Corporate Insolvency and Governance Bill

Baroness Drake Excerpts

2nd reading & 2nd reading (Hansard) & 2nd reading (Hansard): House of Lords
Tuesday 9th June 2020 Lords Chamber

[Baroness Drake (Lab) [V]]

My Lords, I draw attention to my registered interests. The Government’s desire to allow distressed companies a breathing space while exploring a potential rescue is fully understandable, but fast-tracking cannot ignore an unintended consequence. The Bill weakens the position of DB pension schemes and the Pension Protection Fund in the event of insolvency or restructuring. It grants super-priority status for unsecured banking and finance debt if the moratorium is followed by an insolvency or restructuring, ranking it above pension scheme debt. Importantly, trustees might not be able to enforce a security that they have in place with an employer, such as a floating charge or a security over property. That is a big issue if the scheme’s covenant and valuation had been tied in with that security.

If the company does not emerge from the moratorium intact, elevating this class of unsecured creditors could be materially detrimental to the level of recoveries that the PPF, acting as creditor for a scheme, can achieve through insolvency proceedings. The moratorium and restructuring plan process will not, as it stands, trigger a PPF assessment period or a scheme’s Section 75 debt. This means, and here is the rub, that the Pension Protection Fund is not engaged as a creditor for the scheme. It will not have a voice in the restructuring plan discussions and new arrangements intended to shape the future of a company, which is the scheme’s sponsoring employer. Without a trigger to engage as a creditor, the PPF’s ability to secure better outcomes for the scheme is damaged, yet some finance parties could accelerate all debt and loan payments during a moratorium, so the entire finance debt benefits from the super-priority.

The case of Arcadia brings these concerns to life. There, the original CVA proposed a cut in deficit reduction contributions by half. It was the PPF, exercising creditor rights and working with the regulator in the absence of the new super-priority, which influenced a significantly better mitigation outcome, including security over group assets, £100 million in cash and increases in deficit contributions after three years.

Again, 12% of the Pension Protection Fund’s assets, around £4 billion, come from recoveries from insolvent employers. It is a critical income stream reducing the strain on other employer levy payers. I do not believe the Government intended that the PPF would not have a seat at the table for key creditor discussions or would be denied a meaningful voice on employers’ liability to the scheme. That could not have been intended when the restructuring plan procedure can compromise creditors’ claims and standing and a cross-class claim can impose it on creditors. The restructuring plan involves court oversight and approval, but it is unclear what rights of challenge the PPF would have, what standing the regulator would have and how a pension scheme claim would be valued for voting purposes.

Changes to the Bill are needed to ensure that the moratorium and restructuring plan discussions trigger a PPF assessment period or a passing of creditor rights to the PPF giving it a seat at the table and influence to address some of the implications of unsecured finance debt being granted super-priority over the pension scheme. In the helpful briefing session the other day, the Minister advised us that the department is having discussions with the DWP and the PPF. I hope they turn out to be positive, but in Committee appropriate amendments will need to be considered.