NEWSLETTER    |     September 20, 2023

Employers who don’t pay pension contributions risk being wound up by trustees after recent Court decision

The employers of a final salary scheme with a deficit failed to make payments to the scheme, which were due under a variety of funding agreements; the trustees felt the employers’ future financial viability was uncertain and applied to wind up the company.  The Court approved the trustee’s decision to issue a petition to wind-up the employers. Companies should be aware of this risk when managing competing interests if they consider withdrawing support from a pension scheme.

The Biwater Retirement and Security Scheme (the “Scheme”), a final salary pension scheme, at the time of the hearing had a deficit of £28.3m. The Scheme’s employers Biwater Holdings Ltd and Biwater International Ltd (together “Biwater”) owed the Scheme monies in the form of outstanding deficit recovery contributions, expenses, insurance and exceptional contributions payable in accordance with a Schedule of Contributions and other contractual agreements.

Evidence was put before the Court that presented ‘a bleak picture’ of Biwater’s financial position, with the Court commenting it was clear that Biwater has “no prospect of meeting its financial obligations to the Scheme”.  There was also concern over Biwater’s conduct in failing to provide information to the Trustee and the breaching of a negative pledge which resulted in other creditors being preferred over the Scheme.

Under the Scheme’s governing documentation Biwater was in control of how the Scheme could be terminated, except where it suffered an “insolvency”, in those circumstances the Trustee would drive the process forward.  Biwater’s financial position, the (lack of) support Biwater offered to the Scheme, and the Scheme’s funding pushed the Trustee to decide, subject to the Court’s approval, to petition the winding-up of Biwater, i.e. to create the insolvency event needed to terminate the Scheme.

There were also other parties to the case including representations on behalf of the members and beneficiaries, who were unable to provide any grounds or support for the continuation of Biwater.  The PPF was also invited to take part in the proceedings, and it was noted that the prospective availability of the PPF was not a relevant consideration when deciding whether an employer should be wound-up, even if that decision meant the scheme would end up in the PPF.

The Court approved the decision made by the Trustee, demonstrating that employers are at risk from trustees seeking to place them into a winding-up.

The case shows that trustees may choose to exercise the “nuclear option” of triggering an employer’s insolvency and the Court will not be afraid to order the winding-up of an employer where it has not paid amounts due to a pension scheme. The risk of an employer being placed into winding-up at the direction of the trustee will be dependant on the facts of a specific case, but will be influenced by: the employer’s financial viability as an ongoing business, treatment of any other creditors or secured debt, financial support to the scheme such as contribution levels and whether there is ability to provide additional support through a wider group, and the employer’s more general support to the scheme and the trustee such as its ability to work collaboratively.

Employers who are struggling financially should not dismiss how important it is to have open communication channels with trustees and to be able to work collaboratively, as this could mean the difference between finding a solution that would see the employer continuing in business and an unplanned, forced insolvency event.

Key takeaway

Employers are at risk of trustees being able to petition for their winding-up successfully if they fail to pay amounts due to an underfunded defined benefit pension scheme; in financial difficulty, companies should make sure they continue to engage with trustees to avoid the impression they are not supporting the scheme or behaving in a way that has little or no regard for the scheme and its members.

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