Pension scheme trustees will generally be concerned to try to ensure that the “safety net” provided by the Pension Protection Fund (PPF) remains potentially available for their scheme.
One of the conditions for PPF entry is usually that a UK insolvency process has been started over the employer. Ultimately trustees may be able to trigger a UK liquidation themselves by applying to court. But, in some circumstances, this can be more difficult for the trustees to arrange. Even if trustees can show that the employer is insolvent, the court may not be able to place the employer into a UK insolvency process if the employer has already entered an insolvency process in another EU Member State and has its centre of main interests (COMI) in another EU Member State.
There is an exception to this EU restriction on the ability to start a UK insolvency process. A UK liquidation can commence as a secondary proceeding, even if a process has already started in another EU Member State where the COMI is situated, but only if the employer has an "establishment" in the UK at the date the claim is made to the court. So, if the trustees do not spot this and only look to take action after the employer has ceased to have an establishment in the UK (which could have happened before the insolvency starts), then the trustees will not be able to force a UK insolvency over the employer and enable entry into the PPF.
This gap in the PPF protection was what affected the Olympic Airlines pension scheme. Despite paying the PPF levy, the scheme was ultimately unable to place the airline employer into a UK insolvency process because the airline had ceased to have an establishment in the UK before the winding-up petition was presented by the trustees to the English court. Ultimately this was confirmed last year by the Supreme Court in Olympic Airlines Pension Trustees v Olympic Airlines SA  UKSC 27.
Trustees should consider ascertaining whether each of the scheme employers has a COMI in the UK(bearing in mind that even UK registered companies can have a COMI outside the UK). If any do not, and instead the employer's COMI is in another Member State, the trustee will need to confirm whether it has an "establishment" in the UK.
The Government has taken action to address some of these concerns. From April 2016, regulations amended the terms of entry into the PPF by allowing schemes to enter the PPF in some cases without a UK insolvency process being needed by way of an application by the trustees to the PPF. This will help to ease the potential for a scheme to be stuck outside the PPF, but will still leave some issues for trustees. In practice trustees will still want to monitor the position of the employers in relation to their COMI.
UK insolvency process is the main condition for PPF entry
For a qualifying UK pension scheme to even be considered for entry into the PPF, the main condition that must be satisfied is that a ‘relevant insolvency event’ has occurred in relation to the employer1. This is defined in the legislation2 as an insolvency event in the United Kingdom (e.g. administration, creditors winding-up or court liquidation3). An insolvency process over the employer outside the UK does not count.
Other UK statutes adopt the same approach - e.g. the Employment Rights Act 1996 dealing with employee claims on the National Insurance Fund depend on there being a UK insolvency started over the relevant employer4.
The underlying reasoning for this restrictive approach is presumably that entry into the PPF only occurs if the employer has become insolvent. The PPF has no discretion to allow a scheme into the PPF if this condition is not met, and is not necessarily equipped to assess whether an overseas process is sufficiently equivalent to insolvency under the recognised UK processes.
The other route to PPF entry is by an application under section 129 of the Pensions Act 2004. Until 6th April 2016, this was only available where the employer was a charity, trade union, or an EEA insurer or credit institution. This meant that practically all schemes where the employer is a commercial company are were not able to use the section 129 route.
Winding-up in the UK
If a non-UK insolvency process starts over an employer outside the UK, which can occur if the employer is incorporated outside the UK or the overseas country has jurisdiction for some other reason), a UK insolvency event can still occur subject to the EU COMI point outline below. If they can show that the company is insolvent, trustees will usually be able to force a winding-up in the UK by applying to a UK court. The grant of a winding-up order is discretionary in the court, but if:
- there is a sufficient connection with the UK (which there will usually be, given the existence of the pension scheme); and
- the winding-up would serve a proper purpose (which the trigger for entry into the PPF and also employee claims on the national insurance fund will be),
then in practice a winding-up order will usually be made – see for example the court ruling in Re Eloc Electro-Opieck5. A court in England and Wales may look to balance the interests of the relevant creditors (here the pension scheme) against the interest of any other creditors: see for example Re Bank of Credit and Commerce International SA6.
What is the EU COMI problem?
So if the employer is in financial difficulties, how does the trustee ensure that a UK insolvency event occurs? Ultimately if the employer is a UK incorporated company with its COMI in the UK, then the trustee should be able to trigger a UK insolvency process (e.g. by petitioning the court for a winding-up order or an administration order).
