Introduction
The Corporate Insolvency and Governance Act 2020 (the “Act”) became law on the 25th June 2020. The aim of the Act is to assist the survival of companies in difficulty. Amongst many other provisions, the Act imposes a pause (“Moratorium”) on creditors enforcing debts for a period of 20 business days and for much longer periods in certain circumstances. The Act passed through Parliament in record time and some consider this rushed legislation will do more harm than good in the long term.
The level of detail normally expected in an Act of Parliament is absent. Accordingly the Act contains sweeping powers for the Government to make Regulations changing/adding to the Act’s provisions. Regulations are always attractive to Governments of whatever complexion. They are secondary legislation and are subject to far less Parliamentary scrutiny than an Act of Parliament. (Henry VIII found Regulations – in those days Proclamations – particularly useful as an alternative to the full Parliamentary process. Sweeping powers to make Regulations are today still known as “Henry VIII powers”).The Government is unsure how Moratoriums will work in practice and accordingly wants plenty of room to make swift changes.
Moratoriums
A contentious area is the Act’s relegation of pension deficits in defined benefit pension schemes behind certain financial creditors. This issue becomes clear once the Moratorium provisions are understood. In outline:
To enter a Moratorium the directors of the company in question have to be able to say the company is, or is likely to become, unable to meet its debts, and the insolvency practitioner acting as the proposed monitor during the Moratorium (the “Monitor”) must be able to state that in its view the Moratorium would be likely to result in the company being rescued as a going concern (a seemingly high bar in the current climate). The company directors continue in office and function during the Moratorium, but subject to the Monitor continuing to be satisfied that it is likely the company will be rescued as a going concern. If ultimately the new type of Restructuring plan under the Act is used for the company, this will require Court approval. Subject to certain conditions, the Court can still sanction a Restructuring plan even where a class of creditors has voted against.
Importantly from the pensions perspective: (1) finance contracts such as bank and other loans remain payable notwithstanding the Moratorium whereas pension deficits are holidayed (not enforceable) during the Moratorium, and (2) the Moratorium is not an insolvency event under the Insolvency Act 1986 and so does not trigger a debt under section 75 Pensions Act 1995 or start a Pension Protection Fund (“PPF”) assessment period (once a scheme is in a PPF assessment period the PPF in effect exercises rights through the scheme trustees as the employer’s creditor).
On the other hand, there is some limited better news as wages and salaries, which must continue to be paid during the Moratorium, include certain pension contributions.
Impact on pension deficits
The Government’s overriding concern is to ensure the continued availability of finance for the company during the moratorium. Accordingly under the Moratorium financial creditors such as banks can continue to take steps to look after their interests including where appropriate implementing enhanced and/or accelerated payment terms. In contrast, pension scheme deficits cannot be pursued during the Moratorium. The scheme trustees will have to fight their own corner if and when a restructuring plan for the company comes before the Court for approval albeit the PPF and the Pensions Regulator (“TPR“) will be able to make their views known to the count. Whilst the Courts are well used to weighing the competing interests of different parties, one feels pension schemes may suffer given the overriding need to ensure where appropriate a viable commercial future for the company and all or part of its workforce.
The main beef in the recent Parliamentary debates was that, at least since Pensions Act 2004 and the creation of the PPF, unsecured creditors such as unsecured bank lenders and including unsecured pension scheme trustees have been treated equally by the insolvency legislation whereas some consider the effect of a Moratorium and subsequent events may favour unsecured finance lenders at the expense of unsecured pension trustees.
Even before pension debt is secured, it seems the Act prevents enforcement during the Moratorium except in limited circumstances.
There are concerns that the new legislation will place an extra strain on the PPF, perhaps ultimately increasing the PPF levy impacting all companies paying the PPF levy.
Due to lobbying by pension lawyers and others, more far reaching provisions favouring finance lenders contained in the original provisions of the Bill have been withdrawn.
TPR liabilities
Even liabilities stemming from TPR contribution notices and financial support directions would be holidayed and not recoverable during a Moratorium. On an ultimate insolvency of the company TPR may find more of the cake has been eaten by bank finance and less available to help the pension scheme.
As reported in our Pensions Ready Reckoner in this issue of Pensions Compass, the Pension Schemes Bill resumed its passage through Parliament on the 30 June 2020. The Bill contains new criminal offences and notifiable events. Efforts may be made during the future Parliamentary proceedings to bolster the position of TPR further in relation DB schemes to try to regain for schemes ground lost as a result of the Moratorium legislation.
Conclusion
The consequences of the Moratorium legislation for defined benefit pension schemes are hard to predict. Some say it will make scheme trustees more cautious in assessing the employer covenant and in valuation negotiations, and indeed to any request by an employer to defer or suspend pension deficit contributions. An alternative view is that a Moratorium is a useful mechanism as it may avoid an insolvency and the members receiving only PPF level benefits
Employers and trustees of defined benefit schemes should obtain legal advice as needed on this complex new legislation. Our Pensions & Employee Benefits Team, together with our Insolvency and Restructuring Team with its extensive expertise in this area, are available to assist .