The Corporate Insolvency and Governance Act 2020
23rd July 2020
This Act includes measures intended to provide relief to companies impacted by Covid-19. However, its application is wider and trustees of defined benefit (DB) pension schemes should understand the potential impact on their scheme.
Companies will be able to declare a moratorium, initially for a period of 20 business days, during which the directors will continue to run the company under the supervision of an insolvency practitioner (a “monitor”). The moratorium can be extended for a further 20 business days without the consent of creditors; further extensions are possible but will require creditor consent or court approval. The purpose of the moratorium is to allow the company to restructure or refinance, or to present a Company Voluntary Arrangement or Restructuring Plan (the latter being a new arrangement introduced by the Act).
Notice of a moratorium must be given to all creditors (including trustees) and to the PPF. Where creditor consent is sought for an extension to a moratorium, it is the PPF, rather than the trustees, who will have the relevant voting rights. However, the trustees will be able to ask the monitor for its views on the need for the extension.
During the moratorium future service contributions should still be paid but deficit-reduction contributions probably will not, nor scheme expenses. Creditors will not be able to issue winding-up proceedings, nor enforce security, during the moratorium. That applies equally to Contributions Notices and Financial Support Directions issued by TPR.
If a company falls into administration within 12 weeks of a moratorium ending, any moratorium debts and certain pre-moratorium debts will become “priority pre-moratorium debts”, payable ahead of any expenses and remuneration of the administrator. This will include future service pension contributions but not deficit-reduction contributions.
The directors will be able to propose a Restructuring Plan to compromise the claims of creditors and/or shareholders. Under a “cross-class cram down” feature, the Court will be able to approve an arrangement under which dissenting creditors or shareholders are bound, subject to their being no worse off than under a “relevant alternative” – which will probably be liquidation.
A debt due to the pension scheme could, therefore, be deferred under a Restructuring Plan, as compared with an insolvency event, although there will be an ongoing employer. The Trustees should engage with the company as to how the scheme will be treated under the Restructuring Plan. As above, the voting rights in relation to a restructuring proposal will vest in the PPF rather than the scheme trustees, although the PPF will have to consult with the trustees beforehand.
Until 1 October 2020:
- the service of statutory demands is prohibited,
- the issue of winding-up petitions is prohibited and
- the concept of wrongful trading is suspended.
While these measures give companies some breathing space in their recovery process, it will be difficult for trustees to enforce deficit-reduction contributions during the period.
Trustees should check whether a moratorium or Restructuring Plan would trigger the winding-up of their scheme, under the terms of their Trust Deed & Rules. Where trustees have a contingent asset in the form of security, they should check whether a moratorium or Restructuring Plan would trigger the ability to enforce the security.