PPF could soon face court challenge on CVA stance, says barrister

CVAs have dominated retail pensions news in recent months. In May, creditors of Debenhams approved two proposed CVAs – bringing the company’s pension schemes out of the PPF assessment period.

That could be considered inequality of treatment when compared with the other unsecured creditors. This may well found grounds to challenge the CVA itself

Raquel Agnello QC, Erskine Chambers

More recently, Sir Philip Green has agreed a deal with the Pensions Regulator that has the backing of the Pension Protection Fund for the restructuring of Arcadia. As part of its CVA proposal, the retailer has said it will provide security for the pension schemes to the value of £210m, up from an initial offer of £185m, which includes an additional £25m agreed with the watchdog. The group announced on Wednesday evening that its creditors' meetings will be adjourned while the company tries to talk landlords round  to the deal.

The PPF has previously warned that there is scope for CVAs to be misused, emphasising the importance of continuing to scrutinise this type of restructuring and setting out a new approach to CVAs.

But the value of the lifeboat’s claim as a creditor compared with other parties in relation to these arrangements could be seen as unfair in some cases – potentially forcing it to change its current approach, according to a lawyer who has acted on several high profile Supreme Court pensions cases

‘Waiting for a challenge’

Raquel Agnello QC, barrister at Erskine Chambers and a specialist in pensions and insolvency, told Pensions Expert that the market is “waiting for a challenge to reach the court that may very well change the way that these CVAs operate”.

She explained that while the PPF is an unsecured creditor in CVAs – in the same position of all other parties – it becomes a “super creditor” due to the value of the pension liabilities it represents.

She said: “It's not that it has more rights, but the value of its claim is generally so large that unless you get them on board you're not going to have your CVA approved.”

Retail companies have been resorting more and more to CVAs, which involve negotiating with creditors to lessen their claims in order to allow the company to run on. This typically includes the transfer of the pension scheme to the PPF, so the pensions lifeboat takes over the scheme’s creditor rights.

Ms Agnello, who has acted on behalf of the regulator in cases such as Nortel and Lehman in the Supreme Court, noted that the PPF makes its position very clear in these type of restructuring arrangements, and very openly says that it will only vote in favour of the CVA if the pension schemes are protected.

She said: “That could be considered inequality of treatment when compared with the other unsecured creditors. This may well found grounds to challenge the CVA itself.”

Ms Agnello argued that if a CVA is challenged in court and it is “successful in proving there is an inequality of treatment which cannot be justified,” then the PPF “may have to consider its current position in these cases”.

At the end of the day, the “pension scheme liability is an unsecured debt, which doesn’t have any priority,” she added.

Landlords would like more of a say

Toys R Us, Debenhams, House of Fraser and Arcadia are just some examples of companies that have resorted to CVAs as a lifeline to save their businesses, in which the PPF has had to step in.

Jonathan de Mello, head of retail consultancy at Harper Dennis Hobbs, explained that these arrangements are supposed to be a last resort mechanism to stop a company sliding into bankruptcy.

“The spate of CVAs we have seen in the retail sector over the past 18 months, however, stretches this notion to the bounds of credulity,” he argued.

Mark Williams, director of acquisitions, finance and investor relations at asset manager Hark Group, and former president of retail industry body Revo, explained that the problem is a lot of retailers are holding bricks and mortar property that is either too big or too expensive, or simply not needed any more.

He said: “The difficulty is that they, as mature businesses, entered willingly into contracts at a point in time which are sacrosanct in English law, and the CVA allows one side to unilaterally rip it up and walk away.”

Nevertheless, Mr de Mello believes landlords do not “particularly begrudge the PPF being ahead of them in the queue for debt payments – [but] they would however very much like more of a voice in the CVA voting process”.

He noted that it seems unfair that a landlord that might own 30 stores is treated the same as a landlord that has one store.

He added: “I think most landlords would steer clear of any form of litigation against the PPF. Doing so could be politically very toxic for them – essentially putting their perceived ‘greedy’ needs over people’s future livelihoods.

“Also, many UK shops are owned by pension funds… so any form of negative action against the PPF could potentially backfire hugely against landlords.”

Protecting levy payers

Kevin Dolan, trustee director at 2020 Trustees and former member of the PPF restructuring team, said he would be “very surprised” if a judge were to challenge the pensions lifeboat’s position in a CVA, because the idea of the restructuring plans is to arrange a compromise that needs the approval of creditors.

“For a judge or a court to change that, I would suspect that restructuring legislation would need to be rewritten,” he noted. 

Mr Dolan, who worked on some of these restructuring arrangements at the PPF, explained that all the pensions lifeboat is doing is “protecting its position together with that of its levy payers and the pension schemes”.

But he acknowledged that the PPF’s position is to make sure the pension scheme is protected as far as possible, and as part of this “it might ask for pension payments to be expedited, and/or security to be put in place”, he said.

Malcolm Weir, director of restructuring and insolvency at the PPF, told Pensions Expert that the lifeboat applies its relevant guidance when a CVA is proposed.

He noted, however, that the PPF is often a substantial creditor in a CVA because, in the vast majority of cases, the pension scheme's deficit is likely to be the largest claim.

He said: “Unlike the pension scheme, landlords can get their properties back and trade creditors can stop supplying goods to limit their risk.

“The PPF was established to protect the livelihoods of scheme members, and so acts as a single strong creditor in a CVA with often the largest deficit. As such, our clear position, objectives, and our long experience in this area means we are better able to achieve fair results for the scheme members in line with other creditors.”

Rosalind Connor, partner at ARC Pensions Law, explained that the PPF becomes a big creditor because pension scheme debt is considered on a section 75 full buyout deficit.

She said: “There have been some challenges about the fact the pension scheme debt is treated as the full buyout debt, even when that isn't what will end up probably being paid, just because that gives them a much stronger position.”

However, altering this rule is not an option. “If you change the basis, that will just mean that the levy to the PPF will go up because they will need money from somewhere else,” said Ms Connor.

“That means more schemes will go into the PPF underfunded, because there will be a bigger levy and more businesses may go bust as a result.”