“Pre-packs” have proven to be a popular method in the UK of saving businesses since 2003 (when the Enterprise Act of the same year ushered in a rescue culture and made it possible to appoint administrators out of court by providing the flexibility required and of doing so within a relatively short period).
They typically involve a pre-agreed sale of a company’s business and assets by a prospective administrator which is then completed immediately following the administrator’s appointment. Pre-packs have attracted a lot of bad press because they are seen, especially where the sale is to connected parties (i.e. a newco incorporated by the existing directors), as stitching up creditors by cherry-picking assets and leaving the unsecured creditors and company’s liabilities behind. However, it is often the case that pre-packs are the only way to preserve value of the business and assets by avoiding the negative consequences associated with a company entering into an insolvency and therefore not only maximise the return to creditors but also save jobs.
There have of course been a number of high profile pre-pack administration sales, including the recent disposal of Agent Provocateur’s business to a buyer part-owned by Sports direct, which have attracted a great deal of scrutiny; just this past week another pre-pack sale has come in to the crosshairs, following Rutland Partners’ sale of Bernard Matthews turkey business to Ranjit Singh Boparan - a.k.a. “the chicken king” - back in September 2016 for £87.5 million. The House of Commons’ work and pensions select committee is said to be looking into the Bernard Matthews sale closely due to the effect that the pre-pack sale had on the company’s defined benefit pension, which following the company entering administration, triggered its entry into the Pension Protection Fund (PPF); the apparent concern is that the alternative takeover deal offered by Boparan Private Office (BPO), which was on the table at the same time, would have provided a potentially solvent solution under which the pension scheme and its deficit would have been taken on by BPO. However this solution, it is alleged, would not have been in the financial interest of the company’s former owners, Rutland Partners, as it would have meant it writing off substantive loans which had been made to the company.
But has Rutland Partners done anything wrong? The former owners have been quick to point out that the original takeover offer was found by its advisors, Deloitte, not to represent a viable solvent solution for the business. Moreover, the pre-pack sale was clearly to an independent third party, thereby taking the sale out of the remit of the Pre Pack Pool, the body set up in the wake of the Graham report to scrutinise pre-pack sales to connected parties. The question is therefore should Rutland Partners have accepted a deal that was not in its financial interests in order to preserve the benefits of pension scheme members? Ultimately, Rutland Partners runs the risk of the Pensions Regulator issuing a contribution notice against it, requiring it to make a contribution to the scheme or the PPF. A contribution notice can be issued where the Pensions Regulator is of the opinion that a person connected or associated with a defined benefit pension scheme is a party to an act or failure to act which detrimentally affects in a material way the likelihood of accrued scheme benefits being received. There are statutory defences and the Pensions Regulator must consider it reasonable to issue a contribution notice. Ultimately if the Pensions Regulator is to act, it must form the view that it was unreasonable of Rutland Partners not to accept BPO’s takeover offer even though it was not in its financial interest.
Considering the Bernard Matthews case, Gabrielle Holgate, head of pensions at Stevens & Bolton, commented that “This is another example of the tension between the funding of defined benefit pension schemes by struggling employers and the rights of pensioners to receive the pension benefits promised by their pension scheme, which is usually contingent on the ongoing solvency of the employer. The work and pensions committee recently published a green paper on defined benefit schemes which discusses these issues and seeks views from the industry (our article on the report is published here). It is clear that there is no easy answer. In this case the cost of compensating the Bernard Matthews pension scheme members is likely to fall to the PPF, although this will depend on the size of the scheme’s deficit. In any event the resulting pension provision will be less than that which would have been provided under the Bernard Mathews pension scheme if the company had not become insolvent.”
Commenting on the Bernard Matthews example, co-head of the restructuring and insolvency practice at Stevens & Bolton, Tim Carter, noted that “It would appear that the former owners of Bernard Matthews are being criticised for following the advice of their professional advisors in seeking a better outcome for employees through a pre-pack administration than would have been otherwise achieved on any other insolvency process – 1,800 jobs were saved as a result - the fact that the case has also attracted scrutiny with 140 jobs having been lost since is unfortunate but not an untypical casualty of seeking to rescue a distressed business.”