Posted: 07 Apr, 2021
On 25th March TMA UK was delighted to welcome Herbert Smith Freehills to host a webinar looking at some of the new challenges Boards are facing as a result of regulatory changes introduced over the last 12 months.
After an introduction by Paul Davies, TMA UK President, the panel of legal experts discussed the extent to which the Covid-19 emergency measures, designed to assist companies and directors, raise difficult considerations for directors the longer the measures remain in place. They also discussed changes to the Pensions Scheme Act 2021 that introduces new challenges for turnarounds involving defined benefit pension schemes; and shared some lessons that can be learned from recent director disqualification proceedings.
We thank Herbert Smith Freehills for curating the expert panel and hosting the session. If you missed it, or would like to watch it again, you can find the recording here.
A year of temporary measures
John Chetwood, a Herbert Smith Freehills Partner and restructuring lawyer with over a decade of experience advising companies in distress, began the session reflecting on the temporary measures introduced over the last 12 months.
Some of the key measures introduced in March 2020 include the suspension of wrongful trading and the suspension of statutory demands and winding up petitions.
Many of the temporary measures were designed to lift pressure from businesses and have helped to stave off restructurings and insolvencies. Now, with many of these measures still in place, there are relatively few remaining drivers for a restructuring or insolvency. Those that remain include; running out of cash, a loss of stakeholder support, breaches of directors’ duties and fraudulent trading.
For those business that remain viable but need to undergo some sort of restructuring to survive Covid-19, John thinks they have a challenge ahead of them. Many are likely to enter discussions with a higher than usual balance of unsecured creditors due to the non-payment culture we’ve seen over the last 12 months. He thinks this could lead to some difficult judgement calls for Boards who will have to make big decisions against an unstable background.
Commenting on some of the temporary distorting effects of the suspensions on restructurings, John said there are three specific issues he sees arising:
- As unsecured creditor balances have grown, including some creditors with longer term relationships with the company, the extent to which directors are required to stand up for those unsecured creditors is likely to be tested.
- John thinks that the timings of restructurings might become an issue. For some stakeholders there may be an incentive to time a restructuring to coincide with the end of the temporary measures and there is a risk that the system will be gamed with the focus falling on directors.
- John speculates that creditor behaviour during restructuring discussions might change due to the government guarantees.
New pensions offences and regulatory powers
Next, John Whiteoak, who co-leads the firm's global Restructuring Insolvency and Turnaround group, talked about the Pension Schemes Act 2021 and the new pensions offences and regulatory powers that Boards need to be aware of.
He said that the new pension powers will affect any company with a defined benefit pension scheme and may have a big impact on how these companies can be restructured.
Introduced following the collapse of BHS and Carillion, which cast criticism on the Pensions Regulator, the Act introduces new criminal offences, financial penalties, contribution notice triggers and reporting obligations.
While John thinks the new criminal offences will seldom be used, they are causing nervousness amongst investors, advisors, and lenders who could all be caught by the new powers. The wording of the Act is somewhat vague and has the potential to affect many people who become involved in a restructuring. With the main defence being that there is a ‘reasonable excuse’, and the punishment being 7 years imprisonment or an unlimited fine, John is not sure many people will be willing to hang their hat on having a ‘reasonable excuse’.
John’s opinion is that the new offences and powers are designed to imposed upon directors an obligation to treat the pension scheme as something other than the unsecured creditor that it is. He suspects that those directors who are concerned about their personal liability may decide to seek approval from the pensions regulator before entering into a formal insolvency.
Another key concern of John’s is that the new offences and powers may put off overseas investors from coming in to rescue businesses. They present yet another hurdle for investors to overcome and may have the unintended consequence of leading to more insolvencies, putting pension schemes in an even worse position than if the company was saved.
Director disqualification – lessons from Re Keeping Kids Company
Finally, Natasha Johnson, a Herbert Smith Freehills Partner in the Disputes practice, shared some lessons that have been learnt from the recent case of Re Keeping Kids Company.
In the case of Re Keeping Kids Company, directors disqualifications proceedings were brought against the former board of trustees and former CEO, Camila Batmanghelidjh. There was an allegation that the directors caused the charity to run an unsustainable business model.
However the court did not find that the directors were unfit, and instead criticised the official receiver for overstating the case and not taking a balanced approach in its presentation of the evidence, as well as failing to adequately particularise allegations. Mrs Justice Falk also said there might be a wider issue of training and understanding within the Insolvency Service.
No doubt this judgment will impact the approach of the Insolvency Service, which will need to ensure that lessons are learned, and may lead to change in terms of greater selectivity or greater focus in bringing proceedings against directors. Although this impact will be assessed against a backdrop of proposed reforms to the audit and corporate governance regime.
Turning to the substantive findings of the case, Natasha said there were three to take note of:
That non-executive directors are entitled to rely on the judgement and information provided to them by the executive.
That directors are entitled to delegate and trust the competence and integrity of the staff to whom they are delegating to a reasonable extent.
That there was no collective responsibility as a basis for disqualification. The Court said the test for unfitness should take into account an individual’s conduct in the context of their individual role.
Thank you to everyone for joining the session and we hope you can join TMA UK’s next webinar kindly supported by Kroll on 8th April ‘Crown Preference – The end of inventory funding?’. Register here.
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