trustees can then make sure they are getting a seat at the table to engage in this so Tom just turning to you first just so we can all understand a little bit more, what might be expecting lenders and other major creditors to do?

Tom: Rachel thanks for bringing up awards for payments. I think this is useful to give the context for the outcome if an insolvency process does take place and this informs what position all of the other parties will take. This shows the awards full of payment of priority of payments in an insolvency. As you will see at the very top a fixed charge-holder so if you as trustees or a lender has security over bricks and mortar or plants and machinery and that is worth more than you are owed, then you are fine. You have got nothing really to worry about there, but as you sink further down the waterfall, you have got more of a problem. Expenses of the insolvency if this is an administration or liquidation would usually come in next to that as the administrator's fees, any expenditure they incur while trading during an administration. It is the sale, the costs of selling the business, it is the rent for during the period of administration and it is the legal fees, all of that would usually come in next. However, I will go into in a bit more detail later that under the Corporate Insolvency and Governance Act that came in in 2020, the new procedure called the moratorium has come in and this is a standalone process where a company can buy breathing space from its creditors so any enforcement is prevented. You get a holiday free or debts pre-date the start of the moratorium to give up breathing space to rescue a company and it has to be the company rescued as a going concern here not just the business like in an administration sale.

So now any debts that arise during that period of a moratorium, if the moratorium then fails to result in a rescue of the company and administration follows, that comes in next ahead of the costs of the insolvency so before you even start the normal waterfall, this moratorium debt can come in next. Then you would get the preferential creditors - that is usually the employees. Then secondary preferential creditors a new set of creditors in the waterfall now predominately that is HMRC which used to have priority status back in 2002, that was gone and the prescribed part replaced it from secured creditors but the Revenue is now back for any VAT payments that have not been paid, any employers' PAYE or NIC that has not been paid. The Revenue then gets paid before anybody else does so that is a real hit to unsecured creditors and a real hit to floating charge-holders. The prescribed part comes in next. That is another carve-out from the floating charge for up to £800,000 for unsecured creditors. Then your floating charge comes so any lender with a floating charge and only a floating charge is if there is any VAT liabilities and particularly if there is any moratorium that has come in. That suddenly not worth very much at all but any lender there is commercially to be an unsecured creditor affectively and only has the benefit of a debenture say to the extent that they can control any administration process. Then and only then do your unsecured debts which a pension scheme without security would come in there and that would bed way, way down the pecking order and before the shareholders were not really ahead of anyone else and that it is a significantly worse position to be in now particularly that the Revenue's preferences come in so with that context, what will other creditors and other stakeholders be doing, everybody will be protecting their own interests and desperately trying to scrabble up that waterfall if they know or suspect that is what is going on so that is either moving themselves up a category in a waterfall by getting security or getting better security or simply to get paid as much as possible before an insolvency process kicks in and that waterfall begins to flow.

So you can look at the cash-flow forecast and the balance sheet and the security structure of a company to work out what people's drivers may be here but actually that can only tell you so much. It is as important if not more important to know who either the individual or the organization the company is dealing with, how they operate and what their drivers are. So if you are looking at a lender, is that lender secured and over what? If they have security over the bricks and mortar as I have said and there is plenty of equity in it then that will be likely to be more relaxed and more inclined to delay repayment because they know they are covered. There may even if there is enough equity be scoped for a second charge for a key creditor such as a different set of pension scheme trustees. If a lender only has a debenture then it has a power to control insolvency process but that can actually be worth very little commercially in insolvency so what the lender may be doing in those circumstances is be really keen just to keep that business afloat to keep up repayments because that is their only hope of getting repaid.

