When proposing a CVA, take note that the Pension Protection Fund may be one of your largest creditors.
Sir Philip Green is reportedly set to restructure the high street group Arcadia by potentially using a Company Voluntary Agreement (“CVA”).
Last year we saw several other struggling high street chains, including New Look, Mothercare and Carpetright, utilise CVAs to restructure their businesses by reducing the size of their chains and so reducing rental and rates cost.
Notably, BHS, which was sold by Sir Philip Green a year before it then collapsed with the loss of 11,000 jobs, also put in place a CVA.
BHS had a pension deficit of £571m when it collapsed, and the retailer’s fall prompted an inquiry by MPs and the pensions regulator into how the business had been managed and financed in the period before its collapse. In 2017 MPs were told that Arcadia’s two pension schemes had a combined deficit of nearly £1bn on a buyout basis and £565m as a going concern.
It is likely that we will see a sharp focus on the health of the Arcadia pension fund within the scope of any restructuring that may take place.
Pension Protection Fund
Entering into a CVA, or other qualifying insolvency event, will automatically trigger the involvement of the Pension Protection Fund (“PPF”), a statutory fund set up under the Pensions Act 2004 to protect pension schemes in the event that a company goes insolvent.
The CVA will start off a PPF assessment period, during which, the company’s pension scheme will be reviewed to determine whether the PPF should become involved and take responsibility for the pension scheme. If they do decide to take responsibility, the PPF will then assume the role of creditor under s137 of the Pensions Act 2004.
If a CVA is proposed, this is then put forward to the company’s creditors, which as above, may include the PPF, to vote either for or against the proposal. A CVA will not be approved unless the requisite majority of creditors vote to approve the CVA. In some cases, the pension scheme is the company’s biggest creditor (in value) and this can mean that without the support of the PPF, the CVA will not be approved. In previous instances, the PPF have forced companies to pledge additional funding to support the scheme before agreeing to back a CVA.
Where a CVA is proposed that sees a pension scheme being compromised, the PPF will apply its restructuring principles as set out in published guidelines linked below. The gateway criteria for this is that:
- the insolvency must be inevitable in the next 12 months due to the company’s pension obligations, and
- the CVA is not being used to avoid substantial creditors.
If the above is satisfied, the PPF will review the restructuring plan, the role of the management team and the working capital and restructuring finance and work to ensure that the value of the pension fund under the CVA would be greater that it would achieve in an insolvency.
In June 2018, the Pension Protection Fund (PPF) issued updated guidance on the use of CVAs, setting out the position on key pensions-related issues that might arise during insolvency proceedings. To access the PPF’s general guidance note to IPs and its guidance notes as referred to above, please click here.
Clarion has a dedicated Corporate Recovery and Insolvency Team and if any of the matters mentioned above impact you and you require advice, please do not hesitate to contact us.
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