Video transcript: Restructuring plans panel session with Malcolm Weir and Raquel Agnello KC

Transcript

Atul: So, Restructuring Plans, and just for any pension lawyers that haven't come across these. This was introduced three years ago as a new tool to help corporates in financial difficulties restructure their liabilities. And it created a new dynamic in the UK where under specific scenarios a creditors' debt can be compromised without their consent. And this is what's called the so-called “cram down” feature. There have been over 20 Restructuring Plans to date and whilst the “cram down” feature has been tested in the courts, it has not yet been tested with a pension scheme. And so we don't know whether a pension scheme can be crammed down. And this is really hotly debated in the restructuring community. So, Malcolm, I'm going to come to you first. I know you have views on this and similar to CVAs it is the PPF who will have the pension scheme vote in the Restructuring Plan. What is your view on whether an RP could cram down a pension scheme's section 75 deficit?

Malcolm: Well as you say Atul, goodness only knows, because it hasn't been tested. But I'm going to put the proposition to be shot down by Raquel that it's very very difficult. First thing just to note for everybody is that a Restructuring Plan is not an insolvency event. Except in the eyes of Mr Justice Zacaroli. And therefore it doesn't qualify to start a PPF assessment period. So, it is different from CVAs in that respect. Now, the Restructuring Plan is there really to rebuild the balance sheet, and put in a much more presentable format for going forward. And of course, a section 75 debt is not a figure that ever appears on the company's balance sheet. And there's a good reason for that because it would scare anybody, in recent years, away from lending any money to a corporate if they actually knew that section 75 debt was there. So, I do have an issue about if you do compromise the section 75 debt which is a contingent debt at that point, how's it actually going to be addressed within the balance sheet. There are accounting rules as to how you should value the liabilities. The actual underlying liabilities don't change at all. A Restructuring Plan can't change the pension scheme's liabilities or its assets, they stay the same. So, I think there is an issue there that would need to be thought about.

There is also perhaps an argument that you could limit the technical provisions deficit and therefore reduce deficit reduction contributions. Again, we're getting to an area of conflict I think between the corporate law and pensions law. But let's make an assumption or two here because we could be here all afternoon debating it otherwise. And let's assume that a section 75 that has been comprised perhaps the TPs as well. So, there aren't deficit contributions coming in, or not to the level they were. Well, now you've got a real problem for the Trustees in my view. They're in quite an invidious position. Their liabilities haven't changed at all, but they know that they're not going to be able to meet all of those liabilities as time goes by. And so they've got a problem that they could be actually preferring the pensioner members compared to their deferred members' scheme drift. So, in my view they would probably be forced to wind the scheme up, which would crystallise the section 75 debt. But that may not be what the employer actually wanted by putting forward this Restructuring Plan. Now if that's been compromised to the level zero or a lower amount than the company can afford, then the company may well pay that off immediately, and that's the end of the scheme and the employer connection. That's going to have some, potentially some implications for the members at that point, which I'll come on to in a second. But if it can't actually pay that money because it wasn't expecting that debt to be crystallised at that moment, the Trustees are going to present a winding-up petition for the company and liquidate it. Which is exactly the opposite of what they were trying to achieve through the Restructuring Plan.

Coming back though to if the section 75 debit is paid off, or if it's zero, you've got a problem for the scheme members at that point. Because as I said, this isn't an event that starts an assessment period. This scheme is not going to be entering the PPF. Now, if it hasn't got assets to pay at least PPF compensation levels, then the members are going to be worse off. Because they're not going to get PPF compensation that they would have got through an insolvency. So, there's an argument there that will be raised saying, 'Well one batch of creditors is actually worse off for this Restructuring Plan going through.' Then if I look at the PPF’s position. If we've got a scheme that actually continues, where the Trustees don't wind it up for whatever reason but there's no more money coming in because DRCs have been eliminated, and the future contributions capped. Then we've got the issue of PPF drift, whereas more deferred members become pensioners and the reduction that we make and the compensation we pay goes away. We're actually being put in a worse-off position than we would have been if the company had been allowed to fail at that point.

