Businessman fallingIn the United Kingdom, the Pension Protection Fund (“PPF”) is the safety net for the employee members of a defined benefit pension plan or scheme.  The PPF compensates members when an employer has not and cannot put sufficient assets in the pension scheme to meet its obligations to member employees and the employer has suffered a “qualifying insolvency event”.

On 29 April 2015, the Supreme Court of England & Wales upheld the Court of Appeal’s decision in Olympic Airlines SA, highlighting the crucial impact on UK member employees of an insolvent employer whose centre of main interest is in another EU Member State. The members in this case found that the PPF safety net had disappeared and that the scheme’s entry into the PPF was barred.

The Supreme Court noted that, pursuant to the Pensions Act 2004, the entry into the PPF depends upon “a qualifying insolvency event” – and that, in this case, the formal insolvency in Greece was not such an event and what was actually required was a winding-up order entered in the UK.  It should be noted that, where the centre of main interest of an insolvent company is in a EU Member State and it has entered into formal insolvency proceeding in that jurisdiction, any secondary insolvency proceedings in another Member State must be a liquidation.  This is prescribed by the European Union legislation, specifically the Council Regulation (EC) 1346/2000 on insolvency proceedings (Insolvency Regulations).

A winding-up order can be made in the UK for a foreign company under Section 221 of the Insolvency Act 1986. In essence, a winding-up order can only be made against a company if it has an “establishment” in the UK.   An “establishment” is defined as a “place of operation” where the insolvent company carries out “non-transitory economic activity with human means and goods”.   The UK Court of first instance held that the winding down operations, which were being carried out by Olympic at the time of the application, were sufficient to qualify as a “place of operation”.   However, the Supreme Court concurred with the Court of Appeal’s subsequent decision that they were not.

Therefore, no winding-up order could be made in the UK against Olympic Airlines and, thus, its pension scheme was barred from entry to the PFF and no compensation could be paid to the scheme’s employee members.

In our increasingly globalised corporate world, all trustees and employee members of defined benefit pension schemes should be aware that, in circumstances where the employer’s operations spill across EU Member States, there can be serious risks with regard to securing entry into the PFF when the music stops and an insolvency proceeding starts in a EU Member State other than the UK.

Any steps taken to place the employer into formal insolvency outside the UK should act as an urgent and persistent alarm for the trustees to seek appropriate professional advice with a view to protecting scheme members’ interests, by either taking proactive steps to maintain the status quo with regard to the UK operations, pending the outcome of the insolvency procedure, or making immediate application for a winding-up order in the UK.

In the Olympic Airlines case, the PPF entry rules were amended to allow the scheme to qualify; however, the amendments were very specific and apply only until 21 July 2017.

Trustees and beneficiaries beware!