Case summary
(i) Facts and background
August 2013: Rutland Partners LLP ('Rutland') provided £25 million of funding into Bernard Matthews Limited ('BML') in return for 20% per year 'payment-in-kind' interest.
2016: As a result of trading conditions, Rutland decided to seek a buyer for BML while also considering restructuring options.
Rutlands and BML accepted an offer from Boparan Private Office ('BPO') of £87.5 million for BML's business and assets but not its debts (including the pension scheme liabilities). A sale via a pre-pack insolvency was considered the most appropriate option.
20 September 2016: BML entered administration and appointed administrators who sold the company's business and assets to BPO on the same day. Rutland made a £13.9 million profit on its investment, while the pension scheme received nothing and entered into an assessment period with the PPF.
TPR considered whether it would be appropriate to use their Contribution Notice powers in relation to:
- The actions involved in the lead up to Rutland's investment in 2013;
- The period when BML was under Rutland's ownership between 2013 and 2016; and
- Rutland's rejection of BPO's initial offer and the pre-pack leading up to the insolvency.
(ii) Summary of decision
TPR found that there were no grounds for using their Contribution Notice power:
- The actions leading up to Rutland's investment in 2013 did not meet the test for a Contribution Notice because the initial investment was not materially detrimental; Rutland's terms were in line with similar private equity offers at the time and they were negotiated and agreed on an arm's length commercial basis.
- The further decline in BML's performance between 2013 and 2016 did not meet the material detriment test because it was not attributable to Rutland's performance.
- There was no evidence to suggest that the rejection of BPO's initial offer nor the pre-pack insolvency were carried out inappropriately or that Rutland sought to influence or control the process.
(iii) Key legal principles
TPR can issue a Contribution Notice if it considers that an act or failure to act detrimentally affected, in a material way, the chance of accrued scheme benefits being received by or in respect of members (the 'material detriment' test). The contribution regime is now wider in scope.
If a Contribution Notice is issued, an employer, or a company or individual associated with or connected to the employer, can be ordered to make a payment into a pension scheme.
(iv) Practical considerations
TPR will thoroughly investigate pre-pack insolvencies to see whether their anti-avoidance powers can and should be used.
Investors have regard to all the circumstances when considering whether the terms of investments would give rise to the prospect of a contribution notice being issued.
Analysis
By 2013, BML faced financial difficulty. In August of that year, Rutland provided BML with £25 million of funding in return for 20% per year 'payment-in-kind' interest and a controlling stake in the parent company, Bernard Matthews Holdings Limited. This was secured by a charge over assets which ranked behind the bank but ahead of the pension scheme.
A decline in poultry prices in late 2015 hindered attempts to improve BML’s financial position. In response, Rutland arranged for increased banking facilities of £10 million, with £5 million guaranteed by themselves. However, these trading conditions continued to deteriorate, and by 2016 Rutland decided to both seek a buyer for the business and seek restructuring options.
After their initial acquisition offer was rejected, BPO offered £87.5 million to acquire the business and assets of Bernard Matthews but not its debts, including the pension scheme liabilities. The BML board agreed to a sale via pre-pack insolvency and on 20 September 2016 BML’s business and assets were sold to BPO via the relevant administration court procedure. Rutland received £13.9 million from its investment. The pension scheme did not make any recovery under its third ranking charge and entered an assessment period with the PPF on BML’s insolvency.
TPR subsequently considered whether to use their Contribution Notice powers. In doing so, they examined whether any of the events, from Rutland's initial investment to the pre-pack insolvency sale in 2016, were materially detrimental to the position of the pension scheme and whether the use of their powers would be reasonable.
Rutland's initial investment
TPR did not consider that the initial investment was materially detrimental to the scheme's creditor position as Rutland's lending replaced part of the existing secured bank lending. Further, although the payment-in-kind interest of 20% was relatively high in comparison to bank lending, it was in viewed to be in line with general private equity investments at the time and it was found that both the board of Bernard Matthews Holdings Limited and trustees of the pension scheme had approved the security arrangements after taking independent professional advice. All this considered, they did not consider that Rutland's initial investment met the test for a Contribution Notice.
Rutland's investment between 2013 and 2016
TPR found that under Rutland's control BML’s losses before tax were successfully reduced from £18 million in 2013 to £3.7 million in 2015. TPR noted that one factor facing BMLK was the unforeseen decline in poultry prices in 2015. As this decline was not a consequence of Rutland's performance, TPR concluded that the test for a Contribution Notice had not been met.
Insolvency and the pre-pack administration
TPR held that there was no evidence to suggest that the sale of BML and the pre-pack insolvency were carried out inappropriately, or that Rutland tried to unduly control either process. TPR concluded that Rutland sought to maximise the return on their investment and that this was carried out in accordance with the terms agreed back in 2013 by the board of BML.
Overall, TPR held that there were no grounds for the use of their Contribution Notice powers and that Rutland's £13.9 million profit was merely a legitimate consequence of the terms of its high-risk investment with BML.
Key words
Contribution notice