Pensions and insolvency: what insolvency practitioners need to know about criminal liability

The Pension Schemes Act 2021 (the Act) introduces new criminal offences which could potentially capture actions taken by anyone involved in planning and advising on corporate restructuring and insolvency, including insolvency practitioners and turnaround professionals, as well as (potentially) financiers and other stakeholders.  The Act received Royal Assent in February, and is expected to come into force by the autumn of 2021.

Our Pensions team has prepared a detailed insight on the extensive changes set out in the Act, however, the new criminal offences will be of particular concern to corporate restructuring and insolvency professionals.  

The new offences

Section 107 of the Act introduces two new criminal offences (as Sections 58A and 58B of the Pensions Act 2014):

• Avoidance of employer debt; and
• Conduct risking accrued scheme benefits. 

These offences apply in relation to defined benefit pension schemes.  They can be committed by “any person” (not just the employer).  They can be committed in a single act (or failure to act) or during an ongoing course of conduct. 

The offence of avoidance of employer debt will arise where the act or course of conduct results in the avoidance or compromise of a debt which would otherwise have fallen due under section 75 Pensions Act 1995 (in relation to underfunded schemes).  The offence of conduct risking accrued scheme benefits will arise where the act or course of conduct detrimentally affects the likelihood of accrued pension benefits being received.  In each case the person accused must have known, or ought to have known, that the conduct would have that effect.     

The penalty on conviction of either offence is an unlimited fine and/or imprisonment for up to 7 years.  There are also potential civil sanctions allowing the Pensions Regulator to impose financial penalties of up to £1 million on any person who commits the offences or knowingly assists in the breaches. 

The exemption for insolvency practitioners

There is an extremely limited exemption providing insolvency practitioners with protection from criminal liability under the offences in some circumstances.  It applies only following formal appointment as a statutory insolvency office-holder in relation to a company, and presumably only to work carried out post-appointment and within that role. 

This means that insolvency practitioners aren’t exempt in relation to any pre-appointment advice, and they aren’t exempt for work undertaken in connection with a scheme of arrangement or a restructuring plan.  An insolvency practitioner acting as a monitor in connection with the new standalone moratorium will benefit from the exemption, but only to the extent required to carry out that role.

Other parties who may be at risk

It’s not only advice from insolvency practitioners that may inform a company’s conduct at this time.  Directors may be making difficult decisions about trading and incurring credit.  Lenders may be considering enforcement options, or the possibility of providing finance in a restructuring which includes imposing conditions on the borrower and other parties which have an impact upon a DB pension scheme.  Turnaround professionals may be advising the board.  All of these individuals face potential criminal liability and financial penalties if their actions fall within the new offences. 

The defence of “reasonable excuse”

It will be a defence if there is a reasonable excuse for the act or course of conduct.  No further information is given about this defence.  The Pensions Regulator is expected to issue further guidance before the Act comes into force.  Thankfully, the Government has confirmed that the new criminal sanctions will not have retrospective effect, although there is a distinct risk that present conduct will be taken into consideration when criminal charges are brought (given that the criminal consequences would have been known about in in parties’ contemplation at the time).

Next steps

Restructuring and insolvency professionals need to get up to speed on the detail of the new offences.  Where you are advising a company with a defined benefit pension scheme the risk of criminal sanctions arising from any act or course of action should be factored into the decision making process (even though the criminal penalties are not yet in force).  Detailed records should be kept of the reasons for any decisions that may have an impact on the pension scheme or accrual of benefits.

We await further guidance from the Pensions Regulator on, for example, the extent of the “reasonable excuse” defence and confirmation of the date on which the provisions will come into force.  We will keep you updated.  Please contact Richard Clark in TLT’s Restructuring and Insolvency team or Sasha Butterworth in TLT’s Pensions scheme with any queries.

Contributors: Tessa Durham and Chris Crighton