All 3 Baroness Warwick of Undercliffe contributions to the Corporate Insolvency and Governance Act 2020

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Tue 9th Jun 2020
Corporate Insolvency and Governance Bill
Lords Chamber

2nd reading (Hansard) & 2nd reading (Hansard) & 2nd reading (Hansard): House of Lords & 2nd reading
Tue 16th Jun 2020
Corporate Insolvency and Governance Bill
Lords Chamber

Committee stage:Committee: 1st sitting (Hansard) & Committee: 1st sitting (Hansard) & Committee: 1st sitting (Hansard): House of Lords & Committee stage
Tue 23rd Jun 2020
Corporate Insolvency and Governance Bill
Lords Chamber

Report stage (Hansard) & Report stage (Hansard) & Report stage (Hansard): House of Lords & Report stage

Corporate Insolvency and Governance Bill

Baroness Warwick of Undercliffe Excerpts
2nd reading & 2nd reading (Hansard) & 2nd reading (Hansard): House of Lords
Tuesday 9th June 2020

(4 years ago)

Lords Chamber
Read Full debate Corporate Insolvency and Governance Act 2020 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Committee of the whole House Amendments as at 3 June 2020 - (3 Jun 2020)
Baroness Warwick of Undercliffe Portrait Baroness Warwick of Undercliffe (Lab) [V]
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My Lords, until recently I was a member of the board of the Pension Protection Fund—PPF—so, like my noble friend Lady Drake, I want to focus on the impact of the Bill on defined benefit pension schemes.

I recognise the intent and urgency behind the Bill. Businesses have been asked to take extraordinary measures to help control this terrible virus, and we need to ensure that viable businesses survive and get back on their feet. Defined benefit pension schemes and their members want to know that sponsoring employers will ensure that member benefits are secured over the longer term. However, there is a significant shake-up of insolvency, and some of the changes, however well intentioned, could have unintended consequences.

The PLSA and others have highlighted potentially serious consequences for underfunded DB schemes and the PPF. The PPF plays a vital role in protecting defined benefit schemes and enjoys broad cross-party support. We need to ensure that it can continue to perform the role that Parliament has given it. Some provisions in the Bill might make that difficult: they could reduce the ability of the PPF and pension schemes to have any influence in a company restructuring; they could push schemes and the PPF further down the creditor pecking order; and they could affect the amount that schemes and the PPF might otherwise receive in recoveries.

I want to focus on two things. The Bill proposes a new moratorium to provide struggling businesses with some breathing space to speak to creditors and to try to find a way to continue as a going concern. If a company becomes insolvent within 12 weeks of a moratorium ending, some pre-moratorium debts will be granted super-priority in the insolvency. At present, these are on a par with pension debts but under the proposed change they would rank above pension debts. By elevating unsecured debt finance over other unsecured creditors, there could be a serious detrimental impact on DB schemes and the PPF. It stands to reason that if some creditors get priority status and so, in the event of insolvency, get more, others will get less. Also, those with finance debts and super-priority could start to game the system, as the noble Baroness, Lady Bowles, pointed out—for example, by taking equity in a company or accelerating all debts and loans to bring them into super-priority status.

Neither the moratorium nor the restructuring plan appear to count as qualifying insolvency events, so there is no provision, as happens now, to trigger the start of a PPF assessment period or the Section 75 debt. Therefore, as my noble friend said, neither the scheme nor the PPF have a seat at the table when important discussions about the company’s future are happening. That does not seem right or fair.

This matters. There are still more than 10 million members in about 5,500 DB schemes in the UK, the majority of which are already in deficit. Recoveries from insolvent employers are a vital income stream for the PPF: 12%, or about £3.8 billion, of its current assets have come from recoveries, helping it to protect members and reduce the strain on levy payers. The change in the Bill could mean that the PPF needs to raise more levy than it would otherwise have to do from other, solvent businesses.

I believe that these issues could be remedied without a major impact on the overall intent of the Bill. To protect pension schemes and their members, the Government should not let other unsecured creditors—banks or hedge funds, for example—leapfrog up the creditor queue. They should build into the moratorium and restructuring plan appropriate safeguards to ensure that the voice of the PPF is fairly represented so that, as now, the PPF can exercise schemes’ creditor rights and represent their interests. Suggestions such as those must surely be worth considering in Committee.

I support the overall intent of the Bill but I want to make sure that it does not undermine DB schemes and the retirement funds of their members throughout the country. The Minister said at his helpful briefing yesterday when I raised this matter, “Watch this space”. I hope that that means that officials can work with the PPF and others to find solutions.

