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  • Pensions and Corporate Insolvency
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Horton v Henry: The Death of Raithatha?

An article by Simon Passfield

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Pensions and Corporate Insolvency

A Practitioner's Guide


Explains the law and practical issues that arise in pensions and insolvency

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Pensions and Corporate Insolvency podcastListen to Rosalind Connor and Nick Moser discuss the law and practical issues that arise in pensions and insolvency.

 There are some important developments in pensions and insolvency notably the Supreme Court decision pending in Bloom v The Pensions Regulator which focuses on the Regulator's rights where it issues its notice after the commencement of the administration of the recipient.

 At the same time, the Regulator continues to assess its ability to impose its powers in the UK and overseas following the decision in Sea Containers Limited. At the same time, its contribution notice in relation to the Bonas Group Pension Scheme was settled at a much reduced figure out of court, following some significant criticism of its approach in Michel van der Wiele v the Pensions Regulator 2011. All of this happens in the context of the English common law's position on the enforcement of foreign judgments having been further refined by the Supreme Court's October 2012 decision in Rubin v Eurofinance.

 Against this background Pensions and Corporate Insolvency: A Practitioner's Guide sets out to explain law and practical issues that arise in pensions and insolvency. It covers the pensions law and institutions, powers of the regulators and the establishment of the PFF, sets out the process for preparing for an insolvency including financial assessment, negotiating with the parties involved and competing interests, how to structure the insolvency in terms of moving the liabilities away from the operating company and explains how to handle the assessment and PFF entry. There is also coverage on avoiding negotiation and the regulator risks. Other areas covered include solvent restructuring and international issues relating to exporting the Regulator's powers.

 The purpose of the book is to set out the laws and practices relating to pensions within the context of insolvency. It will start with a brief summary of the issues, followed by details of the process to be followed, tactical and structuring issues relating to the various forms of insolvency, restructuring options and the regulatory bodies. The effect on an international group will also be covered.
Introduction to Insolvency Law
  • Introduction
  • Summary of main insolvency procedures
  • Directors' duties and liabilities
  • Disqualification orders
  • Practice
 Introduction to Pension Schemes and Pensions Law
  • Introduction
  • The Pensions Regulator
  • The Pension Protection Fund
 Preparing for Insolvency

  • Involving the trustees
  • Trustee powers
  • Involving the Regulator
  • Involving the PPF
  • Continuing the business
 The Advisers and their Roles

  • The advisers
  • The advised
  • Shared advisers and conflicts
 Financial Assessments
  • Introduction
  • What is the employer covenant and why is it important?
  • Scheme recourse to employers, guarantees and structural priority
  • The benefits of independent covenant review
  • Covenant monitoring, KPIs and triggers
  • What information is required by trustees, employers and other parties in distressed situations?
  • Estimated outcome statements
 Negotiation with the Parties: A Cacophony of Competing Interests

  • The trustees
  • The Regulator
  • The Pension Protection Fund
  • Relationship between the PPF and the Regulator
  • The employer
  • Other parties
 Structure of the Insolvency

  • PPF Equity Requirement
  • Use of a rescue vehicle
 The Assessment Period and PPF Entry
  • Notification obligations
  • The Funding Assessment
  • Preparing for entry in the PPF Assessment Period
  • Administering the scheme in the Assessment Period
  • PPF benefit levels
  • Coming out of the Assessment Period
  • The effect on the ongoing business
 Restructuring without an Insolvency Process
  • Changing the Schedule of Contributions
  • Managing pension liabilities
  • Making changes: moral hazard, type A events and clearance
 Proceeding without Clearance
  • Introduction
  • The pitfalls of a consensual approach
  • Clearance
  • Seeking advice to quantify regulatory risk
  • Lessons for Corporates from the Bonas CN
  • The Great Lakes Settlement - the Regulator achieves its goal without full recourse to moral hazard
 International Issues
  • Exporting the Regulator's Powers
  • The theory
  • Approach of foreign courts
  • The practice
  • Examples
 Read the full contents listing here
"the book is easy to use, especially for practioners under pressure ... if you as a practitioner are involved with matters where there are pensions' issues on a corporate insolvency, you really do need this book, which we would say is distringuished by the clarity and practicality of its approach"

 Phillip Taylor MBE and Elizabeth Taylor of Richmond Green Chambers

"a welcome addition to any firm's library...covers pretty much everything an insolvency professional needs to know about pensions...This reviewer recommends a 'buy'"

        Kevin Murphy, Partner Chantrey Vellacroft DFK

Over recent years, pensions and insolvency have become inextricably linked. As pension costs have risen and deficits become a significant financial burden on business, companies with pension schemes have become increasingly more at risk of acute financial distress.