Then you need to look at who is the lender if it is a major clearing bank with a focus on treating customers fairly and a keen eye on PR or a healthy fear of the tabloids then you will probably have more time than if the debt has been assigned a couple of times and it might have ended up in the hands of one of the more aggressive international debt funds who are perfectly happy to bust a company for a quick buck. Then you look at the trade creditors, what is their motivation that the biggest trade creditor, their motivation may actually be the sponsor is too big to fail for them. They need to get a company to survive before giving support or approach or willingness to delay or reduce payments. Do they just simply want to draw and underline of this and get paid in full asap or at the extreme and in certain sectors, it is more common of relations deteriorating to such an extent that they just want to bring the company down to set an example and if so, a winding up petition could be imminent and at that point all bets are off and any planned process could often be out of the window. Where are they with HMRC? Have they breached the time to pay agreement? Then again, a winding up petition could be imminent. So you need to know the numbers but you need to know your opposition and I suppose to know are they a friend, a foe or is the jury still out? So how much are these various stakeholders taken to account themselves for their liabilities of the Pension Scheme Act so getting around the table and getting to know the safe-holders and what each of their drivers are is key because whatever the legal position is, no two situations are the same given the individuals involved.

Jason: Thanks Tom and again it is really helpful in my experience in working in these situations is it is so important to involve the likes of yourself, to get an understanding of who the various different stakeholders are and what game is being played by each of those and Rachel turning back to you then from the trustee perspective having heard from Tom as to what some of the other stakeholders will be doing, it then becomes really important I think for a lot of trustees to think well what are the levers I have in this game to play and how do I decide what to use when? I just wondered if you could perhaps just pick that up a bit further.

Rachel: Yes of course and thanks for that Tom and Jason. So as you say, I think you have said a couple of times already no situation is going to be the same as any other so I think overall carrying out a scenario planning as a trustee board and with advisors is extremely useful so running through a number of potential what ifs so as to understand how the situation might evolve and what the range of actions might be for the trustees and you might find that you come back to this several times. I think it is key to understand as context for this firstly the powers under the trust deed and rules which will differ in different situations and secondly, the potential financial outcome for the scheme in any subsequent insolvency so specifically what you might call might include from a legal perspective those powers under the trust deed rules for example you might have the ability to require additional contributions in the specific scenario or even wind up the scheme and trigger a section 75 debt and what would trigger those powers and again coming back to the financial impact, what would actually be the impact of using those powers? Would there actually be any benefit in doing so?

Then of course have an eye on any covenant protection that you have in place, is there any contingent security and how and when would that be triggered?

Investment is an important consideration actually and very much in the hands of the trustees of course with consultation with the sponsor. Can or should the investment strategy be re-risked in light of the sponsor covenant concerns and is this even possible in the timescales that you have got. It may go without saying but information provision is fundamentally important and increasing the frequency of dialogue and/or escalating contact within the sponsor organisation if possible can be very helpful. Can the trustees for example be provided with the same monitoring information as other parties and at the same time and frequency to save time and cost and create efficiencies all round? In certain scenarios and to be considered with care and based on specialist advice, you of external communications either reactively or proactively is another lever that could be pulled.

Jason: Thanks Rachel. I mean just on that one in terms of I guess the potential for benefit. There is also I guess the potential for danger as well so I just wondered if you have any other thoughts as to how trustees are careful.

Rachel: Yes and I think I used the word care. You used the word careful and I think that as my top tip but I think that the first probably tip is to engage with that subject in the first place and it is pretty far removed from business as usual trusteeship but it can be quite important in a distressed situation even if no external communications are ever issued and obviously none of us actually want the attention of journalists or politicians on the scheme or the trustee board but you might not have a choice if the sponsor high profile and is already in the news and that is why preparation is very important so I would suggest trustees treat external communications as they would any other discipline in relation to pensions so if you need legal input, you go to a lawyer, covenant input, you would go to a covenant advisor, funding input, you go to an actuary so I would say if you need external communications input, go to a specialist and ideally engage them and onboard them in advance if that is possible and also have a fully thought-out strategy, make sure you understand the range of relevant stakeholders who might be interested in the scheme and how you might reach them if you ever need to and prepare to either be in reactive mode, that is if the situation becomes public without your doing or proactive mode and be able to switch from the first of these to the second if needed.

Timing is very important to as is a need to understand the risks and how to manager broader stakeholders who are potentially impacted by anything that you do or do not do in this space.

