Art collector's court case signals potential legal and contractual issues with NFTs
Out-Law Analysis | 10 Jul 2020 | 9:33 am | 8 min. read
The enactment of the new Corporate Insolvency and Governance (CIG) Act into law on 26 June 2020 will have significant impact on the restructuring of distressed companies, and in particular those affected by the coronavirus pandemic. This will have a knock-on impact on the way DB pension schemes are funded and influence the actions trustees can and should take.
The Corporate Insolvency and Governance Act brings the most significant change to UK restructuring and insolvency practice since the Enterprise Act of 2003.
The purpose of the Act is to provide relief to companies managing the impact of the coronavirus pandemic. It combines a temporary relaxation of some insolvency laws to provide companies with breathing space during lockdown, with the introduction of new restructuring tools to help companies to restructure and avoid insolvency.
The temporary changes provide for the suspension of wrongful trading and the use by creditors of statutory demands and winding-up petitions against Covid-19 affected companies from the beginning of March to 30 September 2020, unless further extended.
The permanent changes see the introduction of a "debtor-in-possession" moratorium – where directors remain in place with limited supervision by an insolvency practitioner as monitor – and a new restructuring plan, intended to make it easier to deliver restructuring plans and more difficult for hold-out classes of creditors to block such plans.
Like pension scheme secretaries, trustees of schemes have a role to play when scheme sponsors experience financial difficulty and insolvency. However, at this stage, the Act raises as many questions as it answers for pension schemes. The Act does provide scope for secondary legislation to clarify and extend its provisions, but other uncertainties over the new procedures will likely need to be clarified by the courts.
With pension schemes often significant creditors in a restructuring scenario, trustees will wonder how the temporary suspension of insolvency laws will impact them, and query whether the new restructuring plan will be used to bind them into new arrangements or whether sponsors will look for their help to vote through new arrangements affecting other creditors.
Trustees might take comfort from the stated aim behind the Act, which is to allow the rescue of companies – their sponsoring employers – and not to act as a precursor to an insolvency, but concerns will persist that the Act provides more opportunity for companies to avoid, replace or reduce their obligations to the scheme.
Partner and head of pensions advisory at Grant Thornton
In an environment of financial uncertainty and difficulty, it is vital that trustees of schemes sponsored by stressed or distressed employers are sighted on these changes and the implications they may have on their schemes. Whilst the new legislation may give sponsors breathing space, the new measures may also have a material bearing on schemes.
The Act raises a number of questions around the position of DB schemes under the proposed moratorium, restructuring plan or related restructuring process:
During a moratorium, what happens to ongoing scheme funding and associated obligations – including deficit repair contributions, scheme expenses and payroll deductions? Do these continue to get paid?
Contributions for continuing accrual of active members to an occupational pension scheme under the terms of an employment contract are deemed to be wages and salary and should continue to be paid during a moratorium. These sums would also enjoy super priority in an administration or liquidation that takes place within 12 weeks of the moratorium.
However, deficit repair contributions and scheme expenses do not appear to fall within this category and do not apparently fall into any of the other exceptions to the moratorium – in which case, the trustees will be unable to collect these payments during the period of the moratorium, enforce security or take any other enforcement action.
The original bill apparently allowed all bank and other financial services debt to be accelerated in a moratorium and then to enjoy super priority status in a subsequent insolvency process, which would have had a significant impact on other creditors including DB schemes that did not enjoy the same priority. However, the Act has removed accelerated debt from this priority status.
A moratorium lasts for 20 business days initially, can be extended for a further 20 business days provided the directors/monitor consider a rescue is still likely and moratorium debts have been paid, and can be extended for further periods with the consent of creditors – including the trustees/PPF in respect of any outstanding amounts due to the scheme – where there is a CVA or with court consent.
During a moratorium, are there restrictions to trustee governance powers of the type which could be used to increase company liabilities – for example, to set scheme investment strategy?
None apparent: the moratorium relates to the conduct of the company not the trustees of the scheme.
Whilst trustees could in theory make changes that increase liabilities, there will be no means to claim additional liabilities during a moratorium.
Does a moratorium or restructuring plan trigger a PPF assessment period – and is the scheme’s debt calculated on a 'Section 75' basis?
