The Part 26A restructuring plan has introduced significant cross-class cramdown powers that may impact the defined benefit pension arrangements in the UK.
By Shaun M. Thompson, Hafza Hussein, Paul R. Lawrence, and Tim Bennett
As the UK looks set to enter a new restructuring cycle, the question remains whether a restructuring plan (RP) could be used to cram down defined benefit (DB) pension liabilities in the face of opposition from UK pension plan trustees and in light of the new and wide-ranging criminal offences introduced by the Pension Schemes Act 2021. The UK Pensions Regulator (TPR) has a statutory duty to reduce the risk of DB plans entering the Pension Protection Fund (PPF), which is the UK’s “lifeboat” arrangement for DB plans whose sponsoring employers have become insolvent.
Restructuring Plans and Cramdowns: New Possibilities
As a new tool in the arsenal of companies facing financial difficulties, the RP can bind dissenting creditors in ways more far-reaching than under other tools such as a scheme of arrangement or company voluntary arrangement (CVA).
The compromise of unsecured DB pension liabilities as part of a wider restructuring has usually taken place consensually alongside any statutory compromise of other creditors. Historical reasons for this approach include: a reluctance for any relevant DB plan to trigger a statutory buyout liability under section 75/75A of the Pensions Act 1995; the risk of any relevant DB plan becoming ineligible for entry into the PPF; the likelihood that DB plan liabilities need to be placed in a separate class under a scheme (thereby granting the trustees an effective veto if they are not supportive of the restructuring); and the likely size of the relevant DB plan’s claim for voting purposes in a CVA (which may also amount to a practical veto).
As such, parties typically address DB pension liabilities either bilaterally through a consensual solution (as happened in the Hibu restructuring prior to the launch of a scheme for other creditors) or, less commonly, by using the supporting vote of DB plan trustees to approve a CVA opposed by other unsecured creditors (as happened in the Arcadia CVA to bind the dissenting landlords). Until now, the active opposition of DB plan trustees to a restructuring in which DB pension liabilities are compromised has usually prevented a successful restructuring outcome.
Are DB Pension Liabilities in a Special Category?
The availability of a cross-class cramdown under an RP has prompted a reassessment of the relative bargaining positions of creditor groups in any restructuring and, in particular, of unsecured DB pension liabilities. In the most significant RP decision to date, Virgin Active was able to cram down unsecured dissenting landlords with the support of an “in the money” class of secured lenders and its shareholders that injected new equity funding. Provided that no class is worse off under the “relevant alternative” of what is most likely to occur absent the RP’s approval (Condition A) and the compromise or arrangement is approved by at least 75% by value of at least one class of creditors having a genuine economic interest in the company (Condition B), the court has been willing to exercise its discretion to cram down a dissenting class where the RP provides a fair distribution of the benefits generated (the so-called “restructuring surplus”) between the approving and dissenting classes and where any differences in treatment are justified. As a matter of general law, unsecured DB pension liabilities are in a no more privileged position than unsecured landlords in terms of priority, and it is therefore reasonable to suppose that they too might be subject to cramdown as a dissenting class, provided that the above conditions have been satisfied.
Risk of Criminal Liability Absent “Reasonable Excuse”
Countervailing forces will make any debtor wary of embarking down this path unless there is no other available option. New criminal offences introduced by the Pension Schemes Act 2021 augment TPR’s long-standing “moral hazard” powers to issue a contribution notice (CN) or financial support direction (FSD). These criminal offences extend to “any person” (which is as broad as its plain English meaning suggests and includes all group companies and their directors, officers and employees, professional advisers, third-party lenders, and shareholders and investors; however, an insolvency practitioner acting in accordance with their professional duties is not in scope) and therefore have far wider scope than a DB pension plan employer, connected company, or officers or shareholders who can be liable under a CN or FSD. Criminal liability attaches if (broadly speaking) any person acts or engages in a course of conduct that:
- is intended to prevent the recovery of a statutory debt to a pension plan (including a section 75/75A “buyout” debt) or otherwise:
- prevent such a debt becoming due;
- compromise or settle such a debt; or
- reduce the amount of such a debt; or
- detrimentally affects in a material way the likelihood of accrued plan benefits being received, provided the person knew or ought to have known that the act or course of conduct would have that effect.
In each case, liability may be avoided if a party has a “reasonable excuse”. While TPR has issued guidance indicating that it would consider the protection of legitimate commercial interests by creditors to be a “reasonable excuse” for these purposes, whether that analysis would apply to a debtor proposing an RP that would compromise DB pension plan liabilities is far from clear.
Would RP Sanction Trump TPR Criminal Powers?
It seems improbable that the sanction of an RP that has the effect of cramming down DB pension plan liabilities would prevent TPR exercising the criminal powers. In a recent decision involving a sale of a group out of administration, administrators sought directions from the court on their proposal to sell the subsidiary companies of the group to a Russian purchaser. While the administrators did not consider that they were in breach of the UK sanctions regime after thoroughly investigating all aspects of the sale, the court was clear that in giving its blessing to the transaction, it was impossible to eliminate the risk that the administrators may breach sanctions in proceeding with the sale. The judge noted that the Office of Financial Sanctions Implementation (OFSI) was not a party to the proceedings and that the court could not bind the OFSI should it want to bring an action against the administrators at a later date. In a similar vein, a court is unlikely to sanction an RP that crammed down DB defined benefit pension liabilities in a way that would prevent TPR from commencing criminal actions under the new powers against any involved parties.
Unlike for CNs and FSDs, no formal clearance process (whether voluntary or mandatory) applies in relation to TPR’s exercise of criminal powers. As such, parties to an RP would not be able to apply for TPR’s formal confirmation that it would not seek to exercise criminal powers in relation to the RP. However, TPR tends to be open to dialogue about the terms of any proposed RP. Indeed, in most cases it will be essential for parties proposing an RP to contact TPR in the preparatory phase to discuss the proposal and its likely effects.
A New Negotiating Dynamic
The mere threat of a cross-class cramdown in an RP is likely to influence creditor behaviour, and the absence of an absolute priority rule makes any creditor class in a company’s capital structure vulnerable to its deployment. However, significant hurdles and potential risks remain for companies seeking to compromise DB pension liabilities in this way. Active engagement with pension plan trustees, TPR, and the PPF at an early stage is not only advisable but — in keeping with the PPF’s interim guidance — expected. Where a consensual solution is not achievable, the threat of a cramdown of DB pension plan liabilities may be effective if parties are confident that moral hazard provisions can be successfully navigated.
 Re Virgin Active Holdings Limited  EWHC 1246.
 under section 58A and section 58B, Pensions Act 2004, which have been in force since 1 October 2021 and do not have retrospective effect. See Latham’s Client Alert A More Aggressive UK Pensions Regulator?
 Petropavlovsk plc (in administration)  EWHC 2097 (Ch).