The Insolvency Service has stepped in to strengthen the position of defined benefit schemes in pre-pack administrations, but the new veto right is not universal, writes Anne-Marie Winton of Arc Pensions Law.
On October 8 2020, the service published the outcome of a review into the transparency of pre-packaged sales in administration — broadly where a distressed company sells its business to a connected or unconnected buyer after an often very accelerated sales process (sometimes starting and ending on a single day).
Following a pre-pack, if the company sponsored a DB scheme, its insolvency — as a result of going into administration — triggers the start of the Pension Protection Fund’s assessment period.
It is a helpful step in the right direction, from the members’ perspective, to give the trustees an effective and contemporaneous seat at the negotiating table in some circumstances
The new company trades on after the employer’s administration, hopefully going on to save jobs and rescue the business, but is now free from any DB pension liabilities.
Pre-packs sometimes take place between connected parties, such as the management team, family members, or even the existing owners of the distressed employer. For this reason, and due to their speed, they can be carried out with little external scrutiny.
This means that the voices of creditors (including trustees) can often be unheard until after the sale has taken place.
Reliance placed on regulators
The Pensions Regulator and the PPF will investigate pre-packs; TPR published section 89 reports on its investigations into the pre-packs of Bernard Matthews and House of Fraser over the summer, concluding in both cases that there were no grounds to use its moral hazard or anti-avoidance powers.
However, this means that a lot may rely on a subsequent, and successful, moral hazard investigation in terms of protecting members’ benefits. Would it not be better to give the trustees a seat at the negotiating table before the pre-pack sale goes ahead in order to determine then whether or not it is in members’ best interests?
To some extent, the Insolvency Services agrees. The new report builds upon the recently enacted Corporate Insolvency and Governance Act 2020, which introduced measures to help businesses survive the impact of the Covid-19 pandemic.
But it concludes that pre-pack sales to connected parties are a cause for concern, and may not always be in the best interests of creditors.
Accordingly, there is a need for further regulation to put in place a process of independent scrutiny. This would address the fear that the best price for the business, in all the circumstances, is not always being obtained.
A new law to permit this has been drafted, and is intended to come into force “when parliamentary time allows” before June 2021.
The regulations would mean that an administrator cannot sell a business via a pre-pack to a connected party within the first eight weeks of the administration starting without either the approval of its creditors, or an independent written opinion obtained by that connected buyer.
Veto will not always apply
This is an ‘either/or’ test, so it does not mean that trustees — often the largest unsecured creditor by far — will automatically have a power to veto or, indeed, allow the sale.
But it is a helpful step in the right direction, from the members’ perspective, to give the trustees an effective and contemporaneous seat at the negotiating table in some circumstances when the ongoing viability of a distressed employer is under threat.
This could give them the opportunity to secure valuable concessions to protect the scheme, whether in the short or long term.
Proposed RI bill would force trustees to consider members’ ‘best interests’
The leader of the Liberal Democrats supports a proposed responsible investment bill broadening the concept of fiduciary duty to encompass sustainability concerns and aim for a ‘world worth retiring into’.
The government recognises that further legislative change may still be needed, and there have been other insolvency-related changes that potentially affect the recovery to trustees on employer distress whose impact is yet to be determined.
For insolvencies starting on or after December 1 2020 — including those following a pre-pack sale — certain unpaid taxes due to HM Revenue & Customs will rank ahead of, and therefore reduce, the claims of unsecured creditors. This leapfrogging by HMRC is called Crown preference.
The outcome under the insolvency distribution waterfall could therefore be reduced for trustees of DB schemes.
Anne-Marie Winton is a partner at Arc Pensions Law
