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The Pensions Regulator (TPR) has published a draft policy on its proposed approach to the investigation and prosecution of the new criminal offences (see our recent update for more details).
The draft policy provides some general reassurance to professionals advising companies with defined benefit pension schemes about the circumstances in which they could face potential criminal liability. However, it does little to clarify how such professionals should approach the sensitive decisions that need to be made during a restructuring or formal insolvency, particularly where there may be limited time and limited information available to them.
The Pension Schemes Act 2021 introduces two new criminal offences in the context of defined benefit pension schemes: the offence of avoidance of employer debt and the offence of conduct risking accrued scheme benefits. The penalty on conviction of either offence is an unlimited fine and/or imprisonment for up to 7 years. There are also potential financial penalties of up to £1 million. It is anticipated that these provisions will come into force by autumn 2021.
TPR already has the power to take action in order to protect scheme benefits. It does so by issuing the following sanctions against the statutory employer of the scheme or against persons “associated or connected” with the employer:
The introduction of criminal offences and associated civil sanctions significantly widens the scope of TPR’s enforcement options.
TPR is consulting on a draft policy setting out its proposed approach to investigation and prosecution under the new offences. The consultation closes on 22 April 2021. It can be found here.
TPR anticipates that it will prosecute the new offences in broadly the same circumstances in which it would seek a contribution notice. There are certainly similarities between the two regimes supporting this approach. However, there are also a number of technical and conceptual differences, which both raise the risk and provide mitigation or reassurance to those potentially affected by the new offences:
Wider scope: The new offences have a wider scope than the existing anti-avoidance powers. While TPR’s existing powers can be exercised only against employers (or those associated or connected with them), the new offences can be committed by any person. This extends the reach to, for example, professional advisors and lenders.
No limitation: Whilst contribution notices are subject to a limitation period (6 years), the new offences are not, means that there may be situations where it is no longer possible to issue a contribution notice due to the length of time that has elapsed, but that prosecution under the new offences is still an option. This raises the potential spectre of an indefinite threat of criminal liability for those involved in advising employers with defined benefit pension schemes.
No clearance: Unlike contribution notices and financial support directions, there will be no clearance process available to forestall prosecutions.
Higher standard of proof: A contribution notice is a civil action with a significantly lower standard of proof (on the balance of probabilities) than the new criminal offences (beyond reasonable doubt). This should reassure those individuals who suddenly find themselves caught within TPR’s anti-avoidance net.
It is conceivable that there may be situations where the available proof is sufficient to enable a contribution notice to be issued, but not to result in criminal prosecution. In practice, TPR will also have to demonstrate, as part of its case, that the person in question had no reasonable excuse for their actions (see next point).
Reasonable excuse defence: The new offences also provide that a “reasonable excuse” for the act or course of conduct will be a complete defence. TPR seeks, in its draft policy, to reassure professionals giving advice in this area that “in most instances, a professional person, acting in accordance with their professional duties, conduct, obligations and ethical standards applicable to the type of … advice being given, is likely to have a reasonable excuse.” However, while comforting, this statement is neither definitive nor legally binding. Advisors should ensure that they take into account the three key factors TPR will consider when determining whether or not a person has a reasonable excuse for their actions, namely:
TPR is looking for evidence that the scheme has been treated fairly compared to other stakeholders. The interests of the scheme cannot be secondary, they will need to be weighed up against all other interests and, where possible, alternative avenues explored. Of course, the luxury of choice may not be available in an insolvency or restructuring situation, in which case it becomes more important than ever to keep detailed records of the decisions that are made and the reasons for them.
Where lenders are making decisions about whether or not to refinance, they can balance their own interests against those of the scheme. TPR does not expect lenders to enter into transactions that are manifestly disadvantageous, but it would be prudent to keep full records of the projected outcomes of the alternatives that are being considered.
TPR doesn’t anticipate that the new offences will change the kind of behaviour it usually investigates, nor that they will result in a fundamental change in commercial norms or accepted standards of corporate behaviour in the UK. However, this expressed intention does not square with the stark reality of the wording of the legislation and it is not hard to see how these offences have the potential to impact the way in which professional advisors approach business rescue.