Corporate Insolvency and Governance Bill

Baroness Warwick of Undercliffe Excerpts
Committee stage & Committee: 1st sitting (Hansard) & Committee: 1st sitting (Hansard): House of Lords
Tuesday 16th June 2020

(4 years ago)

Lords Chamber
Read Full debate Corporate Insolvency and Governance Act 2020 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: HL Bill 113-I Marshalled list for Committee - (11 Jun 2020)
Baroness Drake Portrait Baroness Drake (Lab) [V]
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My Lords, I refer to my entry in the register of interests. I shall speak also to Amendments 39, 63 and 64.

I fully support the Government’s desire to assist companies in bouncing back from Covid-19, but it is neither necessary nor desirable that such a policy should seriously weaken the position of defined benefit pension schemes and the Pension Protection Fund in the event of an insolvency or restructuring. The Bill does this in several ways: by granting super-priority status to unsecured banking and finance debt, ranking it above pension scheme debt if a company is not rescued, which introduces material detriment to the level of recoveries the PPF, acting as creditor for a scheme, can achieve through insolvency proceedings; by finance debts getting preferential treatment over pension scheme liabilities by continuing to be payable during a moratorium; and by the new moratorium and restructuring plan processes not triggering a PPF assessment period or a pension scheme’s Section 75 debt, weakening the position of the scheme and the Pension Protection Fund, which would not have a seat at the table for key creditor and restructuring plan discussions and would be denied a meaningful voice on employer liability to the scheme.

The Minister wrote yesterday and indicated that the Government will bring forward amendments on a number of matters, for which I thank him. We have yet to see the text of those amendments, but I will seek to reference the Minister’s letter in what I say.

Amendment 20 removes amounts payable in respect of pre-moratorium debts and other liabilities

“arising under a contract or … instrument involving financial services”

from the exemption from the payment holiday during a moratorium and the super-priority provisions in the event of an insolvency process. Amendment 39 does the same in Northern Ireland.

There is nothing in the Minister’s letter that indicates the Government’s intention to give further attention to their decision to give such a wide range of finance debts elevated status and preferential treatment over pension scheme liabilities. We have today heard his statement on accelerated finance debt, but I will continue to press my amendment.

It is difficult to comprehend the Government’s reasoning for liabilities under financial services contracts, extremely widely drafted in the Bill. It would include unsecured lending such as shareholder loans and intercompany loans, including from a director or parent company, as well as arm’s-length regulated activities and bank debts, all getting preferential treatment over pension scheme liabilities. Others have asked similar questions in respect of SMEs and workers.

As drafted, it would allow finance parties to accelerate all debt so that the entirety of the lending would be payable under these provisions and benefit from super-priority on insolvency. There is a real risk of gaming. The noble Lord, Lord Hodgson of Astley Abbotts, and the noble Baroness, Lady Bowles of Berkhamsted, articulated such examples so brilliantly in the first group debated. From what I heard during that debate, I welcome the Minister’s statement that accelerated debt will not now have super-priority status, which addresses in part—but certainly not in whole—the purpose of my amendment.

During a moratorium, these financial debts would continue to be payable, pension scheme deficit contributions would not and the trustees could not call on any contingent assets that would otherwise be triggered by non-payment of deficit contributions. Priority for finance debts would remain. The Law Society has said:

“the Bill would create an incentive for lenders without effective security to allow the rescue of a company through a moratorium to fail, so as to force it into administration or liquidation and achieve super-priority.”

I say this without sight of the Government’s amendments, but there may remain a perverse incentive that undermines any preference the trustee or PPF may have to rescue the company.

Worryingly, liabilities imposed by the Pensions Regulator on the company for breach of moral hazard rules, such as contribution notices and financial support directives, also rank behind these financial debts. This is not addressed in the Minister’s letter. Will the government amendments address this concern?

Amendment 63, through an amendment to the Pensions Act 2004, provides that both the start of a moratorium and an application for a meeting of creditors to consider a restructuring plan would trigger a PPF assessment period and a scheme’s Section 75 debt. Amendment 64 applies similar provisions to Northern Ireland. This would enable the PPF to act as the creditor of the scheme, which would have an improved standing and vote. These are key protections that currently exist.

In his letter yesterday, the Minister advised that the Government will bring forward amendments that will: during a moratorium, give the PPF rights to information and the right to challenge the actions of the directors and/or the monitor; on a restructuring plan, provide that both the PPF and the Pensions Regulator will be entitled to receive copies of all the information sent out to creditors; and, on both procedures, grant the ability to provide creditor rights to the PPF, subject to appropriate constraints.