This should also be the case if the employer is incorporated outside the UK or if it is a company incorporated in a part of the UK but with a COMI outside the UK. Here the trustees would usually still be able to start a UK insolvency process (usually a liquidation) by petitioning the court – subject to the point made above about the discretion of the court.
There should not be an issue if the employer has its COMI outside the UK but in Denmark or a country which is not an EU Member State. But there is potentially a problem if the employer has its COMI in another EU Member State (other than Denmark).
The EC Insolvency Regulation 2000 provides that once insolvency proceedings have been opened in a Member State (other than Denmark7) where the company has its COMI, secondary insolvency proceedings can only be opened in another Member State if the relevant company has an "establishment" in that Member State (at the date on which the new proceedings are opened) – Regulation 2(h), EC Insolvency Regulation 2000.
In 2015, in the Olympic Airlines case8 the Supreme Court upheld the Court of Appeal decision that expanded on what is required to fall within the definition of an "establishment" for the purposes of the EC Insolvency Regulation. The UK legislation (and the decision of the Supreme Court in Olympic Airlines) does not deal well with this situation and in some circumstances leaves a hole in the PPF protection.
In Olympic Airlines, an unfortunate effect of the Court of Appeal decision was that the Olympic pension fund was unable to be transferred to the PPF. A minor and temporary change was made to the pensions legislation before the Supreme Court heard the appeal, intended to enable that particular pension scheme to be transferred to the PPF, but this ‘sticking plaster’ has proved inadequate both in its specific and more general impact.
The Supreme Court held, dismissing an appeal by the pension scheme trustees, that in deciding whether or not a company has an establishment in the UK, it is not sufficient for a company to have a branch or office that fulfils no function other than to assist in the internal administration associated with the winding up of a company.
Instead, there must be some subsisting business operation with economic activity that is external, onethat involves business dealings with third parties. The exact nature of the business and the degree to which it must be visible to outsiders may be open to argument. On the facts, the Supreme Court held that Olympic Airlines did not have an establishment in England at the date of the UK winding-up petition and so no secondary proceedings could be opened in the UK.
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The pension scheme trustees wished to ensure that the PPF assumed responsibility for the scheme so that its members would receive the protected PPF level of pension benefit despite the scheme’s underfunding. Under the Pensions Act 2004, a scheme can only enter the PPF if certain 'qualifying events' have occurred. An order for the winding up of a company made by the court under the Insolvency Act 1986 is such a qualifying event, but an order made in Greece is not. In July 2010, the trustees of the pension scheme presented a petition to the High Court in England for a winding up order in respect of Olympic, based on the debt due by Olympic to the scheme and Olympic’s inability to pay.Olympic was a Greek state-owned airline that commenced operations in December 2003. On 17 September 2008, the European Commission held that it had received illegal state aid from the Greek state. As a consequence, Olympic ceased all commercial operations on 28 September 2009 and entered ‘special’ liquidation in Greece on 2 October 2009. Olympic had carried on business in England. It had a head office in London and premises at both Heathrow and Manchester. Olympic employed 27 employees in England, all of whom were members of its pension and life assurance scheme, which had a deficit of £16 million.
As Olympic had its COMI in Greece, the Greek special liquidation proceeding is the main proceeding for the purposes of the EC Insolvency Regulation. Once main proceedings have been opened, a court in a different Member State (such as the UK in this instance) can only open so called ‘secondary’ proceedings.
Need for an "establishment"
A condition to the opening of secondary proceedings is that the company has an "establishment" in the territory of the Member State. Article 2(h) of the EC Insolvency Regulation currently defines an establishment as:
‘any place of operations where the debtor carries out a non-transitory economic activity with human means and goods’.
In the Olympic Airlines case, at first instance, the judge (the then Chancellor, Sir Andrew Morritt) concluded that at the time of the pension trustee’s application to court (following Re Office Metro9 this is regarded as the relevant date), Olympic had an establishment in the UK. He therefore made the winding up order. On appeal, the Court of Appeal overturned the first instance judgment and concluded that at the relevant date, Olympic had no such establishment.
The pension scheme trustees appealed the finding that no establishment was present at the relevant date.
