Court reduces risk of scheme deficits triggering insolvency

COMPANIES ARE LESS likely to be wound up because of their pension deficit after the Supreme Court upheld a decision to set a high threshold for declaring a business insolvent.

The judgement upheld a decision by the Court of Appeal in BNY Corporate Trustee Services v Eurosail UK that the existence of a deficit between assets and liabilities was not in itself sufficient reason to declare a firm insolvent, Accountancy Age’s sister publication Professional Pensions reports.

A number of creditors had claimed Eurosail was ‘balance sheet insolvent’ on this basis, but the court ruled each case should be approached on the basis of its specific facts.

Lawyers said this meant a firm would have to be “past the point of no return” in terms of its ability to continue as a going concern before being declared insolvent.

This makes it difficult to argue that companies with large future or contingent liabilities such as potential liabilities for pensions schemes are insolvent and should be wound up.

Mayer Brown’s joint head of restructuring, bankruptcy and insolvency Devi Shah said: “Companies around the country will breathe a sigh of relief at today’s judgment which is both commercially sensible and a victory for common sense, in particular, against the backdrop of the troubled global economy.”

She added that the Supreme Court’s decision meant future challenges by creditors based on balance sheet insolvency would be more difficult to successfully establish.

If a company is found to be insolvent on a balance sheet basis creditors can seek a winding up order which may trigger termination events in its contracts or lead to acceleration of loans due in the future.

It can also expose the directors to liability for the company’s debts and mean transactions that the company enters into are open to challenge by a subsequent liquidator.

Mayer Brown pension partner Martin Scott said trustees would be relieved, particularly with many schemes heavily in deficit at the moment.

He said: “While trustees are also creditors of the sponsoring employer, it is generally in the scheme’s interests for the employer to continue to trade without fear of being wound up where it is otherwise meeting its obligations under the scheme funding legislation.

“Winding up the employer where it has not genuinely reached the point of no return will normally just result in the scheme itself either being wound up in deficit or entering the PPF.”

Prior to the March Budget, it was announced that the government had given the Pensions Regulator greater powers to look at growth prospects of a business when accessing funding. Instead of obsessing about improving pension scheme funding, the regulator now has an obligation to try to balance funding with the wellbeing of the employer company. 

Two years ago bed maker Silentnight entered an insovlency process when its lenders pulled back its credit facilities, leaving the business with a £100m pension black-hole.