I welcome that the Government have recognised that the pension trustees, the PPF and regulator need the rights and authority to engage effectively during the moratorium and restructuring plan discussions, but it is unclear how meaningful those engagement powers will be without seeing the actual amendments and to what extent they will be broadly comparable with or weaker than the current safeguards available.

It will also be important to understand how any government amendments address the serious risk that the new restructuring process could give rise to the systemic dumping of DB pension schemes by companies that are financially underperforming. The restructuring plan procedure can compromise creditors’ claims and standing. It allows for a cross-class cram down and there is much speculation that this could be used to cram down the pension scheme. I ask the Minister how the government amendment would address that concern.

The relevant legislation, which gives the PPF creditor rights, is chiefly the Pensions Act 2004, which puts in place a careful framework that supports action to rescue distressed companies, while protecting the interests of pension scheme members. It does this by triggering a PPF assessment period at the start of the insolvency proceedings that aim to rescue an employer. The PPF steps into the shoes of the trustees by acting as creditor for the debt owed to the scheme. This legislation has proven effective and has delivered better outcomes.

As drafted, the Bill directly undermines that carefully structured framework. It will be important to understand how and to what extent the Government’s amendment rows back from that consequence. The 2004 Act provisions were a product of the failure of successive Governments to protect pension scheme members under UK insolvency laws. It would be regrettable if, through this Bill, history repeated itself.

The Minister’s letter sent yesterday and his statement on accelerated finance today are a significant step forward, but they do not eradicate all the key risks that many noble Lords are so deeply concerned about. I ask the Minister if, before Report, he will reflect further on the concerns that I, and no doubt others, will express today. I beg to move.

Baroness Warwick of Undercliffe Portrait Baroness Warwick of Undercliffe (Lab) [V]
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My Lords, until recently, I was a member of the board of the Pension Protection Fund. I will speak to Amendments 20 and 63. Like my noble friend Lady Drake, I have yet to digest the contents of the Minister’s letter from yesterday evening and we have yet to see the actual amendments, but I want to set out my concerns, so that they can be tested against the concessions he has made.

I fully support the policy intention behind the Bill: to help otherwise financially viable companies avoid the prospect of failure, as a result of the unprecedented disruption that Covid-19 has caused. However, alongside its temporary measures, the Bill includes permanent measures—the moratorium, the restructuring plan and changes to creditor status—that will be far-reaching. On the current drafting, there will be consequences that have the effect of reducing the protection and rights of underfunded pension schemes and the Pension Protection Fund when companies are in financial distress—protections that have been carefully built up and developed over 16 to 17 years.

Amendment 20 removes financial debts being exempt from the moratorium payment holiday and the granting of super-priority to those debts in the event of a company entering into an insolvency process. Amendment 63 provides for the triggering of PPF creditor rights and a scheme Section 75 deficit at the start of a moratorium and of restructuring plan discussions.

We cannot overestimate just how serious this is. For many years, the covenant position of defined benefit pension schemes has been based on unsecured pension debt ranking side by side with debts owed to other unsecured lenders. This has underpinned all valuation, funding and covenant discussions. The super-priority status granted to finance debts in an insolvency following a moratorium removes that base. It weakens valuations and funding arrangements and is detrimental to members of pension schemes and to the role of the PPF acting as creditor. It also affects the scheme trustees. The liabilities of the scheme—the pension promise—are usually significant and payable over a significant number of years. Unlike other unsecured creditors, trustees are not in a position to manage the exposure to the scheme’s debt by ceasing to deal with their employer. Therefore the Bill dramatically enhances the interests of the finance lenders and weakens the interests of the pensioners and future pensioners in an insolvency situation.

Corporate Insolvency and Governance Bill

Baroness Warwick of Undercliffe Excerpts
Report stage & Report stage (Hansard) & Report stage (Hansard): House of Lords
Tuesday 23rd June 2020

(3 years, 11 months ago)

Lords Chamber
Read Full debate Corporate Insolvency and Governance Act 2020 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: HL Bill 114-I Marshalled list for Report - (18 Jun 2020)
Baroness Drake Portrait Baroness Drake (Lab) [V]
- Hansard - - - Excerpts

My Lords, I refer to my entry in the register of interests and shall speak to Amendment 13 in my name. In this group the Government have brought forward helpful amendments to seek to prevent bank debts and other financial lendings that are accelerated during the moratorium from gaining super-priority status. This is a welcome change. However, serious risks remain of gaming to give current or future lenders access to super-priority, avoid pension liabilities and incentivise insolvency over rescue for certain creditors.