Prior to Olympic Airlines entering into special liquidation, it had an establishment in the UK. Between the date of the Greek liquidation (October 2009) and the date of the trustee’s petition to the High Court (July 2010) the operations were wound down:
- the ticket office at Heathrow was closed;
- the premises in Manchester were vacated;
- the company’s bank in England was instructed to cancel all direct debits and standing orders with immediate effect; and
- the employment contracts of all 27 employees in England were terminated.
Only the English branch’s financial manager and an assistant were re-employed on a short term contract to assist with the liquidation. However, the office still had telephone and internet services until the end of 2010, the branch’s bank accounts were only frozen in August 2010 and the final closure did not occur until December 2011.
In April 2015, the Supreme Court upheld the Court of Appeal’s decision and found that at the relevant time, the London premises were not an establishment for the purposes of the Insolvency Regulation. In doing so, they relied on the Virgós-Schmit report on the EC Insolvency Regulation10 and its reference in paragraph 71 to ‘economic activity’ being activity ‘exercised on the market (i.e. externally)’.
In giving his judgment, Lord Sumption (with whom the other Supreme Court justices agreed) emphasised that:
‘the definition [of establishment] must be read as a whole, not broken down into discrete elements, for each element colours the others’
‘the requirement that the activities should be carried on with the debtor’s assets and human agents suggests a business activity consisting in dealings with third parties, not pure acts of internal administration’.
Therefore, when considering the definition of "establishment", it is necessary to identify more economic activity than the mere process of winding up.
Lord Sumption also referred to the statement of the European Court of Justice (ECJ) in the Interedil case11 (2011) that the activity must be ‘sufficiently accessible to enable third parties, that is to say in particular the company’s creditors, to be aware of them’. Lord Sumption held that this was alluding to the same point regarding external activity as the Virgós-Schmit report, and was not suggesting that the debtor ‘should simply be locatable or identifiable by a brass plate on the door’.
At the time of the presentation of the petition, Olympic only retained a skeleton operation for the purposes of winding up.
For that reason, the Supreme Court found that Olympic did not have an establishment in England. Therefore, under the EC Insolvency Regulation, there was no jurisdiction to order a winding up in the UK.
The outcome for the Olympic pension trustees was disappointing – but the case also has a wider ambit.
Meaning of establishment
The Supreme Court judgment followed the slightly higher test expressed by the Court of Appeal who expanded on the definition of "establishment" set out in the EC Insolvency Regulation and as interpreted by the courts.
In Interedil, the ECJ held that for there to be an establishment there must be ‘a minimum level of organisation and a degree of stability necessary for the purpose of pursuing an economic activity’. In that case, the presence of goods alone did not meet the definition. The ECJ also held that an establishment must be determined on the basis of objective factors which are ascertainable by third parties (as is the case in the determination of COMI).
The Court of Appeal took this further and introduced the requirement that the economic activity must also be exercised on the market, i.e. externally. In doing so, the Court of Appeal relied heavily on the Virgós-Schmit report which the Court of Appeal accepted as authoritative commentary on the EC Insolvency Regulation. The Supreme Court clarified in Olympic Airlines that this interpretation is simply in line with the ECJ’s Interedil judgment.
Unnecessary secondary proceedings
The simplest answer to the problem would be if the Pensions Act 2004 included as qualifying events (for PPF entry) main proceedings that have been opened in other EC Member States and which are afforded automatic recognition under the EC Insolvency Regulation. In this case, the opening of the Greek special liquidation would then have been sufficient for the PPF to assume responsibility for the pension scheme. A similar change to employment legislation would also resolve the issue in relation to claims by employees on the UK National Insurance Fund (where in some cases, under the Employment Rights Act 1996, a UK insolvency process is also needed).
This approach would have been not only in line with the aim of the EC Insolvency Regulation (and, indeed, the new EC Insolvency Regulation 2015, taking effect from 2017) to avoid multiple insolvency proceedings which are disruptive and can be value destructive, but would also have given the concept of automatic recognition under the EC Insolvency Regulation its full and proper meaning.
After the Court of Appeal handed down its decision, the relevant UK legislation, the PPF Entry Rules12 were changed in 2014 to include an additional insolvency event in order to allow the Olympic pension scheme to transfer to the PPF13. This amendment meant that the 'qualifying event' which allowed entry into the PPF would be deemed to have occurred five years after the start of the Greek special liquidation, i.e. 2 October 2014.
