On 20th May 2020, the Government introduced the Bill. As at 11th June the Bill has completed its second and third readings in the Commons and is proceeding to the Lords. It is expected to be enacted in late June/July 2020.
What is the purpose of the Bill?
The Bill is designed to help Companies, charities, co-operatives and limited liability partnerships during the COVID pandemic to avoid insolvency and continue trading where there is a prospect (in the opinion of a licensed insolvency practitioner) that the Company can recover over the longer term.
What provisions are in the Bill?
- A moratorium providing a period of breathing space from the company’s creditors whilst a rescue is mounted when it will not be possible to petition for the company’s liquidation – an example of this would be Parasol Limited which suffers a bad debt of £100,000 when a customer becomes insolvent. Parasol Limited manages to find other customers which will make them profitable in the future, but leave the Company with a temporary cash crisis because of lack of cash-flow. A director intends to raise cash through a personal loan secured on his house. The company in conjunction with an insolvency practitioner, known as the monitor, completes the necessary paperwork for a moratorium period of 20 business days. This can be extended if the monitor believes the monies will come through outside the initial 20 business days.;
- The temporary removal of personal liability for directors for what would otherwise be wrongful trading;
- The introduction of a new restructuring plan for companies in financial distress which are binding on creditors even if they don’t agree to it;
- The introduction of flexibility in relation to company requirements such as holding AGM’s and extending filing deadlines;
- Allowance for some of the temporary measures to be retrospective.
How does the Bill affect Defined Benefit Pension Schemes?
- The moratorium prevents the trustees of pension schemes, as unsecured creditors, from bringing legal actions against distressed employers for unpaid pension contributions;
- Whilst the pension schemes only ranks as an ordinary creditor it is possible the company may seek backing from the pension scheme for rescue, depending on the approach taken by the court to rescue deals – we don’t know yet whether the courts will push the company and secured creditors for concessions towards unsecured creditors to sanction rescue arrangements;
- In contrast to company voluntary arrangements, the Bill does not provide for restructurings under the Bill to be a qualifying event which means the pension scheme will not qualify to enter the Pension Protection Fund (PPF) compensation scheme;
- The pension scheme could be better off if the Bill has the effect of keeping a sponsoring employer afloat which later becomes strong. On the other hand, the Bill could delay the liquidation of the sponsoring employer with the result the pension scheme does not have the protection of entering the PPF until much later than would have been the case had the Bill not delayed the liquidation of the sponsor.