Amendment 13 would remove the exemption which payments in respect of pre-moratorium debts arising under a contract or instrument of financial services have from the payment holiday and from super-priority in the event of an insolvency process. Notwithstanding the Government’s amendments, real concerns remain that lenders may be able to circumvent their intent by the drafting of their lending agreements; the definition of accelerated debt could be sidestepped so that lenders can continue to bring forward debt and benefit from super-priority. It is unclear, for example, whether on-demand debt that is called during the moratorium would be caught by the definition of accelerated debt and debts accelerated prior to the moratorium would continue to be granted super-priority.

Adding to these concerns is the width of the definition of financial institution debt which would qualify for super-priority, covering intra-company loans, for example. In addition, finance debts due prior to or in the moratorium continue to be exempt from the payment holiday. Debts due to the pension scheme are not, would not be payable and would be outranked in subsequent insolvency. That exemption and the super-priority given to that financial debt, which are permanent provisions within the Bill, will inevitably lead to novel forms of moral hazard when it comes to pension liabilities.

This is a fast-track Bill containing permanent, major changes and scrutiny has consequently been fettered, but government Amendment 80 in this group gives a power enabling the Secretary of State, by regulation, to change the definition of moratorium debt and priority pre-moratorium debt. This is a welcome concession by the Government, because it implicitly recognises the arguments that many noble Lords have made that it allows the Government to respond to actual experience of gaming and perverse behaviours. Will the Minister confirm that the intention of Amendment 80 is to allow the Government to quickly address the risks other noble Lords and I have identified when they emerge and to change the definition of moratorium debt and priority pre-moratorium debt in response? Will the Government commit to monitor closely the impact of the provisions on moratorium debt and priority pre-moratorium debt, and to consult relevant bodies on the real concerns around super-priority status, the definition of accelerated debt and the implications for pension scheme debt?

Baroness Warwick of Undercliffe Portrait Baroness Warwick of Undercliffe (Lab) [V]
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I added my name to Amendment 13 and I set out in Committee my concerns about the Bill. As I said then, I fully support the intention behind it—that the disruption caused by Covid-19 should not be allowed to trigger the failure of otherwise financially viable companies—but I was anxious, and I remain anxious, that some of the permanent and far-reaching proposals would be damaging to pension funds and to their members in the longer term. I assumed that this damage was unintended and was caused by the speed with which this package of protective measures had had to be introduced, and I am pleased that the Government have gone some way to acknowledging this in the amendments they have brought forward.

Other noble Lords have set out in detail the problems that the Bill would cause as currently drafted. I emphasise just one point in relation to defined benefit pension schemes. The stability and effectiveness of the current system in dealing with insolvency has depended on unsecured pension debts ranking side by side with debts owed to other unsecured lenders. This has underpinned all valuation funding and covenant discussions. The super-priority status granted by the Bill to finance debts in an insolvency following a moratorium undermines that stability and endangers members of affected pension schemes, while preventing the PPF acting effectively as creditor. As I said in Committee, it also undermines the role of the regulator. However, the Government have clearly made efforts to address these concerns and go some way to addressing the issues raised by me and other noble Lords. I have been convinced that the Government want to make this work and will ensure that the PPF has access to and influence on discussions about recovery plans.

The Secretary of State will have access to considerable Henry VIII powers in the Bill and will be able to intervene swiftly if it seems that restructuring plans and insolvency procedures are being abused, to the detriment of pension scheme members. So in thanking the Minister for the way he has responded to the concerns we in this House have expressed about the Bill, I urge him to stay alert to any attempts to undermine the assurances he has given that the position of pension scheme members will not be weakened, and that their lifeboat—the protective umbrella of the PPF—will not be undermined in any restructuring and insolvency discussions.

Baroness Bowles of Berkhamsted Portrait Baroness Bowles of Berkhamsted (LD) [V]
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My Lords, I draw attention to my interests in the register. I support Amendment 13 and what has been said already about it. I am a signatory to that amendment, but I shall concentrate on Amendment 14. The Times this morning reports that Intu, owner of shopping centres, is seeking a standstill on loans from its banks, otherwise it will go into administration. Without commenting on the merits of the case, save to mention that coronavirus has stopped rent payments, the facts are writ large: it is all in the hands of banks.

The idea of a moratorium is as a formal standstill, a breathing space for a company to trade out of its problems, get back on its feet or at least find a way to reorganise without the situation deteriorating due to a feeding frenzy of creditors, each trying to get at the assets before someone else does. For all essential suppliers other than financial institutions the moratorium terms are that they must continue with normal supply, with no demands for up-front payments or elevated prices that would destroy cashflows and undermine the purpose of a moratorium. But not for banks: they have no constraints and are free to demand accelerated payment. So there is a feeding frenzy exclusively reserved for the banks.