 The last twenty years of pensions legislation, designed to provide appropriate protection and avoid the more spectacular pensions scandals, such as Maxwell and (internationally) Enron, has left employers with little or no room to restructure pensions obligations. Soaring costs have combined with complex legislation to bring pensions to the front of any restructuring discussion.

 Insolvency and restructuring experts have come to understand pensions and their framework, their trusts, funding assessments and endless pages of government regulations. Pensions experts have begun to learn about restructuring, understanding cashflows and issues of wrongful trading. However, both areas of expertise are immense and the industry continues to suffer from experts in one area who lack understanding of the other, leading to confusion, uncertainty and, sometimes, the reality of a little knowledge being a dangerous thing.

 The purpose of this book is to give a general grounding in both areas and where they overlap, explaining in detail the complexities that are relevant in the pensions/insolvency environment, and explaining the issues and problems that arise in practice. It is hoped that practitioners in the field can benefit from the clear understanding of the legalities and the practice in this growing area of work.

 This book would never have been possible without the assistance of many others. Most notable amongst those is Nick Tinker of Zolfo Cooper, who assisted greatly, not only in drafting and reviewing several chapters, but also kept the authors coordinated and enthused. Also, Stephanie Creed of Taylor Wessing, who organised, proofread, and gently nagged to ensure that deadlines were met. Other valuable assistance came from Emily Goodridge at Zolfo Cooper, and Angela Sharma and Ian Malone in the Taylor Wessing pensions team.

 On a more personal level, it should also be admitted that chapter 2 would never have been written if the junior members of the Connor household had not kept their promise to play quietly in the other room whilst a first draft was put together. From the Moser perspective, the most thanks go to Tracey, Molly and Noah who put up with increased ‘Dad working time’ without complaint (and the inconvenience of the PC being hogged) and also thanks to the members of the Monday Night Club for their enduring support and inspiration.
Comment from the authors
 Much to the relief of most of the industry, the Supreme Court handed down its decision in the Bloom case on 24th July 2013, overturning the lower courts and holding that any liability arising from a notice or direction issued by the Regulator is in fact a provable claim in the insolvency, and so stands as an unsecured creditor, as with other pension liabilities. The threats of the pension liability to floating chargeholders and aadministrators and the rescue culture generally have now been effectively dealt with by the court's decision.

 Floating charges – Nortel/Lehman
 6.62 However, often a fixed charge is granted by a borrower as part of a security package which includes a floating charge and so we have to consider the position of a fixed chargeholder who is also a floating chargeholder. Here, the position is less straightforward because of where the floating charge ranks in the order of priorities as described in chapter 1. Put simply, on an insolvency, the floating charge realisations are paid to the floating chargeholder after payment of the costs and expenses of the office-holder, after any preferential creditors and after any prescribed part payment (which is up to £600,000). The floating chargeholder is therefore at risk of a reduced recovery from an insolvency.

 6.63 There is a further reason why a floating chargeholder may want to avoid an administration or liquidation, which results from the decision of the Court of Appeal in Bloom & Others v The Pensions Regulator and Others, otherwise known as the Nortel/Lehmans Case. The court upheld the decision of Mr Justice Briggs, saying that a Financial Support Direction (‘FSD’) or Contribution Notice (‘CN’) issued by the Regulator is payable as an expense of the administration or liquidation. The effect on floating chargeholders is that the cost of complying with an FSD or CN comes out of the floating charge assets before any payment is made to the floating chargeholder (as mentioned in chapter 4, this also has an impact on the administrator and liquidator). Where there is a risk of an FSD or CN being issued, the floating chargeholder will be nervous as to the prospect of not recovering sufficient to repay the debt owed to it. The Court of Appeal’s decision has been appealed to the Supreme Court.

 6.64 In the meantime, the Regulator has attempted to assuage fears that it will engineer situations in order to ‘scoop the pool’ of floating charge realisations by publishing a statement in July 2012 entitled ‘Financial support directions and insolvency’ in which it says:

 "We have no intention of deliberately delaying [the issuing of an FSD] until after an insolvency event in order for it to be treated as an expense of the administration or liquidation.

 We will have regard to the creditors’ claims. This includes consideration of the return that the unsecured creditors would receive had the FSD been issued prior to the insolvency event. We expect that this will result in a level of support which achieves broad equity between the trustees of the scheme and unsecured creditors of the FSD recipient.

 We are acutely aware of the importance of an effective restructuring and rescue culture and do not intend to frustrate its proper workings, nor those of the lending market."

 6.65 However, it is fair to say that the Regulator’s attempt to reassure floating chargeholders has not been met with relief from the lending community. Nothing that the Regulator says in the statement is binding on the Regulator (indeed, it ends with a paragraph in bold print confirming exactly that) and so the uncertainty continues. Until the Supreme Court or Parliament clarifies the position, floating chargeholders will see the threat of an administration or liquidation in circumstances where an FSD could be issued as a threat to the value of their floating charge.

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