The Corporate Insolvency and GovernanceBill – a pensions perspective

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IntroductionThe new Corporate Insolvency and Governance Bill (theBill) has been introduced into Parliament and proposessignificant changes to insolvency law, including:

that companies will be able to trigger a standalonemoratorium on enforcement actions; and

the introduction of the “restructuring plan” which willbe a new mechanism for companies to compromise theirobligations to creditors/members.

In addition, the Bill proposes to introduce temporarychanges which are intended to provide a measure ofprotection to companies during the COVID-19 pandemic.For example, the Bill includes a prohibition on winding uppetitions (WUPs) being presented by any creditor on orafter 27 April 2020 on the basis of a statutory demandserved from and including 1 March to one month after theBill comes into force (expected sometime at the end of Juneor July).

In this briefing, we provide some high-level thoughts onthe key pensions implications of each of the: (i)restructuring plan; (ii) the moratorium; and (iii) thetemporary restrictions on WUPs.

Restructuring planIn recent years, we have seen companies in financialdistress using insolvency procedures (such as schemes ofarrangements and company voluntary arrangements (CVA))to make proposals to creditors to compromise existingobligations.

Defined benefit pension schemes can be a significantcreditor of companies. The restructuring plan offers apotentially more f lexible option for companies thatsponsor defined benefit pension schemes to compromisetheir obligations to creditors and, potentially, to thepension scheme itself:

Voting requirements: The restructuring plan must beapproved by 75 per cent. by value in each class of creditors/members (subject to cross class “cram down” – see below).Unlike schemes of arrangements/CVAs, there are norequirements for majorities: (i) in the number of voters; or(ii) amongst unconnected voters. The voting rules thereforeallow for the possibility that the pension scheme vote couldbe used to offset dissenting votes even where the pensionscheme is connected with the company. This is in contrastto CVAs, where the impact of the pension scheme’s vote isdependent on the accident of how the trusteearrangements are structured. The voting requirements ofthe restructuring plan could therefore increase theleverage of the pension scheme in negotiations.

For pension schemes, it will also be important tounderstand who exercises the vote in a restructuring plan.It is not currently proposed that the restructuring plan willbe an “insolvency event” which may potentially trigger a“PPF assessment period”. The PPF will therefore notexercise the vote of the pension scheme trustee on arestructuring plan proposal (in contrast with, for example,a CVA proposal where the CVA triggers a PPF assessmentperiod).

In practice, we expect that a trustee would not exercise itsvote without consulting with the PPF and the PensionsRegulator extensively beforehand. However, the trustee(rather than the PPF) voting in the restructuring plan maymean that the scheme is more likely to vote in favour ofthe plan. The trustee will often have a greater interest inthe plan succeeding than the PPF, which has wider policyaims such as not setting market precedents in how it votesrather than simply focusing on what is best for themembers of the particular pension scheme in question.

We would note that, in parliamentary debate on the Bill,some peers in the House of Lords called for therestructuring plan to trigger a PPF assessment period togive the PPF a greater role in a company’s insolvencyproceedings. The restructuring plan could, therefore, be

Freshfields Bruckhaus Deringer LLP The Corporate Insolvency and Governance Bill – a pensions perspectiveJune 2020

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included as an “insolvency event” via a later statutoryinstrument. As noted above, however, this does notnecessarily equate to greater protection for the members ofthe particular pension scheme.

There are further advantages for companies/trustees in therestructuring plan not triggering PPF assessment period inthat it would make scheme administration easier. Forexample, pension schemes do not need to consider whetherpension scheme benefits need to be reduced during therestructuring plan as they would during any PPFassessment and deficit repair contributions would not besuspended.

Cram down: Dissenting classes may also be ‘crammeddown’ (ie the court may sanction the plan despite therebeing dissenting classes) provided that:

no members of the dissenting class would be worse offthan in the most likely alternative scenario (in thecourt’s view) if the plan is not sanctioned (the relevantalternative); and

the plan is agreed by at least 75 per cent. by value of aclass of creditor/members who would receive a paymentor have a genuine economic interest in the company inthe event of the relevant alternative.

If the pensions vote is being used to cram down anotherclass of creditors, the conditions for the cram down meanthat there may be an advantage in a pension scheme beingcategorised within a smaller class for the purposes offulfilling the second condition. In addition, the value to thecompany of the pension scheme’s vote (and therefore thepension scheme’s leverage to extract concessions from theemployer) may be significantly increased where thepension scheme’s vote is required to cram down dissentingvoters.

Compromising pension obligations: There also seems to bethe possibility that the restructuring plan could be used tocompromise company obligations to pension schemes(including via a cram down without the scheme’s consent).This would require that the pension scheme’s positionwould be “no worse” under the restructuring plan thanunder the relevant alternative (which may be anotherinsolvency process, such as administration).

If the compromise were done with the trustee’s consent, itwould raise a number of issues:

Where the PPF votes in a CVA, it has a number ofonerous conditions that a company must fulfil in termsof mitigation for the pension scheme before the PPF willvote in favour. However, if it is the trustee and not thePPF which has the vote, might that fact make the PPFand the Pensions Regulator compromise conditions lessrelevant than they are in an CVA? This would notnecessarily be detrimental to the pension scheme if it

enabled a different type of deal to be done whereinsolvency was the only alternative.

