TPR puts £25m anti-avoidance case to bed

Silentnight owner HIG Group, an American private equity firm, was accused by the regulator of deliberately forcing the original Silentnight Group into insolvency in order to buy its business out of administration while leaving its DB pension scheme behind.

Though several of TPR’s targets disputed the charge, HIG Group has agreed to pay £25m into the scheme, which recouped an extra £10m from insolvency proceedings. 

The case ran for a long time, beginning in 2011, with TPR issuing warning notices in 2014 and 2016, as well as contribution notices “against targets in the UK and overseas”, TPR’s regulatory intervention report explained.

The regulator successfully defended a judicial review application brought by HIG Group in 2016. 

The report explained how Silentnight, the largest bed manufacturer in the UK as of 2011, had in the 2000s “made a series of decisions that led to a substantial debt burden in the business”.

However, it noted that “that debt had been serviced and reduced by the end of 2010 — with its term loan having reduced from £26m in 2006 to £3.7m by that point”.

The group had taken no decision on whether to refinance the debt before it was sold in 2011 to HIG Group.

Meanwhile, the trustees of the pension scheme, which closed to future accrual in 2010 and had 1,200 members at the end of 2020, had agreed a recovery plan for the scheme’s ongoing deficit of £39.5m and its buyout deficit of £99.8m.

That plan was intended to last for 29 years, with contributions beginning low but increasing after 2018. TPR’s report noted that the trustee had agreed to such a long plan because it was believed it would assist the company in its refinancing endeavours.

The regulator alleged that when HIG acquired Silentnight, its intent was to do so without the DB scheme. It effectively forced the company into administration despite the fact that, in its own words, it knew Silentnight was “not a distressed business facing a burning platform”.

TPR first considered using its anti-avoidance powers after the pre-pack administration. It concluded after an investigation that HIG had bought the business and its assets undervalue, thereby reducing the sum paid to the scheme as a result of the insolvency “to the material detriment of member benefits”.

The regulator issued its two warning notices, and saw off an application for judicial review. The case was due to go before a hearing of the Determinations Panel until its targets made an offer to settle, which TPR accepted.

However, it noted that the sum offered was too little to eradicate the scheme’s deficit on a PPF basis, and the TPR expects it to fall into the lifeboat.

Nicola Parish, TPR’s executive director of frontline regulation, said: “It is our view that HIG brought about the unnecessary insolvency of the original Silentnight Group in order to buy its business out of a pre-pack administration without the pension scheme.

“We believe this is unacceptable and it was vital we acted, in part as a deterrent against this type of behaviour in the future.”

The regulator was prepared to hold settlement discussions in parallel to its enforcement action “to see if an appropriate outcome could be achieved without the need to formally use our powers or risk prolonged legal action”, she continued, adding that this “enabled us to avoid further costs and obtain certainty for scheme members”.

“This was a complex enforcement case, involving the successful defence of a judicial review application against well-resourced targets in the UK and overseas. We continued to pursue our case despite those challenges,” Parish said.