A couple of don'ts too. One of which and the most important is do not even attempt external communications as a trustee either reactively or proactively if you have not been through something like the steps I have just outlined, but on the other hand do not dismiss it, do not assume that you do not need to consider this because depending on the circumstances, you might not have a choice because you might not be the one driving this.

Jason: Yes thanks Rachel and I think my takeaway from listening to you and Tom here is that from a trustee perspective, it is really important I think we use the phrase to get the before strategising the timing of using it and I guess sometimes it will be right to be very proactive as a trustee, there will be other moments and times when you just have to try and have little patience and just let things play out a bit and I think one of the really important things for the trustees is to be thinking carefully about that timing and when to use the different levers.

So sometimes in these situations, we then see that a transaction unfolds in a solvent scenario and then something comes out of it where actually there needs to be say a refinancing or some other kind of transaction that takes of a solvent basis takes things forward and I guess refinancing might often be one of those things and Tom there has been quite a lot written about that recently and how trustees in particular to deal with that situation.

Tom: Yes it was actually pretty helpful for the purposes of this webinar that David Fairs wrote an article last month setting out what the Pensions Regulator expects both the sponsor employees and the trustees to consider when refinancing. I won't go through all of that in detail here if you could read it yourselves but the key sentence in that for me was that it is critical to understand the implications of any refinancing on the pension scheme and the employer covenant and to mitigate to the extent possible any detriment caused to the extent possible is doing a lot of heavy lifting in there and to as trustees getting to really understand the detail of your advisors of what is being proposed here, how it affects the pension scheme and what if anything you can do about it either using legal powers or your soft power so you need to know what it is going to do to interest, to the actual structure of the debt and security any covenants or who the new counterparty is? Could this be a sign to a new counterparty could for example more aggressive debt funds step in here. You need to understand that everything that is changing and understand what you can do about it so again early engagement in getting that seat at the table is vital. You do not want to be presented with a fait accompli that I either do this or the company has no future.

So there really is an onus on the trustees to be proactive and to really understand any transaction in the current and proposed structure of the death and security and obviously there is an onus on the lenders and the sponsors particularly to consider the pension scheme and how it affects the pension scheme as well. You need to know how any changes are affecting the scheme's position in the waterfall I went through earlier. New money be that from a new lender or a new advance from an existing lender that I covered by security. May for example, say the employer's business, you still have a solvent sponsor but if this is secured debt that it can really drop the scheme down the waterfall and put the scheme out of the money when the money runs out so trustees need to really carefully consider what is preferable for the scheme's perspective? Is it an insolvent employer with a pension scheme high in ranking so that they will get a decent slug of cash out if there is an insolvency now or an employer that has been refinanced that struggles on but with the scheme further down the pecking order so there has got to be significant period of training recovery and profit before the scheme is back in the money again so that is something that trustees and their advisors will need to way up very carefully.

Jason: And Rachel from your perspective, from a trustee's perspective, presumably once you start to see a transaction take shape that is a moment when the trustee really does need to be proactive to make sure those levers we have talked about are brought to the fore.

Rachel: Absolutely and of course it will depend on the trustees' powers in relation to the scheme and also on the trustee's view on the perspective viability of the underlying business involved and these are questions that the trustees will no doubt come back to more than once.

It can also present an opportunity to thinking back to Tom's really helpful waterfall chart and the comments he has made already. Is there an opportunity even in this sort of scenario to seek increased protection for the scheme for example through second charge and as we said in general, in this sort of scenario requesting information and being kept up to date is key, ideally before heading into a specific scenario i.e. a refinancing as trustees you would already have knowledge of the current facilities for ease of comparison and then you would want to understand the difference between key terms of the existing facilities and the proposed new financing and of course you would ideally be seeking mitigation if the sponsor entering into the proposed refinancing would result in detriment and it goes without saying as we have said before, seek specialist advice in this scenario.

Jason: Thanks Rachel and I think again just pulling together the threads from both yourself and Tom it seems clear to me that it is important for the trustees to really be understanding those different powers, those different leverage but to really not be shy in standing back at that point once you get into the transaction to be engaging fully. Just a slightly different task that we have not picked up so far and Rachel I am turning to you on this one it is just in terms of, there is a trustee and a professional trustee perhaps bringing along that board of late trustees with events like that that can often be concerning as well for some members of the board given their involvement in the sponsor which is in distress and also the advisory team. How do you pull that piece together to make sure you can really deal with these situations?