Pension schemes may cease to be eligible for PPF entrywhere the trustee of a scheme enters into a legallyenforceable agreement which reduces any section 75debt. Compromises under a scheme of arrangement arecurrently explicitly exempt from this rule, but itremains to be seen whether compromises under arestructuring plan will also be made exempt byamendment to the PPF Entry Rules. It might also not bepossible to trigger a PPF assessment period (because therestructuring plan is not an insolvency event). Unlessthese issues were addressed, a trustee would only vote infavour of a restructuring plan: (i) which proposes tocompromise obligations to a pension scheme, where thescheme was fully funded on a PPF basis; or (ii) where analternative restructuring mechanism for compromisingobligations to the pension scheme was used alongsidethe restructuring plan – which in turn would requirePPF and Pensions Regulator involvement.

Any attempt to compromise a company’s obligations toa pension scheme (even with the trustee’s consent)raises issues of the Pensions Regulator potentiallyseeking to use its moral hazard powers against thecompany/trustee. In addition, when the PensionSchemes Bill becomes law, there is also the possibility ofcriminal sanctions for companies and directors (see ourprevious blog post discussing the new criminal sanctionshere). However, the fact that the restructuring plan hasto be sanctioned by the court should make it difficultfor the Pensions Regulator to argue that it is reasonableto attach criminal or civil liability specifically to theimplementation of the restructuring plan.

If the compromise were done without the trustee’s consent(ie if the scheme were “crammed down”) then, alongsidethe moral hazard/criminal risks set out above, thereremains the question of whether the court would refuse tosanction a restructuring plan on the basis that it would notbe just and equitable to compromise the company’sobligations to the pension scheme. This would seem likelywhere the proposed compromise would mean the schemeceases to be eligible for PPF entry if it does not havesufficient assets to cover its PPF liabilities.

MoratoriumThe moratorium protects companies from creditor actionby granting a “payment holiday” for “pre-moratoriumdebts”, which are debts due prior to the moratoriumcoming into force or debts which become due during themoratorium if they relate to obligations incurred pre-moratorium. Some pre-moratorium debts are excludedfrom the payment holiday (for example, debts or otherliabilities which arise under a contract or other instrumentinvolving financial services, such as bank lending).

Freshfields Bruckhaus Deringer LLP The Corporate Insolvency and Governance Bill – a pensions perspectiveJune 2020

For pension schemes, the impact of the moratorium doesnot seem to have been well thought through andsignificant issues arise:

Are pensions payments subject to themoratorium?Given the aims of the moratorium, it might be expectedthat deficit repair contributions (DRCs) would not bepayable during a moratorium. However, the moratorium,as currently framed in the Bill, does not apply to a widerange of financial products and it would, conversely, alsoseem inconsistent with general policy to have the pensionscheme put at a disadvantage compared with lenders.

Unfortunately, the Bill is not completely clear on whetherDRCs are payable during the moratorium.

Section A18(3) of the Bill states that “wages or salary arisingunder a contract of employment” are excluded from thedefinition of pre-moratorium debts for which a companyhas a payment holiday during a moratorium. SectionA18(7) states that “wages or salary” includes “a contribution toan occupational pension scheme”.

It is unclear, however, whether “a contribution to anoccupational pension scheme”: (i) is limited only tocontributions in respect of the future accrual of benefitsdue to active service; or (ii) also includes DRCs payablepursuant to a schedule of contributions (or, indeed, anysection 75 debts and moral hazard liability imposed by thePensions Regulator).

The narrower view seems to us to be the correctinterpretation as it is the more natural reading of “wages orsalary”. It is also more consistent with some of theexplanatory notes which accompany the legislation.However, this would put pension schemes at a significantdisadvantage compared with other financial creditors,particularly when the “super priority” position is takeninto account.

Super priorityIf the company enters into administration or liquidationwithin 12 weeks from the end of the moratorium, pre-moratorium debts which are not subject to a paymentholiday have “super priority” and rank ahead of expensesof an administration and preferential debts and unsecuredcreditors in a liquidation or administration.

If unpaid DRCs and other payments to pension schemessuch as section 75 debts are caught by the paymentholiday, then significant creditors (eg creditors in respect ofunsecured accelerated financial debt) could gain super

priority over the pension scheme whereas, in a normalinsolvency process, they would rank alongside the pensionscheme’s claims.

Temporary restrictions on winding-uppetitionsIf DRCs are not paid on their due date, a pension schememay enforce that obligation as a debt. The trustees willhave the usual remedies of an unsecured creditor – themost significant of which is seeking to wind up thesponsoring employer.

Because of the temporary restrictions on issuing WUPs,pension schemes will lose key leverage in their negotiationswith a sponsoring employer in the near term. This is thecase even though failure to pay DRCs may have otherconsequence, such as triggering a scheme wind-up underthe scheme’s rules.

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This material is provided by the international law firm Freshfields Bruckhaus Deringer LLP (a limited liability partnership organised under thelaw of England and Wales) (the UK LLP) and the offices and associated entities of the UK LLP practising under the Freshfields Bruckhaus

Deringer name in a number of jurisdictions, and Freshfields Bruckhaus Deringer US LLP, together referred to in the material as 'Freshfields'. Forregulatory information please refer to www.freshfields.com/en-gb/footer/legal-notice/.

The UK LLP has offices or associated entities in Austria, Bahrain, Belgium, China, England, France, Germany, Hong Kong, Italy, Japan, theNetherlands, Russia, Singapore, Spain, the United Arab Emirates and Vietnam. Freshfields Bruckhaus Deringer US LLP has offices in New York

City and Washington DC.This material is for general information only and is not intended to provide legal advice.

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Dawn HeathPartner

T +44 20 7427 3220E dawn.heath@freshfields.com

Katharina CrinsonCounsel

T +44 20 7716 4510E katharina.crinson@freshfields.com

Samuel TaylorAssociate

T +44 20 7785 2609E samuel.taylor@freshfields.com