Pension Schemes Bill – Additional hurdle for English law restructurings?
The intention was that the Pension Schemes Bill would enhance the Pensions Regulator’s powers to respond earlier when employers fail to take their pension responsibilities seriously, targeting “reckless bosses who plunder people’s pension pots”. However, the new criminal offences proposed as part of the Bill may inadvertently create additional hurdles for English law restructurings, making them potentially more expensive and difficult.
Proposed criminal offences
The Pension Schemes Bill, as confirmed in the Queen’s Speech on 19 December 2019 and brought forward on 7 January 2020, is due to introduce two new criminal offences (as sections 58A and 58B of the Pensions Act 2004), each of which would carry a maximum sentence of seven years in prison and/or an unlimited fine. In brief, these offences are as follows:
Avoidance of employer debt: a person does an act or engages in a course of conduct that (i) prevents the recovery of the whole or any part of a debt which is due from the employer in relation to the scheme under section 75 of the Pensions Act 1995, (ii) prevents such a debt becoming due, (iii) compromises or otherwise settles such a debt, or (iv) reduces the amount of such a debt which would otherwise become due, in each case having intended the act or course of conduct to have such an effect, and without a reasonable excuse.
Conduct risking accrued scheme benefits: a person does an act or engages in a course of conduct that detrimentally affects in a material way the likelihood of accrued scheme benefits being received, and knew or ought to have known that the act or course of conduct would have that effect, again without a reasonable excuse.
The offences, as put forward, appear very broad in scope, and may have far-reaching implications for English law restructurings.
The underlying rationale for the new offences, based on the earlier White Paper, was to target unscrupulous employers and those connected or associated with them. The notes to the Queen’s Speech on 19 December 2019 also confirmed that the overall intention was to enhance “the Pensions Regulator’s powers so it can respond earlier when employers fail to take their pension responsibilities seriously, including putting lengthy jail terms on the table for reckless bosses who plunder people’s pension pots, thereby building greater trust for saving in pensions”.
However, it appears that the scope of the two new offences is drafted much more broadly, so that they would apply to “any person” (except for a limited carve-out for insolvency practitioners when acting in their role as such). In this context, “any person” may capture a wide range of third parties, such as investors, bank lenders, pension trustees, professional advisers and even the Pensions Regulator itself.
Unfortunately, the Bill does not offer any guidance on the interpretation of the “reasonable excuse” defence, which may narrow the scope of these new criminal offences and it is unlikely that many professionals involved in a restructuring would want to risk having to rely on it.
Potentially severe implications
Given the wide scope of these offences, how can bank lenders, investors, pension trustees or even professional advisers be certain that they don’t fall foul of them when they propose a restructuring plan for a company in distress?
In practice, restructuring plans are usually proposed and implemented under significant time pressure, on the basis of sufficient but often perhaps not as detailed financial diligence as one would wish for. In light of the potentially severe consequences, we expect that third parties who may be subject to these new criminal offences will likely be much more cautious when drawing up restructuring terms going forward.
If the Bill is implemented in its current form and as long as there is no guidance on the interpretation of the “reasonable excuse” carve-out, it is likely that the financial advisers will be requested to carry out additional analysis to explore the impact of the restructuring on the pension scheme and any employer debt. Such diligence would impose an additional layer of complexity and thus may make restructurings more expensive and protracted – which would not be in the best interest of either the company or its creditors.
More generally, in light of the criminal liability, the parties involved in a restructuring may also become more hesitant to take certain decisions, which could lead to the company being placed in an insolvency process prematurely, resulting ultimately in lower recoveries for creditors. Could this failure to act in itself lead to liability?
We can only assume that these potentially grave consequences were unintended and this is not an attempt to harm the rescue culture under English insolvency law. However, to avoid creating these additional hurdles for English law restructurings, clearly something will need to be done – ideally, the proposed legislation will be amended to narrow the scope of the offences. Whilst more guidance on the “reasonable excuse” defence and the actual scope of these offences may be helpful, it would not be sufficient to address the concerns.