Although insolvency practitioners benefit from a limited exemption to the risk of criminal liability once they have been formally appointed, this exemption does not apply to pre-appointment work. It also does not extend to any of the other professionals who may be involved in planning for a restructuring or formal insolvency.
Stakeholders and professionals will no doubt be interested in the delineation between TPR’s use of civil as opposed to criminal sanctions, and in any event one can expect the incidence of clearance applications to increase significantly, at least in the short terms, until TPR’s approach becomes clearer.
Cases such as Silentnight, in which the owners of the group settled with TPR following a pre-packed administration sale of a group with a defined benefit scheme, amply demonstrate a regulatory willingness to pursue perceived deliberate misconduct prejudicing pension schemes against a wider class of persons than simply the old and new employers. In that case, the original insolvency practitioners were replaced as liquidators of one of the group companies to facilitate independent investigation of the sale and the Financial Reporting Council also separately brought a professional misconduct complaint against the individual administrators.
With stakes this high, companies in financial difficulty and their advisors are likely to proceed with greater caution. They will face difficult choices when weighing up the comparative interests of the company, its creditors as a whole, the pension scheme as a specific creditor, and their own potential exposure to criminal liability.
It’s possible that in this environment potential rescuers may well back out of deals which might otherwise have salvaged a situation, including through the use of the “cram-down” mechanism in the new restructuring plans introduced by the Corporate Insolvency and Governance Act 2020.
Although TPR asks that the scheme be treated “fairly” in relation to other creditors, the strict wording of the offences does not reflect that intention and the reality is that TPR will now have a significant and persuasive advantage when influencing pre-restructuring or insolvency planning (especially when one considers that obtaining TPR “clearance” for a transaction does not expressly preclude the bringing of criminal charges). Ultimately, this may result in cautious directors and advisors being unwilling to take steps that would ordinarily be viewed as beneficial for the company’s creditors as a whole.
It also results in an inherent tension between stakeholders and their advisors want in to build up an “evidence trail” to demonstrate their reasoning (in order to forestall action) and legal professional privilege, where legal advice on thorny and potentially prejudicial issues can be exempted from disclosure in furtherance of criminal proceedings.
Although the new offences are not yet in force, and are not intended to be retrospective, TPR has confirmed that it may nevertheless look back at actions taken before the commencement date if that indicates a person’s intentions where relevant to the new offences. Accordingly, these prospective changes and the draft guidance needs to begin to inform acts taken and courses of action agreed upon now. Waiting until the provisions come into force may be too late. Advisors unfamiliar with the world of criminal proceedings may now wish to upskill in order to familiarise themselves with the landscape with which they now faced.
Advisors and directors can give themselves the best protection by keeping detailed notes and minutes of decisions and engaging with TPR in a reasonable and open way. Be aware that internal discussions are likely to involve commercially sensitive information and some of the documents produced may be subject to privilege though some may legally be required to be disclosed. If you are at all uncertain about what information you can share with TPR or have to disclose, you should take legal advice on this point before doing anything further.
A complete audit trail may provide vital evidence in the future that there was a reasonable excuse for any act that results in detriment to a defined benefit pension scheme or its members. All decisions should be documented, together with:
On the other end of the spectrum, where disclosure of facts to TPR or the authorities would be undesirable (particularly where prejudicial or marginal decisions are contemplated), a refresher on the principles surrounding legal professional privilege would be no bad thing, in order to ensure that advice sought in good faith is not used against you.
This is of course a best case scenario. In many instances insolvency practitioners and turnaround professionals are engaged at the last minute, often with limited information at their disposal and urgent competing creditor demands to deal with. TPR’s guidance falls short of giving any concrete reassurance to professionals appointed in such circumstances that their actions will not result in prosecution in the future. These concerns will no doubt be raised as part of the consultation process, and it remains to be seen how or whether TPR will address them. We will keep you updated.
Please contact Richard Clark in TLT’s Restructuring and Insolvency team or Sasha Butterworth in TLT’s Pensions scheme with any queries.
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at March 2021. Specific advice should be sought for specific cases. For more information see our terms & conditions.
30 March 2021