Assigning employer debt in insolvency

Assigning employer debt in insolvency

Pensions analysis: What is the significance of the recent decision in respect of the circumstances in which a trustee of a pension scheme can assign the debt owed to the scheme? Alastair Meeks, a partner at Pinsent Masons LLP who worked on the case on the claimant’s side, says the case could be relevant to other forms of statutory debt owed by insolvent companies.

Original news

Trustee of the Singer & Friedlander Ltd Pension and Assurance Scheme v Corbett [2014] EWHC 3038 (Ch), [2014] All ER (D) 248 (Nov)

In the course of the administration of a bank, which ran a pension scheme, the claimant trustee sought a declaration that a debt owed to the pension scheme was assignable. The Chancery Division considered whether the trustee of a pension scheme was able to assign the debt owed to the pension scheme which was created by the Pensions Act 1995, s 75 (PA 1995). It held that, among other things, a declaration to that effect would be made.

What issues were considered in the case?

The scheme has been in winding-up for some time. The employer debt had been certified and the scheme had been receiving payments in the insolvency along with other creditors. It now had the opportunity to sell the remainder of its employer debt and wished to do so if it could secure the right price in order to complete the winding-up expeditiously. Before doing so, it applied to court for directions as to whether the statutory employer debt was capable of being assigned.

What conclusions did the court reach?

The court, after some hesitation, concluded that the debt was capable of assignment and so the trustee could properly sell the debt if it could secure appropriate terms.

What was the court’s reasoning in reaching the particular conclusions it did?

The court held that the framework of PA 1995, s 75, as it was originally founded, would permit the assignment of the debt, relying on the decision in Bradstock Group Pension Scheme Trustees Ltd v Bradstock Group plc [2002] EWHC 1461 (Ch), [2002] All ER (D) 109 (Jun). Birss J considered whether this conclusion had been impliedly altered by the Pensions Act 2004 (PA 2004) framework for contribution notices and financial support directions. He noted that:

‘The existence of a power to direct the trustees not to take steps to enforce the section 75 debt is inconsistent with the concept that the section 75 debt could be assigned away by the trustees. Obvious difficulties would arise if the trustees assigned the section 75 debt but then after that the Regulator wished to make a direction under s 41(4) or s 50(4) of the 2004 Act. If a direction was issued after a trustee had assigned the debt then the trustee would be unable to comply with it because the debt no longer vested in the trustee.’

The judge, after preparing his draft judgment, noted the further concern that:

‘For the trustee to assign such a debt undermines a safeguard built into the fairness of the moral hazard provisions. Compromising the debt may be different since at least in that case the employer will also have obtained a release of the balance of the s 75 debt.’

Ultimately, however, he concluded that:

‘The relationship between the new provisions and the existing section 75 debt system is complex. There are no express provisions which answer the question arising in this case. The arrangements governing the relationship between the provisions of the 2004 Act and the section 75 debt give rise to potential anomalies whichever way they are looked at. That is important because it undermines any attempt to construe the legislation in such a way as to avoid an anomalous result.

It is unreal to find in sections 41(4) and 50(4) of the 2004 Act any manifestation of an intention by Parliament to alter the debt created by section 75 of the 1995 Act.

Accordingly the debt created by section 75 of the 1995 Act may be assigned by the trustees or managers of the scheme.’

What practical implications does the court’s decision have for employers, pension scheme trustees and their advisers?

Pension schemes that wind up outside the Pension Protection Fund may be able to wind up more quickly if the trustees are able to sell employer debt on a secondary market.

How does this case fit in with other developments in this area? Do you have any predictions for future developments?

The case is an extension of the Bradstock decision, but shows that PA 2004—legislation that was designed for the enhanced protection of scheme members—does not sit particularly easily with the very different purpose of seeking to ensure fairness between different interest groups in an employer insolvency.

This case is also likely to be of interest to insolvency practitioners in other contexts, since it is of potential relevance to other forms of statutory debt owed by insolvent companies.

Interviewed by Anne Bruce.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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First published on LexisPSL Pensions.

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About the author:
Kathy specialises in restructuring and cross-border insolvency. She qualified as a solicitor in 1995 and has since worked for Weil Gotshal & Manges and Freshfields. Kathy has worked on some of the largest restructuring cases in the last decade, including Worldcom, Parmalat, Enron and Eurotunnel.