Industry bodies lobby government to change insolvency bill

’This warning comes from the Society of Pension Professionals, which set out its “serious concerns” over the current drafting of the legislation in a letter to the Department for Work and Pensions, seen by Pensions Expert.

The Department for Business, Energy and Industrial Strategy introduced the bill in parliament on May 20, aiming to relieve the burden on businesses during the coronavirus outbreak and allow them to focus all their efforts on continuing to operate.

Fred Emden and Daniel Gerring, chief executive and chair of the SPP, said the legislation “could result in a dramatic enhancement in the position of ‘lender’ creditors to an insolvent company compared with the position of its other ‘non-lender’ unsecured creditors” such as defined benefit pensions schemes. Plans “may suffer materially worse recoveries”, they warned.

The legislation is clear evidence that the political pendulum is swinging away from member protection and towards a more employer-friendly dispensation

David Everett, LCP

The industry body warned that the legislation, as it is currently drafted, “could be widely portrayed as the government favouring lenders over workers and pensioners”. 

“We do not believe this can have been the government’s intention. We think the language of the bill has inadvertently gone too far in creating this potential problem,” the pair wrote.

Pensions Expert understands that other industry bodies such as the City of London Law Society, the Association of Pension Lawyers and the Pensions and Lifetime Savings Association are also lobbying the government on this matter.

One of the main issues is the new company moratorium – designed to provide struggling businesses with a formal breathing space to pursue a rescue plan, during which time no legal action can be taken against a company without leave of the court. 

Mr Emden and Mr Gerring explained that where a company makes use of the new moratorium, any unsecured lending that falls due or is incurred during that period is subsequently granted a super-priority if the company is not rescued. 

“This debt would rank ahead of any unsecured pension liabilities. In practice, this means that DB schemes and the PPF would stand to recover even less than they currently would in a liquidation or administration,” they argued.

During the moratorium period, trustees of pension schemes will have their negotiating position weakened, Mr Emden and Mr Gerring said.. 

“Lenders whose debt falls due before or during the moratorium, or who lend during the moratorium, will not be subject to the moratorium at all and will have a correspondingly much stronger negotiating position,” they said. This could result in these companies being able materially to improve their position relative to other creditors, including trustees. 

The SPP also warned about the impact of the new restructuring plan, which will be available to struggling companies, so that a rescue option can be proposed as an alternative to the liquidation of the business.

The goal of the legislation is to enable complex debt arrangements to be restructured and will support the injection of new rescue finance. Creditors who disagree with the plan will be bound to it, if sanctioned by the court as fair and equitable, and if the court is satisfied that those creditors would be no worse off than if the company entered an alternative insolvency procedure.

Mr Emden and Mr Gerring argued that “the way the new restructuring process works would raise a serious risk of systemic ‘dumping’ of DB pension schemes by companies that are financially underperforming”, as the “proposed cross-class cram down raises a serious risk of undermining the influence that DB pension scheme trustees or the PPF might otherwise have had over the terms of a restructuring plan”.

House of Lords criticises bill

The bill has also come in for criticism in the House of Lords, where peers across the political divide have questioned the impact on pensioner security.

“The bill weakens the position of DB pension schemes and the PPF in the event of insolvency or restructuring. It grants super-priority status for unsecured banking and finance debt if the moratorium is followed by an insolvency or restructuring, ranking it above pension scheme debt,” said Jeannie Drake, a Labour peer and former trade union leader and pensions expert.

Baroness Drake stressed that the bill could even threaten alternative funding arrangements that have been used to help employers avoid cash contributions, as trustees “might not be able to enforce a security that they have in place with an employer, such as a floating charge or a security over property”.

She said the PPF’s shutting out of the process, as the moratorium would not be considered an insolvency event, could leave it powerless to fight for members while other lenders accelerate repayments. Twelve per cent of the PPF’s asset come from insolvency recoveries, leaving the lifeboat exposed to a funding hit if it loses priority.

“The case of Arcadia brings these concerns to life. There, the original CVA proposed a cut in deficit reduction contributions by half,” Baroness Drake said.

It was the PPF exercising creditor rights and working with the regulator in the absence of the new super-priority that influenced a significantly better mitigation outcome, including security over group assets, £100m in cash and increases in deficit contributions after three years.”

Diana Warwick, another Labour peer who is a former board member of the PPF, agreed that there could be “serious consequences for underfunded DB schemes and the PPF”, and warned of the possibility for “gaming the system” by other creditors.

“This matters. There are still more than 10m members in about 5,500 DB schemes in the UK, the majority of which are already in deficit,” Baroness Warwick said.

Michael Aherne, counsel at Herbert Smith Freehills and member of SPP’s Legislation Committee Council, is hopeful that the peers will introduce some amendments to the bill at the current committee stage.

“The hope is that the government wasn't aware or didn't intend for these consequences, and therefore is minded to put its thinking cap on and make changes,” he said.

“We will certainly get a better feel for [what amendments will be introduced] when the committee comes back on June 16.” 

Rosalind Connor, partner at Arc Pensions Law, is more pessimistic about possible changes to the legislation.

“The government really wants to do this. People around the [insolvency] industry are quite supportive, and they need to do it quite quickly, due to the current market situation,” she said. 

“If the bill changes as a result [of amendments introduced in the Lords], then it will need to go back to the House of Commons. There is a push against this from the government as they want it to be done on time.”

Trustees could become more weary

Other industry voices have warned about future consequences if the bill is not amended. David Everett, partner at LCP, said that this legislation “is clear evidence that the political pendulum is swinging away from member protection and towards a more employer-friendly dispensation”.

However, he questioned if the moratorium super-priority to lenders was intended. “If it is, the law of unintended consequences could apply, with trustees being more wary of offering flexibilities to employers such as deferment of deficit recovery contributions, for fear that they will be doubly disadvantaged if the employer becomes insolvent,” Mr Everett said.

Ms Connor has warned trustees to be prepared for the court cases if the legislation goes ahead.

She said: “Creditors get to have their say in a court process, and it is really important that trustees are geared up very quickly to start looking at this and start presenting their case. In general, trustees have had the advantage that if something happened, such as a company voluntary arrangement, the PPF sits in the trustees’ shoes in those meetings. 

“It looks like this isn’t the effect of the new legislation, which means that it will be up to the trustees themselves to argue their position.”