Despite this legislative change designed specifically as a sticking plaster for Olympic, the pension trustees pursued their appeal: it would have been better for the pension scheme members if the PPF compensation was treated as payable from 29 May 2012 (i.e. the date when the order for winding-up was made in England by the first instance court) rather than the later date of 2 October 2014 (under the amending 2014 legislation). An earlier date would have minimised the period (between the commencement of the Greek liquidation proceedings and the relevant insolvency event occurring) during which the PPF Board could require the pension trustees to claw back any overpaid benefits.
The Supreme Court’s judgment in Olympic Airlines meant that in many cases it would not be possible to have a UK insolvency event for a company which has a COMI in another EU Member State (other than Denmark) and has entered into insolvency proceedings in that other another EU Member State.
From the policy perspective of the EC Insolvency Regulation, which is to avoid multiple insolvency proceedings, the restriction on secondary proceedings is understandable.
However, unless the requirements for entry into the PPF are amended, this created a significant headache for UK pension schemes with employers in similar positions. This is because, without a UK insolvency event, such a scheme would be unable to enter the PPF even if its employer has suffered an insolvency event outside the UK.
As a result, despite pension schemes paying their (compulsory) PPF levies in the expectation of the PPF safety net, members risked receiving benefits which are substantially less than the expected minimum of PPF compensation.
What can trustees do?
This headache is a particularly nagging one because it is difficult to see what trustees can do to protect their members effectively. Particularly where an employer is part of a wider multi-national group (or indeed simply has, or moves, its COMI to another Member State), there will be a risk of the employer’s COMI moving outside the UK to another EU Member State so that future insolvency proceedings could start in that other Member State. This could apply to both employers incorporated outside the UK and employers incorporated in the UK.
If this occurs and there are to be secondary UK insolvency proceedings, the employer must have an “establishment” in the UK at the date of the secondary application. The essence of the Olympic problem is that a potentially complex and fast-changing factual matrix will then determine whether and when UK proceedings can be brought.
Trustees might consider:
- seeking undertakings and information covenants from employers in relation to maintaining an establishment in the UK and/or having a COMI in the UK; or
- seeking a debt trigger (in the schedule of contributions) if the employer ceases to have an establishment in the UK or enters an insolvency process outside the UK.
In practice those might not be much assistance – the warning may simply come too late.
However, there are a couple of legislative initiatives under way that may address many concerns - that could relieve this migraine.
Aspirin 1 – from June 2017: New EC Insolvency Regulation
The first “aspirin” is the revised the EC Insolvency Regulation 2015 (recast)14, which is due to come into force on June 2017. This will change the “establishment” requirement so that it only needs to be met in the three months prior to the main insolvency proceedings starting,not at the time the secondary UK proceedings begin. However, there is a gap before these changes are due to come into force.
Further, trustees would still need to monitor whether their employer has an “establishment” in the UK. As more and more schemes become frozen schemes, it must become more likely that employers in multinational groups may end up without UK establishments. As a policy matter, this should not make a difference to the availability of PPF protection to otherwise eligible schemes which continue to pay PPF levies.
Aspirin 2 – from April 2016: Changes to PPF Entry Rules
The DWP has arranged for new regulations15 to be made which amended the PPF entry procedure and provide a potential solution to this issue in many cases. This followed a consultation issued by the DWP in November 2015.
The amending regulations changed the PPF Entry Rules from 6 April 2016, so as to allow companies to apply to enter the PPF in circumstances similar to those in Olympic Airlines. Trustees (or the Pensions Regulator) may now apply to the PPF for entry under section 129 of the Pensions Act if various conditions are fulfilled, even where the employer has not entered a UK insolvency process.
This route will require the trustees:
- to show that the employer has its COMI in another EU Member State (other than Denmark) – regulation 7(5)(a), PPF Entry Rules (as amended);
- to show that relevant insolvency proceedings (within the EU Insolvency Regulation) had been opened against the employer in the other Member State – regulation 7(5)(b), PPF Entry Rules. Presumably in practice this will usually be relatively easy to prove;
- to show that the employer does not have an "establishment" in the United Kingdom – regulation 7(5)(c), PPF Entry Rules;
- to show that the employer is "unlikely to continue as a going concern" – section 129(1)(a), PA 2004; and
- to make an application under section 129(1) to the PPF Board in the prescribed form (and containing the prescribed information, and be made within the prescribed period – section 129(3), Pensions Act 2004.