And you've got to remember that these Restructuring Plans, nobody should be in a worse position than the alternative. So, I'd argue that there is a failure of that test here. We've also got to consider, and again, I haven't got the answer to this. Is whether compromising the section 75 debt has actually made the scheme ineligible for entry to the PPF anyway. And therefore perhaps prejudiced the members of the scheme. I don't know. Can a Restructuring Plan be used at all? Well yes, I think there are a couple of situations where it can be used. The most obvious is if it's used as an exit route to a company in administration. At that point the section 75 debt has already crystallised and it's just a debt like paying the milkman or the electricity company or whatever. And it's perfectly fair game to compromise the debt then, and members won't be prejudiced because it's already in the PPF and will be going through our normal processes. I think the other area that Trustees and their covenant advisors are actually going to have to be a bit more wary about, is the area of guarantees provided to pension schemes with the guarantor going through a Restructuring Plan, and that being compromised down. Because that can have a big effect. PPF won't have the vote there, that will be down to the Trustees.

So, in my way of thinking, potentially you've got an awful lot of conflicts with other bits of legislation here, and it's going to be an absolute minefield for the poor judge who actually gets to decide the first one of these. I certainly back up BEIS’s view when we were fighting to get more clout within this act as it was going through the House of Lords. They said very clearly to us-, whether they would ever allow it and say it now- I don't know. But they said, 'Really we don't want Restructuring Plans used to deal with pension schemes. There are enough other tools to deal with those.'

Atul: Raquel, what do you want to go back on?

Raquel: Okay. Let's start from the basics. Can a pension scheme be crammed down by a Restructuring Plan? The answer is yes. On the structure of the legislation, a section 75 contingent debt is like any other contingent unsecured debt, or even secured debt, capable of being compromised into a Restructuring Plan. That, I think is a quick short answer that the legislation allows it. Now the issues that Malcolm has raised are interesting for another point, these aren't rubber-stamped. The court goes through them in some great detail. And there's two matters about the cram down, and people get very excited about the cramdown on a hypothetical. And I think it's worth looking at what you have to establish to cram down because that really shows you one of Malcolm's points, that it will be a difficult or an unusual case on its facts, that it's capable of cramming down a section 75. So, before we all get excited we should remember what the cram down does. It's the real question is on the facts of that case which is going to be before the court, will it cram down the particular-, the pension scheme as a creditor? And Restructuring Plans are all about creditors who have a genuine economic interest in the company. Two conditions for cram down. That none of the members of the dissenting class will be worse off than they would be in the relevant alternative. This is all about valuation. This is all about the relevant alternative. So, if in the relevant alternative, let's say it's in an administration, a pre-pack, you can demonstrate that under the Restructuring Plan the pension scheme will be no worse off. Then you have a tick on that element of it. And it doesn't matter how difficult it will be for Trustees and everything. Because on the issue as to whether you have established (TC 00:10:00) the conditions, difficulty and other issues comes in discretion, which I'll come to in a minute.

The second point of course is that the Restructuring Plan as approved, has got to be approved by at least one class of creditors or members who have a genuine economic interest. They're going to receive everything. And it's always worth remembering that Restructuring Plans are not looked at by the court in isolation. Classic example of how they're looked at is Virgin. Virgin, you had valuation evidence on both sides. I know you guys at PwC were on one side. Looking at it-, the judge comparing it-, the judge looking at all of it and then exercising his discretion. And a case in respect of a pension scheme will be treated in the same way. It's not an easy exercise. It's not one in my opinion, where you can go ahead and just say,' I think it's too difficult. It's not going to happen.' You need to engage with the facts. Now, that's what you need to establish and it's important that you get the relevant alternative. And if in the relevant alternative, the pension scheme is going to get, 'X,' and in the Restructuring Plan they're going to get, 'X plus whatever percentage.' Then immediately the court starts to look, 'Look this benefits. It's a better alternative.' That's what I'm looking at. That's when a cram down can be triggered.

I think the real issue here deals with the exercise of discretion. By the way I should just pick up on one thing Malcolm said. Tony Zacaroli in Gate Group said very clearly that Restructuring Plans were an insolvency event. The reason Malcolm says it's not is because it's not a triggering insolvency event under the Pensions Act 2004. Not that it isn't an insolvency event. And that's quite important for restructuring lawyers and any insolvency lawyer going to court. Because Restructuring Plans are there for insolvent companies and that's quite key. You're looking at an alternative. Now, there are cases where they say the alternative isn't administration or liquidation, it's a continuation of the company. And a recent case tried to argue that, didn't succeed, but there's that possibility if you have a construed Restructuring Plan.

