On the go: New insolvency laws introduced in parliament, designed to prevent companies being forced to file for bankruptcy due to the Covid-19 crisis, could cause new hurdles for defined benefit schemes, a law firm has warned.
The Department for Business, Energy and Industrial Strategy introduced the Corporate Insolvency and Governance Bill in parliament on Wednesday, which removes until June 31 the threat of personal liability for wrongful trading from directors.
Under legislation introduced in 1986, a director can be liable if they are found to have continued trading a business, and did not minimise losses to creditors, while knowing that they could not avoid going into administration.
The new rules also temporarily prohibit creditors from filing statutory demands and winding up petitions for coronavirus-related debts, and introduce a new moratorium to give companies breathing space from their creditors while they seek a rescue.
According to Rachel Pinto, pensions partner at Herbert Smith Freehills, this is the most significant change to UK insolvency law for more than 30 years.
“While the changes to the insolvency regime may come as welcome news for distressed DB sponsors, the same cannot be said for the pension schemes themselves or the Pension Protection Fund.”
She explained that normally DB schemes are unsecured creditors and “these changes will make their position even more perilous”.
“In particular, the restrictions on issuing statutory demands or winding-up petitions and the introduction of a new moratorium are likely to make it virtually impossible for schemes to take action in the short term to enforce debts that have, or that may become due from their sponsor. By the time action can be taken, it may be too late,” she said.
The bill also introduces a new restructuring plan as an option for companies in financial difficulty.
Ms Pinto argued that this new mechanism “means that DB schemes and the PPF may also have no say over corporate restructuring plans”.
“The only silver lining for DB schemes and the PPF is that the legislation is designed to help viable businesses survive this crisis,” she added.
“If it achieves this, while individual schemes might suffer greater losses in some cases, when looked at in aggregate, DB schemes and the PPF may actually benefit from the stay of execution afforded to distressed scheme sponsors by these measures.”
