Clothing and homeware manufacturer Edinburgh Woollen Mill’s collapse into administration has sparked fears its defined benefit scheme will not recover the £17.5m owed to it.
The company went into administration in November, with the pension scheme the largest potential loser in a list of unsecured creditors that includes suppliers, which could lose £11.4m, and HM Revenue & Customs, losing £10.5m, according to figures first reported by inews.
Though the administrators, FRP Advisory, continued to trade the business in the run-up to Christmas, subsequent rounds of Covid-19 restrictions have seen its remaining stores shuttered, putting 2,000 jobs at risk.
According to the administrators’ report published at the end of December, the Edinburgh Woollen Mill Retirement Benefits Scheme is also a preferential creditor due to £51,459 unpaid pension contributions owed to the scheme in accordance with legislation, and which is expected to be paid in full.
We want to reassure members of the Edinburgh Woollen Mill Retirement Benefits Scheme that they are protected by us
Pension Protection Fund
It is as yet unclear whether the pension scheme will receive any of the £17.5m it is owed by the company, which had previously seen the prospect of a company voluntary arrangement ruled out as inappropriate.
Unsecured creditors, like pension schemes, fall lower in the priority list than fixed charge holders and the expenses of insolvency firms.
Generally, the lower down the list a pension scheme falls, the less money it stands to gain from insolvency proceedings, a fact that can have knock-on effects for the Pension Protection Fund should the scheme fall into it.
Company collapsed before insolvency law changes
However, a sliver of good news for the PPF can be found in the fact that the company filed for administration in November, before a change in the law came into effect that moved HMRC up the priority list.
Nick Moser, head of the UK restructuring and insolvency team at Taylor Wessing, clarified that “since the company went into administration before December 1 2020 [when the change came into effect], HMRC is an unsecured creditor alongside all the other unsecured creditors”.
Pensions Expert reported at the time on the switch, which saw the taxman elevated from the position of unsecured creditor to secondary preferential creditor. The change was criticised at the time by Malcolm Weir, PPF director of restructuring and insolvency, who warned it could have a deleterious effect on the pensions lifeboat.
HMRC’s leapfrog on insolvencies to hinder PPF recoveries
Government changes to prioritise the payment of insolvent businesses’ tax bills at the expense of other creditors could reduce recoveries by the Pension Protection Fund and adversely impact levy payers, according to the lifeboat.
He said: “Firstly, recoveries from insolvent employers will now transfer to the government rather than their scheme. Secondly, the likelihood of a scheme being able to buy out benefits with an insurer may be reduced. Finally, the recoveries from insolvent estates will not be available to the PPF if the scheme transfers to us.
“The combination of these factors risks reduced pensions for scheme members, greater claims on the PPF’s resources, and a potential impact on levy payers to cover the increased costs.”
A PPF spokesperson said of Edinburgh Woollen Mill’s collapse: “Insolvency events are a concerning time for employees and pension scheme members. We want to reassure members of the Edinburgh Woollen Mill Retirement Benefits Scheme that they are protected by us.”