Problems with Aspirin 2
The third and fourth conditions summarised above may give rise to some evidential difficulties. Under section 129, Pensions Act 2004 the PPF does not have a discretion about whether or not to admit a scheme if the relevant conditions are met. But there may be doubts about whether or not in fact the third or fourth conditions above have been met (as was the case in the Olympic Airlines litigation in relation to the third condition).
The requirement to show that the employer is “unlikely to continue as a going concern” could perhaps raise difficulties depending on the outcome of the European insolvency (for example in the UK some insolvency processes can result in the survival of the company – e.g. some administrations). It is not inconceivable that the PPF may require the trustees to bring a case to court to determine whether or not the conditions have been met.
The prescribed time limit under section 129 is tight –the application currently needs to be made within 28 days. The amending regulations will allow the PPF Board to accept applications later than this (but no longer than three months) if the PPF Board determines that this is “reasonable in the circumstances of a particular case”.
In both cases the time starts to run on the date that the trustees or managers “become aware that the employer in relation to the scheme is unlikely to continue as a going concern” – regulation 8(1), PPF Entry Rules (as amended).
This could cause an interpretation conundrum – the employer may still have an establishment in the UK at the time that the trustees become aware that it is unlikely to continue as a going concern. But at that time the section 129 procedure does not apply. There would be no point in the trustees making a section 129 application to the PPF at that stage. But if they wait and the establishment in the UK ceases (as happened in Olympic Airlines), then they may be too late to make a later application.
If there is still a UK establishment, will the UK court order a liquidation?
If the employer retains an establishment in the UK16, then the section 129 route will not be available. Instead the trustees would need to seek a UK insolvency process (in practice a UK liquidation ordered by a UK court).
On or after June 2017 the recast Insolvency Regulations will allow secondary proceedings in a Member State if the employer has an establishment in that State in the three months before the company enters the main insolvency proceedings in the COMI Member State (see the definition of “establishment” in article 2(10)). It is, of course, possible that the PPF Entry Rules will be amended nearer June 2017 to deal with this17. The government stated, in its response to the consultation (March 2016) that it intends to keep the position under review (para 31).
In addition, the insolvency practitioner in the main EU insolvency will (from June 2017) be given greater powers under the 2015 EU Insolvency Regulation (articles 36 to 44) to object to secondary proceedings being opened (and to offer undertakings instead). So there may be circumstances where the UK court refuses to order a local liquidation.
If this were to occur the gap in the PPF protection would remain. Although the trustees may be able to run the pension scheme on as a frozen scheme, the potential for ‘priority drift’ (as more and more members reach the scheme’s normal pension age and so qualify for greater levels of PPF protection) could be an issue. This would mean that, if the scheme were to wind up outside the PPF, members who are below normal pension age at the time of winding-up would suffer a disproportionate reduction in their benefits under the statutory order of priority that applies on the winding-up of pension schemes under section 73 of the Pension Act 1995. If, alternatively, the scheme wraps up later to enter the PPF (due to further litigation in the context of the insolvency), the burden on the PPF would be greater.
Why not a wider change?
It would be easy to cure the headache with an amendment to the relevant PPF Entry Rules so that an insolvency event which occurs in another Member State would be a qualifying event for entry into the PPF.
From an insolvency law perspective, such an approach would follow the aim of the EC Insolvency Regulation to avoid multiple insolvency proceedings and would give the concept of automatic recognition under the Insolvency Regulation its full and proper meaning.
From a pensions perspective, it is difficult to see any policy reason (or indeed moral justification) for why the DWP and Parliament should not address this problem properly and on a permanent basis to give trustees and scheme members the peace of mind about PPF protection that they deserve.
In its response to consultation (March 2016)18, the government rejected this wider approach, commenting:
“29. The government is concerned about protecting the PPF, and would not want the PPF to be opened up to circumstances where an effectively solvent employer was able to get the PPF to take responsibility for its scheme. The government considers that the conditions and processes which must be satisfied and complied with in order for a scheme to transfer into the PPF are reasonable and proportionate to the need to protect the PPF against this risk.”
Absent a change in the regulations, pension scheme trustees will continue to need to monitor the position of their sponsoring employers, in particular whether or not they have a COMI outside the UK or an establishment in the UK.