No: a restructuring plan is a Companies Act procedure which suggests it is not intended as a 'qualifying insolvency event' to trigger a PPF assessment period. The court does, however, have wide powers to determine the voting rights of creditors in a restructuring plan, so it remains to be seen how a pension debt will be determined for these purposes.
Although a moratorium is an Insolvency Act procedure, its stated aim is to rescue a company as a going concern and not to lead to an insolvency event.
The fact that a restructuring plan and moratorium are not "qualifying insolvency events" was debated in the House of Lords and apparently accepted.
If a moratorium is a precursor to a CVA, then the CVA itself will trigger a PPF assessment period.
However, trustees should check scheme rules to establish whether either a moratorium or restructuring plan will trigger a winding up of the scheme. Also, trustees should consider whether the inability to collect deficit repair contributions during a moratorium may have consequences under any security arrangements that they may hold.
What class of creditor would a scheme form part of for voting and other purposes? Who would represent the scheme’s interests?
Criteria for class assessments have not yet been stipulated but are anticipated to be in line with class composition for schemes of arrangement. Unless a scheme has security it would, as a minimum, continue to be an unsecured creditor.
The Act provided for regulations to be made to allow the PPF to exercise the voting rights of trustees in respect of a restructuring plan and moratorium. These regulations - The Pension Protection Fund (Moratorium and Arrangements and Reconstructions for Companies in Financial Difficulty) Regulations 2020 - came into force on 7 July. The regulations allow the PPF to exercise the trustees rights to vote on an extension to the moratorium or to challenge the directors conduct in a moratorium and also to exercise trustees rights in relation to a restructuring plan alongside trustees and to vote on a restructuring plan in place of the trustees.
How would any compromise or "cram-down" arrangements affect a scheme? Could they go so far as to affect the basis of the scheme – including benefit arrangements?
The nature of liabilities which could be the subject of compromise or cram-down is unclear. However, it seems the Act is deliberately non-prescriptive as to the nature of an arrangement or timeframe for an arrangement to allow companies to be flexible in their approach whilst relying on the discretion of the court to approve.
It is difficult to see how the overall obligations of a scheme to its members could be fundamentally altered, not least on account of TPRs powers and the court involvement. However, it is conceivable that short term funding arrangements could be reached in a compromise arrangement and in cases where trustees are out-voted by members of the same class or crammed-down by other classes of creditors.
What will the role of trustees, the PPF and TPR be at various points in any process?
The central amendments to the original draft bill now reflected in the Act provide for the PPF and TPR to receive the same notification and information as the trustees and other creditors where there is an eligible scheme – i.e. at the start of a moratorium, an extension or termination of a moratorium or proposing a restructuring plan.
The amendments also allow the PPF and TPR to make representations at relevant court hearings and to have the same rights of challenge to the actions of monitors and directors enjoyed by other creditors.
One proposed amendment to require PPF/TPR consent to the court-approved disposal of any asset pledged to a scheme, was rejected.
The trustees will vote on behalf of the scheme unless the PPF exercises its rights under the regulations to take over any of those rights, or to exercise those rights alongside the trustees. Trustees should therefore insist on being as informed and involved as possible and keep in communication with the PPF so everyone is clear who is taking the lead.
Given the current approach of TPR it is difficult to envisage a situation where they and the PPF are not keen to be involved alongside the trustees at an early stage, even if the PPF assessment period has not yet been triggered.
Will this proposed legislation override the various moral hazard protections in the Pensions Act 2004, and those in the current Pension Schemes Bill, and leave trustees and TPR powerless to seek mitigation or other redress?
The interaction between these legislative frameworks is unclear at this stage: as drafted, the Act does not override the Pensions Act 2004.
However, the Pension Schemes Bill is also still progressing through parliament and it remains to be seen whether anything will be done to clarify the relationship between the new insolvency regime and existing moral hazard provisions. This point was flagged in the House of Lords debate, so at least it is on the radar of the legislature.
Particular issues for trustees include the potential impact of the Act on any security arrangements and the possibility that a restructuring may not properly take account of the pension scheme.
The trustees can mitigate their risks by:
The anticipated wave of restructurings and insolvencies following lockdown in combination with the proposed new legislation to tackle them mean that trustees should be alert and making appropriate preparations. Whilst many unanswered questions on the impact of the new legislation remain, this is likely to evolve rapidly.
A version of this article was produced in partnership with Grant Thornton.
20 May 2020
Art collector's court case signals potential legal and contractual issues with NFTs