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The PPF has statutory step in rights, meaning it can vote on certain aspects of both the moratorium and RPs to the exclusion of scheme trustees. This guidance represents the PPF’s take on use of RPs and what they expect to see. However this is only the PPF’s position – this article looks to critically evaluate whether the guidance is tenable.
You can find the PPF’s interim guidance here.
This should be read alongside its existing restructuring guidance, which can be found here.
The RP was introduced in the UK on 26 June 2020, alongside a number of other reforms to the UK’s corporate insolvency regime including a new standalone moratorium against creditor action. The RP is intended to be a flexible tool enabling qualifying companies to compromise or otherwise restructure their debts without entering into a formal insolvency process. This could include compromising pension scheme liabilities.
The RP has much in common with the existing scheme of arrangement. Both are court regulated processes under which a company may enter into a binding compromise or arrangement with its creditors. They each involve two court hearings: one to seek an order that creditor meetings to be convened, and a second to obtain sanction of the scheme or plan if approved by creditors.
There are also a number of important differences. Most notably, the court has the power to sanction a RP (but not a scheme of arrangement) even if the plan has received insufficient support from the affected creditors or members. This is known as cross class cram down.
The court has a discretion to approve a RP, even if not all creditor classes approve it if:
If the court exercises its discretion and approves the plan using cross class cram down, it will be binding on all members and creditors, even those who voted against it. The cross class cram down mechanism has only been used once to date, and this did not involve the compromise of any liabilities to a defined benefit pension scheme.
If the RP proposes a compromise or restructure of the company’s obligations in relation to a defined benefit pension scheme, then the trustees or managers of that scheme will be creditors with certain rights in relation to the proposed plan.
If the RP does not involve the pension scheme being compromised then the trustees or managers will not be creditors for the purposes of voting on the plan. The sponsoring employer is under a statutory duty to send to the Pensions Regulator (TPR) and (where the scheme is eligible) the PPF any notice or other document that would be sent to a creditor. This would include the plan proposals.
The PPF has a statutory right to step into the trustees’ shoes and vote on the proposed plan as if it were a creditor. This means that any vote inadvertently submitted by the trustees would not be counted, although the PPF is under a duty to consult with the trustees before exercising this power. The PPF may also exercise any other creditor rights in addition to the trustees.
The proposal of a RP will not trigger a PPF assessment period or the payment of a section 75 debt.
The PPF guidance indicates that it is unlikely to agree to restructuring proposals that potentially compromise the pension scheme’s eligibility for PPF protection. A scheme will not be eligible if, at any time, the trustees or managers enter into a legally enforceable agreement which reduces the amount of any debt due to the scheme under section 75 which may be recovered by, or on behalf of, those trustees or managers.
It is not clear whether the courts will allow RPs to be used as tools to compromise the recoverability of a section 75 debt, although that seems likely given that schemes and CVAs can both be used to compromise contingent labilities. What seems clear from the early guidance in DeepOcean, though, is that a cross-class cram-down would not be sanctioned by the court if its sole purpose was to prejudice a pension scheme, under “horizontal treatment” principles (under which the court will assess a scheme’s treatment vis à vis other creditor classes). It should be remembered that, due to the unique position of a pension scheme and its rights and protections, it will almost certainly be in a creditor class of its own.
Assuming the recovery of a prospective section 75 debt can be compromised, however, it is certainly arguable that a RP is not a “legally enforceable agreement for these purposes” and therefore does not compromise PPF eligibility. By analogy with commentary and case law dealing with schemes of arrangement and CVAs, although not definitive, it is more likely than not that a RP will be viewed as a statutorily imposed compromise rather than an agreement. This is particularly the case where cross class cram down is invoked to bind dissenting creditors. It is therefore open to debate whether the PPF’s stated position is tenable on those grounds alone.
As with any restructuring, the PPF is clear that it will only participate if the gateway test is passed (i.e. is insolvency inevitable without the restructuring?) and the return to the scheme under the RP is better than if the company were left to fail.
The interim guidance indicates that the PPF (and TPR) expect full engagement from the directors and their advisors including the provision of detailed financial information in accordance with the PPF’s approach to employer restructuring. This guidance is not legally binding, but clearly sets out the PPF’s priorities and negotiating position. Given the voting power that the scheme (and, under its step in rights, the PPF) is likely to have in a restructuring, directors would be wise to enter into discussions with them sooner rather than later.
Directors and their advisors should also ensure they are familiar with the kind of provisions the PPF is likely to want to see in the plan: for example, an offer of at least 33% equity in the restructured company for the scheme. Given what we have said above about the contentious nature of a cross class cram down, it appears unlikely that it would be used purely to compromise a pension scheme liability.
Although the justification for the PPF’s stance on RPs seems legally tenuous, given their step-in rights when RPs affecting DB schemes are involved, full engagement with the PPF (and TPR) is always advisable in order to secure their support.
TPR has the power to take action in order to protect scheme benefits. It does so by issuing contribution notices or financial support directions against the statutory employer of the scheme or against persons “associated or connected” with the employer.
The Pension Schemes Act 2021 introduces two new criminal offences in the context of defined benefit pension schemes: the offence of avoidance of employer debt and the offence of conduct risking accrued scheme benefits. While TPR’s existing powers can be exercised only against employers (or those associated or connected with them), the new offences can be committed by any person. This extends the reach to, for example, professional advisors and lenders. The penalty on conviction of either offence is an unlimited fine and/or imprisonment for up to 7 years. There are also potential financial penalties of up to £1 million. It is anticipated that these provisions will come into force by autumn 2021.
Further details are set out in our recent updates:
There is a real risk that directors and their advisors who are otherwise legitimately preparing for and negotiating a restructuring could fall foul of these provisions and put themselves at risk of potential criminal liability. Although clearance can be obtained from TPR against the risk of a contribution notice or financial support direction being issued, this will not be available for the new criminal offences.
It is likely that directors and their advisors may proceed more cautiously when proposing a restructuring in order to protect themselves from criminal liability and perhaps it is these provisions, rather than the guidance issued by the PPF, that is most likely to limit the circumstances in which an employer will seek to restructure pension scheme debt particularly using cram down.
It remains to be seen how the courts will approach a RP proposal that seeks to compromise pension scheme debt. 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.
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at April 2021. Specific advice should be sought for specific cases. For more information see our terms & conditions.
 In the matter of DeepOcean I UK Limited and others  EWHC 138 (Ch)
22 April 2021