But let's have a look at the discretion because not every case will go for a cram down. Most restructuring lawyers don't pick a fight. They don't pick a fight with the creditors. They try a consensual approach. Why? Because once you take it to court it will depend on the judge, it will depend on the facts, it will depend on valuation. So consensual is always the way to go. But there will be cases where you've engaged and they say, 'No, no, no we don't want this,' for some of the reasons Malcolm says. And the courts facing a cram down and then it's got to look at the discretion to be exercised. There's also the issue of a blot on the scheme. That's a nice little phrase you find in some of the older scheme cases. And the thing to remember about the blot is it tends to be quite technical. Now, there's one element where, I think that if I were acting for either the regulator or PPF, you would push. And it's the issue of the fact that because this is not an insolvency event, under the Pensions Act, that by sanctioning the Restructuring Plan, effectively you're going to have the position where the company-, there cannot be a trigger of PPF. The company would be left just to wind down.

You need to remember something about Restructuring Plans. The court is looking at creditors and the outcome for the creditors. And one of the immediate reposts to that by a company seeking a Restructuring Plan is well-, it's very interesting what he says about PPF and not having PPF entry. But actually, if you're saying that the beneficiaries of the pension scheme are worse off, they are not creditors of the company. Restructuring plans are all about creditors of the company. So, you're going to have to persuade the court that in the exercise of its discretion it can go beyond the interests of the creditors as a whole. And this leads onto something else. Some of the matters which Malcolm raised which are clearly serious issues for the trustees and for the PPF. You need to look at it. If a court, because of the PPF entry issue says, 'Well I accept that there is a better alternative-, the alternative of the Restructuring Plan is the better alternative than an administration,' for example, 'But in the exercise of my discretion I am not going to grant this Restructuring Plan because of the PPF issue.' Then the court is actually giving that more leverage than the creditors as a whole of this insolvent company. And that's quite a tough ask for the court on what is an insolvency matter.

So, yes I think the law would allow it. But I think it really will depend upon the facts and the precise valuations and very importantly the relevant alternative. And if there's one takeaway I would give to both Trustees, to the PPF, although Malcolm doesn't need any advice from me, and to the regulator if they want to intervene, is get prepared. Let me give you an example. Fitness First has just been in court on the sanction hearing. The landlords came along and opposed and they made a big fuss about a month ago saying, 'We need more time. We need to put the evidence in.' And the court gave them 28 days. And they're in court, they were in court yesterday and today. I don't know the outcome in case you're asking me. But here's the thing, the court's not going to give you months because this is an insolvency matter, yes? And the court expects you to deal with it in a short timetable. So, if there's one message, Atul, if you want it for everyone hearing is, get prepared, don't wait. And certainly don't go to court and say, 'Well, I don't think you can do this.' Because the court wants to know facts, evidence and what's before it exactly as they did in Virgin Active.

Atul: Thank you Raquel. We are so close to time so I would love to open up again but I think we're going to have to draw it to a close. And just Raquel just on a closing point, this point around PPF eligibility of course, is only relevant for schemes in a PPF deficit. And the majority of schemes are in a PPF surplus. So all of that kind of stuff that's been commented on actually isn’t relevant. And potentially opens it up more?

Raquel: It does. It does, Atul. I'd also say that if there's-, one of the issues, and I hear what Malcolm says, the House of Lords says-. All this idea of not touching pensions always intrigues me. And it goes back to my Nortel Lehman days because it was all about, 'Oh, isn't that an expense? Is it a contingent creditor claim?' If you really want to protect pension deficiencies you need to give them a better status than unsecured creditor. It always amuses me. HMRC got back its preferential status. It's calling the shots on RPs at the moment. It's very interesting. And a lot of them-, I can see Malcolm nodding. And I'm sitting here going, 'What happened to your lobbyists guys?' Get yourself a foot in the door about it.

Atul: Thank you so much. I'm going to draw to a close but you've heard it there. Raquel is saying it's possible. But you're up for a fight if it's in a PPF deficit because Malcolm will be fighting against it. Firstly I want to say a massive thank you to our panelists Malcolm, Raquel, Rich and Katie for a really fascinating panel. Lots to think about there. I also want to give a massive thank you to all of you for attending. Really enjoyed the content but also it's really great to hear all of your views. We will be going through the results and we'll publish a document and share it with all of your firms. It’s going to be a fragmented economy over the next year and we're really looking forward to working with many of you where companies are either thriving, or where they're struggling and finding the appropriate solution in each case. Thank you and see you soon.