Rachel: Thanks Jason and again another key part of the role of the chair of trustees I think or the professional trustee on the board so taking the trustee board first I think agree as soon as you can as a board how the situation will be led and by whom and that could be a delegation to a small number for example. Obviously, you will need to agree how you are going to manage any conflicts of interest in the scenario and depending on the role in the sponsor organisation, some of the trustees may be able to continue. Other might need to be recused from involvement for a period so as I said, it is likely to be because these situations can be very fast paced. It is likely to me delegations to a small number from the trustee board so it is important to agree how the wider trustee board will be kept updated, how their views will be sought and how any decisions will be made and I found that frequent brief calls are a good idea to keep everybody up to speed and on the same page. Even trustees who are not in perhaps part of a small group are very likely to need some training in this area.

Turning to advisors, I think as a trustee I would always want to have the right people in the right roles ideally planned in advance and that may be different from or additional to members of the usual advisory team so it is good for the usual contacts in all of the key areas so legal, actuarial covenant to have identified colleagues who can be brought on to the team at short notice.

Agree how you are going to commission and obtain advice in a fast paced situation and very importantly I think give your advisors permission to think outside of their specific roles and work as a team and as well as thinking about the technical skills set so I have mentioned already legal and by legal, I mean both pensions and restructuring advice and also covenant, actuarial, investment and as we have mentioned earlier, external communications and also member communications. Ensure that you have diversity of style in the team I have found to be very important so what do I mean by that, well I mean a range of different sort of roles in a sort of soft skills sense if I can put it that way so you do not want everybody to be fast paced. You definitely want some of that but you also need members of the team who can be very calm and measured. You definitely need a devil's advocate and you need a lateral and creative thinker for example.

Jason: Thanks Rachel. That is a really interesting point because sometimes we look at these issues and certainly as advisors as well, we can be very technical in their thinking that we have go to let's work out what rule 5.6 is and section this, that and the other and actually these are very real human situations that are going on live and that whole sort of personality and human element of all of this ends up being very critical I think. I would like to just take a move on then just to think a bit more about what happens if there is a formal insolvency process that happens and think one of the things that is important for us as pensions people to understand from Tom is what are all these different insolvency processes and procedures because there are a lot of them and there is a certain language about them but I think it is important that trustees understand them because the sponsor will be talking with its advisors about the potential ways forward and some of them Tom will take us through, some of them have implications for example triggering section 75 debts or a PPM assessment period but other do not and particularly Tom I think some of the more recent insolvency processes.

Tom: That's right. I think we should have a slide coming up to assist me here. There we go. As you can see yes as Jason mentioned, there are quite a few of these and a few more than there were a couple of years ago and the pandemic has really accelerated many things including developments in solvency law that have been on the back burner for a number of years so while I have broadly listed these in order of most to least terminal, and you will see the tick or the cross as to whether they trigger section 75 and does not necessarily make a lot of sense for all of them where that does or does not apply but to wrap up quickly because I am conscious of time, compulsory liquidation, this is where a creditor who is owned £750 or more when it was increased to £10,000 for the pandemic but now it has gone back down again issued a winding up petition and the Court ordered a compulsory liquidation of the company so it's a fairly brutal end to a company. As soon as a petition is issued a bank would usually freeze the company's accounts so even if a company wasn't insolvent really at the time a petition was issued it can very quickly become insolvent as a result of it as a house of cards can very quickly be brought down there. Any payments made between the issue of a petition and the making of a winding-up order which can be a couple of months later are automatically void so need paying back unless you get a special Court order, so that's, that's really catastrophic, a compulsory liquidation.

Close is voluntary liquidation, it's still an insolvent liquidation. It's what we have seen a huge spike in the last few months. It's effectively a burial of a company where there is no business to save, there's nothing to save here, might sell some assets and distribution what's left amongst the creditors. That is company led as opposed to creditor led but it is not a happy end for a company because there's usually very little if anything to distribute and that's the worrying trend that we're seeing at the moment where there's an awful lot of those about.

