Rumble in the (pensions) jungle

4th June, 2020

  • Insolvency law and pensions set to clash over new Insolvency reforms … coming soon to a courtroom near you! 

    The intentions of the proposed Insolvency reforms currently navigating their way through parliament are to help preserve viable businesses and ensure a better outcome for all creditors. This is considered a positive step by many to help protect UK businesses grappling with the Covid-19 fallout.  

    Where these businesses are also sponsoring employers to pension schemes and if the reforms do help deliver improved outcomes for all creditors, then surely this should be good for pension schemes? 

    Well maybe, maybe not. Some in the pensions industry have expressed serious concerns that the proposals could harm schemes by restricting their existing rights and powers. Whilst I agree with this in certain aspects, particularly the super priority provisions allowing certain debt to leapfrog the scheme in the insolvency pecking order, I can also see certain scenarios where the scheme could potentially benefit by having a key seat at the restructuring table. Whether this is ultimately good or bad for schemes will depend on how the legislation is actually used in practice. 

    The reforms cover a number of different areas but I’m going to focus on just one, described by some as the Court sanctioned Restructuring Plan. In reality, this is using the existing Scheme of Arrangement (“SOA”) legislation but now including cross cram down provisions which could be used by the Court to impose terms on dissenting creditors. 

    Before we get startedneither a SOA, nor it seems the new moratorium, are qualifying insolvency events for PPF assessment purposesAs such, it will be the pension scheme trustee not the PPF leading the scheme into the restructuring ring. 

    Round 1    

    The SOA proposes that the existing position of secured lenders is protected and potentially provides for 25 pence in the pound return over two years to all unsecured creditors, including the pension scheme. Compared to the alternative of an insolvency now, giving unsecured creditors a nominal five pence in the pound feels like a good outcome as it protects the business and improves returns for all creditors. How can the Trustees not accept such an offer? Well, how can they? A vote to ‘compromise’ the schemes debt is likely to make the scheme and its members ineligible for PPF entry should things go wrong in the future 

    Could the Court impose it on the dissenting scheme creditor using the cross cram down provisions in the bill? What if 25 pence in the pound left the scheme (and members) below PPF funding? Surely the Court would not impose a SOA that had members losing out against PPF benefits? Or would it, if the benefits of saving the company, the jobs and its creditors were truly significant?   

    What if over time the SOA gave members a better outcome then PPF? If it did work, then members will have benefitted but what if doesn’t, and the promised PPF+ position turns in to a PPF deficit because the SOA fails? What then for members and their PPF eligibility  feels like some risk to take. 

    Tight round this one, hard to see who comes out on top. End of round 1. 

    Round 2 

    New round, different strategy. The proposal protects the existing position of secured lenders, keeps the scheme whole (preserving full members benefits) but provides framework for future/additional recovery plan payments. Arguably, not that dissimilar to a number of recent CVAs involving pension schemes. Having negotiated a good deal for their members, the Trustees support the proposal (in manner which is not seen to compromise the scheme debt)Again, this feels like a good result for the scheme. 

    A disgruntled trade creditor then enters the fray claiming it is unfair that the scheme, as an unsecured creditor is protected and will get their debt paid in full when they and other unsecured creditors are being forced to accept 25 pence in the pound. Is the scheme a separate class of unsecured creditor and can the SOA withstand such a challenge? 

    Now, consider the scenario where the Trustees are not supportive of the conditions attached to the framework agreement, feeling they should get more to protect their members in the future. There is no compromise of any debt here, so future PPF eligibility should be preserved, but will the Courts be deciding what is in members interests rather than the Trustees? 

    Once again, another tight round still hard to see a winner. 

    And the result     

    Who knows?! Absent some amendments to the current bill the rules or the law, we could go the full 12 rounds and still have no clear winner, with the Trustees representing the scheme and the PPF sat ringside.    

    Can this be fixed in advance? Wellmaking the new moratorium a qualifying insolvency event would seem a step too far. Given this moratorium is only a temporary stop gap protection and given the significant work and costs associated with a PPF assessment process, not a decision one should leap to in haste. 

    What about making the SOA a qualifying insolvency event? Well that may then impact on solvent SOAs, which could be undertaken for genuine reasons and which are not impacting on the scheme. 

    What about making the SOA which seeks to compromise a scheme position? 

    You get the picture. In theory, what should be good for pension schemes could become a minefield through which trustees and advisers will have to navigate. Only time will tell where we end up, whether the proposed reforms turn out to be an opportunity or a threat to pension schemes, or whether they actually work at all when you have a pension scheme creditor! 

    Oh and that’s just the Restructuring Plan. Greater legal minds than mine consider that the new moratorium potentially allows existing unsecured bank/finance debt to become super priority and in doing so, leapfrog the pension scheme in a subsequent insolvency! 

    Unless the rules are agreed up front, as with all tight contests, ultimately it will come down to the judge’s decision. Watch this space! 

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    • Published byTom Lukic

      Tom is a Director of Dalriada Trustees and leads our business across the Midlands. He has broad pensions experience with particular expertise in restructuring and corporate transactions. Prior to joining Dalriada, he was a Restructuring and Covenant Advisory partner with...

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