On 25 June 2020, the Corporate Insolvency and Governance Bill (the “Bill”) received Royal Assent and on 26 June 2020 CIGA came into force. The restructuring team in Mayer Brown’s London office have previously commented on the different elements of the Bill in a series of blog posts and podcasts. CIGA was swiftly followed by the introduction of The Pension Protection Fund (Moratorium and Arrangements and Reconstruction for Companies in Financial Difficulty) Regulations 2020 (the “Regulations“), which came into force on 7 July and were subsequently amended yesterday on 23 July. Now that CIGA is in force, we take a closer look at the legislation from a pensions perspective.
As the Bill passed through Parliament, the UK Government debated various concerns raised by the pensions industry about the Bill which, as drafted, could have resulted in pension schemes and the Pension Protection Fund (“PPF”) being disadvantaged as unsecured creditors in an insolvency scenario. The main concerns highlighted were:
- Pension schemes would be at a significant disadvantage compared with other financial creditors because deficit repair contributions (pursuant to a schedule of contributions), section 75 debts and moral hazard liabilities imposed by the Pensions Regulator (“tPR”) (together “Pension Debts”) were not specifically included in the list of liabilities which have to be paid during a moratorium.
- The fact that the Pension Debts were not included in this list also meant that they would not receive the “super priority” status which applies to any unpaid moratorium debts or pre-moratorium debts which were not subject to a payment holiday, in the event the company entered into administration or liquidation within 12 weeks of the end of the moratorium. This would mean that certain debts including unsecured finance debt would be paid in preference to such pension scheme liabilities.
- The PPF assessment period would not be triggered by either a moratorium or restructuring plan because these were not defined as a relevant “insolvency event” under pensions legislation and therefore the PPF would not be a creditor or entitled to vote on a restructuring plan.
Amendments have been built in to CIGA and the Regulations in an attempt to allay concerns and provide greater protection for tPR and PPF.
More detail on the new stand-alone moratorium and how this works can be found in our blog post. In short, the CIGA introduces a free-standing moratorium for an initial period of 20 days which can be initiated by the directors simply filing certain relevant documents with the court. A monitor (who is a qualified insolvency practitioner) must state that, in their view, it is likely that a moratorium for the company would result in the rescue of the company as a going concern.
- “Super Priority”
Certain debs of the company do not need to be paid during the moratorium. There are, however, a number of pre-moratorium debts which are excluded from this payment holiday, and therefore must be paid during the moratorium, namely:
- the monitor’s remuneration or expenses;
- sums for goods or services supplied during the moratorium;
- rent in respect of a period during the moratorium;
- wages or salary arising under a contract of employment (including a contribution to an occupational pension scheme);
- redundancy payments; and
- debts or other liabilities arising under a contract or other instrument involving financial services (including any accelerated financial debt).
Pursuant to the Bill, these are the payments to receive “super priority” status if left unpaid during the moratorium and the company enters into administration or liquidation within 12 weeks of the end of the moratorium.
Despite lengthy debate about whether debts arising under a financial services contract (especially accelerated financial debt) should be included in the list of pre-moratorium debts excluded from the payment holiday, the list above has been included in the CIGA. To alleviate the concern that this would mean accelerated financial services debt such as loans and guarantees would be paid in priory to Pension Debts, the CIGA has specifically excluded “relevant accelerated debt” from the list of payments to receive “super priority”. It is not open, therefore, for a lender to call for all of the debt due to it to be paid during the moratorium and have that accorded super-priority status.
It remains unclear whether “a contribution to an occupational pension scheme” may also include Pension Debts and not just be limited to contributions in respect of the future accrual of benefits due to active service. However, on a more natural reading of “wages or salary”, these sums would not be included.
- Notification Obligations
The monitor is now under an obligation to notify the board of the PPF when a company, which is an employer in respect of an eligible scheme within the meaning of section 126 of the Pensions Act 2004 (an “Employer”), has entered into a moratorium. They must also notify tPR when the company is or has been an employer in respect of an occupational pension scheme that is not a money purchase scheme. A monitor must do this as soon as reasonably practicable after receiving their notice of the moratorium from the directors of the company. Failure to do so without reasonable excuse is an offence. The monitor also has an obligation to notify the PPF and tPR where the moratorium is extended, comes to an end, where the monitor is replaced or an additional monitor is appointed.
- Right to Challenge
A new section has been introduced in the CIGA to afford the board of the PPF the same rights to challenge the monitor or the company directors as the trustees or managers of eligible pensions schemes have as creditors. Where the company is an Employer and the trustees or managers of the scheme are a creditor of the company, the board of the PPF may apply to the court on the ground that an act, omission or decision of the monitor during a moratorium has unfairly harmed their interests. They may also apply to the court if the company’s affairs, business and property have been managed by the directors in a way which has unfairly harmed their interests or any actual or proposed act, omission or decision of the directors causes or would cause unfair harm to their interests.
The Regulations provide that the PPF will be able to exercise the trustee’s creditor rights to the exclusion of the trustee but must consult with the trustee before exercising such a right.
The CIGA introduces a flexible restructuring compromise or arrangement for companies in financial difficulty (the “Restructuring Plan”). More detail on the new Restructuring Plan and how this works can be found in our restructuring blog post.
The CIGA has included a specific requirement that any notice or document required to be sent to a creditor of the company must also be sent to the board of the PPF when a company is an Employer and tPR when the company is or has been an employer in respect of an occupational pension scheme that is not a money purchase scheme.
The Regulations provide that the PPF can exercise the trustee’s creditor rights in addition to the trustee. There is one exception in that, where there is a meeting summoned under the Companies Act 2006 at which a compromise or arrangement is proposed, the PPF will exercise the trustee’s creditor rights instead of the trustee but again must consult the trustee before exercising this right.
Although the intention behind CIGA is to ensure that businesses have more flexible tools available to facilitate a turnaround and therefore ultimately be able to survive distress and continue to support their pension schemes, it will remain to be seen whether the amendments included in the CIGA are sufficient in practice to protect the rights of pension schemes when the various new procedures are being contemplated and implemented.