Members' voluntary liquidation you would usually see that in a group restructure and the reason that won't trigger section 75 is it is a solvent process. The directors will give a declaration that all creditors will be paid in full. Members' voluntary liquidation is if say an asset isn't worth what you thought it was, and your creditor comes out of the woodwork, can be converted into creditors' voluntary liquidations at which point a section 75 is triggered again.

Administration can be terminal, usually is terminal, but is usually or very often results in the rescue of the business, not the company but the business and it's often sold in what is known as a pre-pack, how their business and assets are sold immediately upon the appointment of the administrators. So there's an insolvency process but it's the one where there is something to rescue here, there's like a business albeit one maybe buried under a terrible balance sheet. This can be a really positive thing saving jobs, saving businesses, helping with this rescue culture, but if you're a large unsecured process such as a pension scheme you could very easily be left behind here and see a business phoenixing itself, you could say, and surviving without being lumbered with your debt and that's when there's a bit of a problem for all concerned.

Administrative receivership is the predecessor to administration. We don't really see that very much. You can only, you only see that if there is a debenture predating September 2003 and that does trigger section 75 but there's slightly different duties where the receivers only owe duties to the lender who appointed them rather than all the creditors.

Fix charge or LPA receivership, that doesn't trigger section 75, the reason being that that is only an appointment over a specific asset, over a specific property usually, can be bank accounts, can be shares, where the receiver is appointed over a specific property so that it doesn't affect the management or ongoing trading in the business as a whole unless, you know, the commercial effects of seizing that property does that.

CVA creditors… sorry Company Voluntary Arrangement does trigger the PPF and it is when the nominee, the insolvency practitioner, files a report with the Court that they think there's a reasonable prospect of this succeeding is what triggers the section 75 debt and then the PPF does have the voting rights of the trustees in that situation. This is a compromise with creditors. Traditionally it would be creditors accept x pence in the pound over x number of months or years as a compromise of their debts, it being a lot better than the alternative of usually a liquidation. Seventy-five per cent in value of the creditors and 50%25 of non-connected creditors have to vote that through. What this has been used for a lot in recent years is compromising landlords and ditching leases, highly controversially, but no challenges to that have been successful as yet.

And we'll move on to the scheme of arrangement next, it gives context to the next one, that is a Court sanction compromise with creditors or shareholders often used in respect of a group restructure, so it can be a solvent scenario or it can be used usually on large international groups where certain creditors need to be compromised, certain classes of creditors need to be compromised, and that requires the majority of any affected class of creditors to vote that through and then of course has to give the seal of approval that is a genuine compromise.

Then we move to the restructuring plan which is a new process coming in in 2020. We're starting to see a few of these coming through and finally starting to filter down to the mid-market, you know, from just being used for the likes of Virgin and previously it is a scheme of arrangements with an additional complication of… and it's easy for me to say – Cross Class Creditor Cram Down – which means that the creditors be parcelled up into different categories, that can be controversial in itself as to where you end up, and some groups of creditors can be compromised whereas others remain whole or others are compromised less and even if your class of creditors votes that you do not want to be compromised the rest can still push it through. Now the reason is that this gets rid of the 'cut your nose off to spite your face' creditors who just want this to fail and could do in a scheme of arrangement or those creditors who in the alternative, be it administration or liquidation, they're not going to see a penny or they're only going to see a little bit and although they're compromised more than other people here they still are no worse off than they would be in an alternative situation.

So this is where it seems puzzling to me that it doesn't trigger section 75 when a CVA does, there is more scope for a certain class of creditor to be singled out but that is where we are.

And finally the moratorium that I discussed first, that is not an insolvency procedure in of itself, it is a holding position to either a rescue or an insolvency procedure should that moratorium not work. So that's a quick canter through.

