Part Two

Yesterday, we looked at the proposed new moratorium process and the implications for pension schemes. Today we consider the new restructuring plan process.

Background

The Corporate Insolvency and Governance Bill (the Bill) is passing through parliament at the moment. Some of the measures included in the Bill are in response to the current pandemic and will provide temporary easements for company directors from an acute economic downturn. Other measures have been under consideration for a while, and will be permanent.

Our restructuring colleagues provide some insights into the proposed new measures on their blog page.

The pensions/insolvency nexus has long been a complex interface. The key areas where the pensions and corporate insolvency worlds collide in statutory terms are the employer debt regime under section 75 of the Pensions Act 1995 and the trigger events for entry to the Pension Protection Fund (PPF) under the Pensions Act 2004. Many readers will be familiar with these and may initially derive some comfort from the fact that, as currently drafted, the Bill makes no changes to either regime. However, appearances can be deceiving and the proposals contained in the Bill throw up some interesting pensions angles.

Restructuring Plan

The Bill introduces a new restructuring plan process. Unlike the moratorium, a restructuring plan requires court approval. A restructuring plan is similar to the existing process, called a scheme of arrangement, and allows companies to enter into an arrangement with its creditors if at least 75% in value of creditors in each class vote in favour of it. Creditors would be divided into classes with similar rights. The key difference is that the restructuring plan proposals include new tongue-twisting “cross class cram down” provisions, which mean that the court can approve a restructuring plan if only one class of creditors votes in favour of it, if (broadly speaking) it is satisfied that the other classes would not be prejudiced compared with the likely alternatives e.g. administration.

See our blog for more on the new restructuring plan generally.

Summary of key pensions implications (based on the draft Bill)

• As mentioned above, a restructuring plan requires court approval so trustees cannot be “taken unawares”. This assists with the acute conflict issues we highlighted yesterday, which company directors and senior executives will face with the moratorium process.

• If conflicted company executive trustees cannot participate in trustee deliberations on the company’s restructuring plan, consideration will need to be given urgently to whether the remaining trustee board can function effectively. Is there a quorum? Do the remaining trustees have the skills, experience or even simply the time to consider and deal with the issues in hand? Should the trustees seek the support of an independent trustee?

• A critical question is the value of the debt that the trustees will be able to rely on in the process. Trustees will wish to assert that it is the full buy-out section 75 debt value (which in many cases would give it a controlling vote in its creditor class, and possibly force a cross class cram down). However, based on the current drafting of the Bill, a restructuring plan does not trigger a section 75 debt. Where contributions are fully paid up to date, arguably there may be no debt owed and no vote on the proposal. A further complication is that there is some discussion amongst insolvency professionals as to whether a creditor who does not have an economic interest in a restructuring plan could then be bound by the plan without having a say in it. So, for example, could a sponsoring company compromise a contingent section 75 debt without the pension trustees having a say in that compromise (because the contingency trigger has not happened)? We think that it is unlikely, but something that needs to be clarified.

• The ability to put the section 75 debt into the mix may also depend upon the idiosyncrasies of each pension scheme’s rules. Companies and trustees will need legal advice to help them understand the position.

• Whilst a restructuring plan does not have to follow a moratorium, where it does the legal restrictions for trustees introduced around the moratorium could be critical to the leverage the trustees have at the restructuring plan negotiating table and hence the outcome for a pension scheme.

• Trustees will need to take extreme care that they do not enter into a legally enforceable agreement which reduces the amount of a section 75 debt due to a pension scheme as this could render the scheme forever ineligible for entry into the PPF (although it is possible to seek PPF “blessing” to such an agreement). Schemes of arrangement (see above) are exempt from this but restructuring plans are not.

Broader commentary

The Bill has the potential to upset the delicate balance that has existed for many years in the pensions/corporate insolvency nexus. In simple terms, it tilts the playing field in favour of companies, meaning trustees of pension schemes linked to sponsors facing any kind of financial distress will need to keep very alert and potentially be prepared to take pre-emptive steps that hitherto would have been considered theoretical only.

It will also be interesting to see how The Pension Regulator (which has so far been very supportive of companies that are struggling with the headwinds of COVID-19) reacts to this power shift in the landscape.

One likely consequence of the Bill is that trustees will increasingly seek security from sponsoring companies or greater control of winding-up triggers in future funding negotiations.

The Bill is still in draft so changes may still be made. In particular, there has been support in the House of Lords for the moratorium and restructuring plan to engage the section 75 regime or trigger a PPF assessment period. As we noted yesterday, this would be a seismic change which could result in large numbers of pension scheme members relying on PPF compensation in future. However, this may inadvertently limit the attraction (to companies) of a moratorium or restructuring plan if it also triggers the section 75 employer debt regime or the potential for The Pensions Regulator to consider exercising its anti-avoidance (or “moral hazard”) powers.

What should trustees do?

The Bill will be relevant to all schemes but especially the trustees of schemes linked to sponsors with weak or weakening covenants, perhaps especially if the sponsor operates in a sector hard hit by COVID-19. Even though the Bill is not yet law, such trustees may wish to reassess what “tools they have in the box”, consider how a surprise moratorium would change that and increase the frequency of their scrutiny of the sponsor. Trustees facing requests for extensions to deferrals of deficit reduction contributions may also wish to consider if the change in landscape affects their view of the proposal.

We will provide a further update once the Bill has received Royal Assent.