These are just a few of the big high street names which have sought to compromise their obligations to creditors in recent months via a company voluntary arrangement (CVA).
CVAs are designed as a flexible method by which companies can seek to contractually alter their position regarding different creditors – each CVA will be different, but it is typical, for example, for unsecured trade creditors to be treated differently to landlords. It’s worth noting that secured creditors are not bound by a CVA, unless they agree to this.
Following the upsurge in the use of CVAs for high profile companies in recent months, the Pension Protection Fund (PPF) has issued a guidance note (available here) on CVAs. This applies when one of the creditors is a defined benefit pension scheme.
The guidance note contains some useful insight into the PPF’s approach to CVAs, summarised briefly below:
- The PPF’s approach will depend on the CVA itself and the facts at hand – given the flexibility of CVAs, this is a logical starting point.
- Although the Pensions Regulator (tPR) is not a counterparty in a CVA proposal unless clearance is requested, the PPF will consult with tPR on all CVA cases. However, the PPF’s agreement to a CVA shall not imply clearance from tPR. This will put the particular proposed CVA on tPR’s radar. One of tPR’s key objectives is to act as the guardian of the PPF and the compensation it pays, so this could also be a trigger for further tPR information gathering and involvement.
- A PPF Assessment Period will commence when an employer lodges a CVA proposal with the court. This is the formal process during which the PPF assesses the pension scheme for eligibility for compensation from the PPF. While the Assessment Period is ongoing, any rights or powers of the trustees of the pension scheme in relation to any debt due to them pass to the PPF. This means that the PPF will acquire the trustees’ voting rights in the CVA.
- The guidance notes that, even where the pension scheme appears unaffected by a CVA, certain circumstances may give rise to concern in relation to the scheme. For example, the fact of the company’s insolvency in proposing a CVA suggests its covenant strength is weaker than its valuation. Equally, the pension liability may increase during the period of a proposed CVA, during which a company’s workforce will get closer to retirement age (known as ‘PPF drift’).
- The PPF will consider the risk that the pension scheme presents to the PPF, as a separate consideration to the risks to the scheme members.
- The PPF will normally vote in favour of, or against, a CVA proposal rather than abstain. In order to vote in favour, the PPF expects employers and those proposing a CVA to adhere to the PPF’s restructuring principles (available here). Broadly speaking, when taken with the list of considerations in the guidance note, the CVA proposals should:
- Provide a significantly better outcome than administration or liquidation, and should be proportionate in relation to the section 75 debt that is being eliminated. Among other things, the PPF will consider the CVA’s prospect of success, current market practice and the viability of the business.
- Include ‘anti embarrassment’ provisions, such that the pension scheme should receive 33 per cent or more of the equity in the employer (subject to increase).
- Treat creditors fairly and should not disadvantage the pension scheme, with a particular focus on the treatment of intra-group and connected creditors. The independence of management from the wider group position will be considered, along with the funding and financing position of the company and the treatment of the banks under the proposed CVA.
- Provide that the costs of the scheme in relation to the CVA will be met by the company.
As with any insolvency process, engaging with key stakeholders early on is of crucial importance. The guidance note provides an overview of the factors the PPF will consider when reviewing CVA proposals, which should provide a steer for those considering or proposing a CVA as to areas of concern to be addressed when formulating the CVA proposals where there is a defined benefit pension scheme involved.