Jason: Perfect, thanks Tom. And I think again the reason for just wanting to highlight that to a largely pensions audience is to make us all really understand that there are slightly different things going on here, particularly important to understand if a debt's triggered or a PPF assessment period is triggered and in terms of then trying to work out how the trustee positions itself and in those different things. But I'm just conscious of time and there are just two more questions that have come in that I'd just like to try and pick up if we can in the last few minutes. So one, if I can come back to you Rachel is this point about, well, we've heard all of this stuff as where trustees are in these situations, what do you do in the good times to try and put yourself in a better position?

Rachel: That's a really good question, thanks Jason, and one on which I've reflected with advisers after certain situations. So I think it can be summarised as three P's which are Planning, Processes and People. So on planning there's no reason why trustee boards can't do the sort of scenario planning that we talked about earlier at any point not just when it appears that they might be heading into a distressed covenant scenario. Document the output and then save it in case you need it later. It's unlikely you'll face the exact scenario that you've planned for but at least you'll have a starting point and many of the continuations and actions are similar across the various scenarios.

Turning to processes and putting them in place in advance, one of the most important process of course is covenant monitoring. Agree an appropriate and proportionate frequency and approach to this with the sponsor so that it becomes the norm in business as usual times. If you can use an information sharing protocol so that there's clarity all round on what information is to be provided and when, and then if you are unfortunate enough to enter into a distressed scenario you can dial up the frequency of that monitoring and then ideally turn it back down again if and when you get through that scenario.

Other key processes to have in place are, in advance, are management of conflicts of interest which of course all trustee boards need to do anyway, risk management and member communication. So in very practical terms if you have to issue something quickly to members, who will produce that and practically how will you issue it? And then people, and we've talked about the advisory team and the trustee board and the sponsor. Whenever possible seek to build good working relationships in the business as usual times and it's so much easier if you've got a good foundation going into a stressed scenario and by that I mean in between the trustees themselves with those who provide scheme management and secretarial, advisors and of course the sponsor. Also identify any other key stakeholders specific to the circumstances and aim to open a dialogue with them if you can.

Jason: Thanks Rachel, and just picking up another question that's come through before we close and that's whether you see any linkage to the new sort of long-term funding code coming through, a lot longer term investment and funding strategies and, you know, is there anything in that that relates to this… situations we've been discussing today?

Rachel: Yeah, I think there is actually Jason and so what you're referring to is the draft regulations that have come out on funding and under those trustees and sponsors will need to agree a funding and investment strategy for their scheme to achieve full funding with low dependency on the sponsor by the time the scheme reaches significant maturity and in stressed scenarios I think where the… and particularly where the scheme is material in size compared with the sponsor, limited affordability might mean that full funding on a low dependency basis is actually some way off and where you don't have visibility of the strength of the covenant all the way to the date for full funding and actually it would be unusual for there to be a hundred per cent certainty about almost any sponsor covenant over say a seven to ten year period and beyond, it comes back to contingency planning and determining whether there's anything that trustees can do either now or in future to mitigate the risk of any future insolvency before the long-term target is likely to be achieved.

Jason: Thanks Rachel. I'm just conscious of the time, we're just ticking up now to the hour so I think we're probably just gonna pull things to an end there. Many thanks both to you Rachel and to Tom for all your insights from the different backgrounds of both a pension trustee and also a restructuring and insolvency practitioner. I think an important thing for everyone to take away is the importance of understanding that context of the restructuring and the insolvency world and the trustees do need to get very familiar and good understanding of what's going on. But also the points you both brought out really are, well, there's the technical pieces but there's also clearly the human element and the strategic and tactical to think through, so I think that all came across really very, very clearly.

So thank you for all of that, and I'll be practising saying 'cross class creditor cram down' for the rest of the day – I think I just about got there – carefully! And thanks to all of you for joining this webinar and any questions that I'm afraid we haven't answered we will pick up separately and come back to you and thank you for it. A reminder you can watch the first webinar and download it on demand from the Gowling website and sign up to the third webinar that looks at protecting schemes in risk transfer which will be coming up in a couple of weeks. Grateful for any feedback, it only takes a minute and if you could give us that feedback we're always very grateful to get that for next time and for future webinars.

That's all from me, we're coming up to one o'clock, thanks for joining us, thanks again to Rachel and Tom and have a good rest of the afternoon. Thank you.