Yesterday, the Government introduced legislation before Parliament, in the form of the Corporate Insolvency and Governance Bill, which will make radical changes to the UK insolvency regime. The goal of the legislation is to prevent otherwise viable companies from failing as a result of current events. However, its effect will be to make the position of defined benefit (DB) schemes with distressed sponsors (and, therefore, the Pension Protection Fund (PPF)) even more perilous. It also risks upsetting the delicate balance that exists between a debtor and its creditors under UK law – a dynamic that is fundamental to an efficient business environment and the free flow of credit and liquidity.
The Bill will also amend several corporate governance requirements. For example, by introducing temporary easements relating to the holding of annual general meetings and the deadlines for filing information at Companies House.
Changes to the UK insolvency regime
The Bill contains provisions which will make significant changes to the UK’s insolvency regime. These include:
- temporarily suspending wrongful trading laws until at least the end of June, allowing companies to keep rading whilst reducing the risk of personal liability for directors
- temporarily suspending the ability for creditors to issue statutory demands and winding-up petitions where a company has been prevented from paying its bills by the pandemic – once again, these changes will continue until at least the end of June
- introducing a new form of “moratorium” by which struggling companies can obtain formal breathing space for 20 business days, extendable to 40 days, to pursue a rescue plan without creditors being able to take legal action or enforce debts
- changing termination clauses in supply contracts so that where a company enters an insolvency or restructuring process its suppliers cannot use such contractual terms to stop supplying it or to put up prices, and
- enabling companies in financial difficulty, or their creditors, to form a restructuring plan, which dissenting creditors would be forced to accept if it is sanctioned by a court.
As far as corporate governance requirements are concerned, the Bill will (amongst other things):
- ease regulatory requirements so companies can delay annual general meetings until late September or hold “closed AGMs” online, and
- allow extensions to deadlines for filing information, such as changes of director and annual returns, at Companies House.
This is the most significant change to UK insolvency law for over 30 years. Whilst 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 PPF.
Ordinarily, 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.
In addition, the new restructuring mechanism that is set to be introduced 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. 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.
We will issue further analysis of these proposed changes and what they mean for DB schemes, sponsors and the PPF in due course.