The UK Pensions Regulator (tPR) has published a regulatory intervention report explaining its decision not to exercise its anti-avoidance powers in connection with the pre-pack administration of Bernard Matthews Limited (BML) and the entry of the Bernard Matthews Limited pension scheme (BML scheme) into the PPF.
The report focusses on the propriety of not issuing a contribution notice (CN) to Rutland Partners LLP (Rutland), a private equity investor in BML. Under a CN, an employer or a company/individual associated with or connected to the employer, can be ordered to make a payment to a pension scheme. There are two grounds on which a CN can be issued, the "material detriment test" was the focus in this case, requiring an act or failure to act to have had a materially detrimental effect on the likelihood of accrued scheme benefits being received. In addition to satisfying this ground, tPR can only issue a CN if it believes it is reasonable to do so, having regard to whether it was reasonable for the potential target to act in the way it did. tPR has published a Code of Practice and guidance on how it will apply the "material detriment test".
Events leading up to a pre-pack administration and entry into the PPF
In 2013, BML was in severe financial difficulty. It found itself under pressure from its bank to refinance its existing debt - or face insolvency.
1. Initial investment of £25 million by Rutland
In return for its investment, Rutland took a controlling stake in the parent company (giving it control over BML board decisions), a payment in kind interest rate of 20%, and a charge over assets (ranking ahead of the BML scheme but behind an existing bank charge).
TPR's view was that the terms agreed with Rutland were reasonable, negotiated on an arm's length commercial basis and reflected the high risk nature of the investment, with little or no assurance of any return.
The payment in kind interest rate of 20%, though high compared with bank lending rates, was in line with what was on offer in the private equity market at the time. The Trustee lost its position as the second ranking secured creditor, but as Rutland's funding replaced existing secured bank finance, this change in ranking position was not materially detrimental to the BML scheme's position as a creditor.
2. Restructuring and a decline in the poultry market
Following a restructuring under Rutland's control, BML's losses reduced from £18 million in 2013 to £3.7 million in 2015. However, a decline in poultry prices in 2015 left BML struggling. Rutland arranged a £10 million bank loan, guaranteeing £5 million itself, and £5 million being guaranteed by the Matthew's family shareholders. However, in spite of this, in the year to June 2016, BML's losses increased to £26 million.
3. Agreeing a sale in 2016
In the face of increasing losses, Rutland sought a buyer for BML in 2016. Taking account of the interests of all the group's creditors, the board of BML accepted an offer of £87.5 million for the assets and business of BML, but not its debts. The company entered into administration and its business and assets were sold in a court-approved pre-pack administration. Rutland made £13.9 million on its investment; the BML scheme obtained nothing for its third ranking security, and entered the PPF.
Prior to agreeing to a pre-pack administration, Rutland, in its position as a secured creditor, had rejected two earlier offers:
- Purchase of the share capital of BML. This would have allowed BML to continue to support the BML scheme, but would have left Rutland writing off the majority of its investment and the entirety of its payment in kind interest.
- Another offer would have excluded BML's liabilities (including the BML scheme), and also have resulted in material loss to Rutland.
tPR concluded that as a secured creditor, it was legitimate for Rutland to choose to sell the business of BML to crystallise and maximise the profit on its investment. It found no evidence that the sale process or pre-pack administration process were carried out inappropriately. Rutland's profit was a legitimate consequence of its high risk investment. Consequently, tPR concluded that there were no reasonable grounds on which to issue a contribution notice.
tPR's assessment of the reasonableness of the decisions leading to the pre-pack administration being agreed is interesting. It gives more weight than might be expected to the importance of Rutland making a profit from its high risk investment, despite the fact that the consequence of this was non-payment to the trustee as a third ranking secured creditor and the BML scheme entering the PPF. In this regard, it may be conscious of not deterring investors who seek to turn around failing businesses – and in this case, Rutland had a relatively short period of involvement with BML, took a high risk and made well-intentioned efforts throughout to invest in and strengthen the ailing business. That being said, there was quite a contrast in the outcomes of the sale for Rutland and the BML scheme.
Would the position have been any different if tPR were in possession of the new anti-avoidance powers proposed in the Pension Schemes Bill? This contains two new grounds for issuing CNs, amends the reasonableness test, as well as introducing criminal sanctions and fines for certain conduct. The two new grounds for issuing CNs are both aimed at preventing a deterioration in the employer covenant. In both cases, the amended reasonableness test would apply, which in its amended form includes consideration of the effect of the act or failure to act on the scheme's assets or liabilities. As is the case currently, these new powers, and the power to impose criminal sanctions, give tPR flexibility as to how it pursues its agenda – and this may well change over time. However, it may be that tPR's approach in the regulatory intervention report gives some insight as to how it might approach exercise of its new powers in relation to a third party investor, where ultimately the rescue fails.