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Freshfields Transactions

| 5 minutes read

The Corporate Insolvency and Governance Act 2020 – PPF guidance on restructuring plans

The Corporate Insolvency and Governance Act 2020 (the Act) introduced significant changes to insolvency law, including permitting companies to propose a “restructuring plan”. The restructuring plan offers a flexible option for companies that sponsor defined benefit pension schemes to compromise their obligations to creditors and, potentially, to the pension scheme itself. The restructuring plan also allows the possibility of dissenting classes being “crammed down” in certain circumstances, where the court may sanction the plan despite not every class having voted in favour.

There have been a handful of sanctioned restructuring plans to date. Only one of those plans has included a cross-class cram down, and none have so far included a proposal to compromise obligations to a UK defined benefit pension scheme.

As explained in our blog published on 8 July 2020 (“The UK Corporate Insolvency and Governance Act 2020 – Pension Protection Fund back in the driving seat”) the Pension Protection Fund (Moratorium and Arrangements and Reconstructions for Companies in Financial Difficulty) Regulations 2020 (the Regulations) greatly expanded the rights of the Pension Protection Fund (PPF) and the UK Pensions Regulator where a company proposes a restructuring plan. Under the Act and the Regulations:

  • where the pension creditor has the right to vote, it is the PPF which has the right to vote on a restructuring plan proposal to the exclusion of the trustees (subject to prior consultation with the trustees);
  • the PPF may, if it so chooses, exercise any creditor rights of the trustee in respect of a restructuring plan as if the PPF were a creditor of the company (for example, the right to participate in the creditor meeting(s) summoned in relation to the plan). The PPF may exercise such rights in addition to the exercise of those rights by the trustee; and
  • the PPF and UK Pensions Regulator have been given rights to be provided with the same notices and documents as are sent to other creditors in relation to the restructuring plan.

The PPF published interim guidance last week (“Guidance note 9”) on its approach to the Act, which companies with significant defined benefit pension liabilities will need to consider before proposing a restructuring plan where the pension creditor has the right to vote. Unsurprisingly, the PPF’s guidance is consistent with the approach that it has taken on major restructurings using other restructuring mechanisms (such as CVAs) in recent years, and clearly demonstrates that the PPF will use the powers afforded to it to ensure that pension schemes are adequately protected as part of any restructuring process.  It is worth noting, however, that (unlike in a CVA) the PPF will not necessarily have a vote on the restructuring plan except where the plan seeks to compromise pensions liabilities (which could be a compromise of the on-going deficit repair contributions, or the pension scheme’s section 75 debt).

Key points to note from the PPF’s interim guidance are:

  • The PPF expects directors and their advisers to fully engage with the pension scheme trustee, the PPF and the UK Pensions Regulator in relation to the plan, including by: (i) allowing sufficient time for such engagement; and (ii) providing relevant information to allow an understanding of the ongoing employer covenant, existing funding arrangements and the PPF exposure to the PPF deficit and drift.  The importance of having appropriate expertise on the trustee board and with the trustee advisers is also emphasised.

It will, therefore, be important for companies to appropriately consider and engage with trustees, the PPF and the UK Pensions Regulator when proposing a restructuring plan in the same way as such engagement is important when considering other restructuring mechanisms. This is particularly the case given the Pensions Schemes Act 2021 will (assuming the relevant provisions come into force in autumn 2021, as expected) introduce: (i) new criminal offences; and (ii) wider powers for the UK Pensions Regulator to intervene in restructuring activity impacting pension schemes (see our blog on the new Pensions Schemes Act for further information on the impact of that legislation on restructurings). 

  • The PPF considers that the pension scheme’s vote should always be valued at the full section 75 debt “buy-out” level (and will submit a claim on that basis) because, if the restructuring plan fails and there is a subsequent insolvency, the section 75 debt would be triggered.

We would note, however, that it remains to be determined on a case-by-case basis whether the relevant alternative to the restructuring plan would in fact be an insolvency process triggering a section 75 debt.  This may well be the case, but determining the “relevant alternative” is a key task in preparing the restructuring plan and is highly fact specific. Where insolvency is not the relevant alternative, there might be an argument for the pension scheme’s vote being valued at an amount lower than the section 75 debt.

  • The PPF has confirmed that, if a restructuring plan were to be proposed which sought to compromise pension liabilities, then it will apply: (i) the same principles as it does to compromises of pensions liabilities when other restructuring mechanisms are used (see the Guidance on the PPF’s approach to Employer Restructuring); and (ii) the same considerations as it does to CVAs when assessing the viability of on-going companies (see section 3 of the Guidance note 5 on CVAs). 
  • The PPF will seek to guarantee the current insolvency outcome for the pension scheme, essentially removing outcome risk for the pension scheme.  Whilst it is understandable that the PPF might seek that outcome, it clearly may not be possible or appropriate in all restructuring scenarios.
  • The PPF states that the restructuring plan should not be used in a way which would prejudice PPF eligibility for the pension scheme and that the PPF would encourage the UK Pensions Regulator to use its powers where a company proposed to use the restructuring plan in this way.  

Where the proposed compromise would mean the pension scheme ceases to be eligible for PPF entry, there is a question over whether the court may refuse to sanction a restructuring plan on the basis that it would not be just and equitable to compromise the company’s obligations to the pension scheme in those circumstances.  However, if such a compromise were sanctioned by the court, it would seem difficult for the UK Pensions Regulator to argue that it is reasonable to attach criminal or civil liability specifically to the proposal or implementation of such a restructuring plan.

  • Finally, the PPF will also consider whether the restructuring plan presents any “adverse precedent risk” (i.e. the risk that the restructuring plan will set an unhelpful market precedent in terms of the treatment of pension schemes where a company restructures).  This indicates that the PPF will consider wider issues than simply the best outcome to protect the particular pension scheme in question.

Whilst none of the above is particularly surprising, it is helpful that the PPF has confirmed its approach.  It will be interesting to see whether, in practice, the restructuring plan will be a useful tool for restructuring groups which operate UK defined benefit pension schemes – either as a way to compromise pension liabilities, or as a way to implement a restructuring which does not compromise pension liabilities without a PPF vote and so reducing the leverage of the pensions stakeholders compared with a CVA.  In all cases, however, the mission of the PPF to maximise available leverage to protect pension schemes is clear.


pensions, restructuring and insolvency, europe