Issued under section 89 of the Pensions Act 2004 in relation to the Bernard Matthews Ltd (BML) Pension Scheme.
Published: July 2020
Case summary
This report summarises our investigation into the circumstances leading to the BML pension scheme’s entry to the Pension Protection Fund after the company’s insolvency, and why we didn’t use our anti-avoidance powers.
Background
By March 2013 BML, a household name food products business specialising in turkey meat, was in severe financial difficulty. It was required by its bank to refinance a substantial proportion of its existing secured debt as the bank wanted to limit the risk it faced in recouping its lending. BML engaged professional advisers and asked them to carry out a marketing process to secure new funding and investment. This resulted in an offer of financing from Rutland Partners LLP (Rutland), a private equity fund.
In August 2013, Rutland provided £25 million of funding which entitled Rutland to 20% per year ‘payment-in-kind’ (ie accumulating non-cash) interest. Rutland’s financing was secured by a charge over assets which ranked behind the bank but ahead of the pension scheme. Up to this point, the pension scheme had held a second ranking charge behind the bank’s security. As part of the refinancing terms, Rutland also took a controlling stake in the parent company, Bernard Matthews Holdings Limited. This led to their being able to control the decisions taken at board level due to the percentage weighting that their vote would carry.
Rutland’s investment was considered to be high risk, with little or no assurance that they would get any return. The terms on which Rutland was willing to invest reflected the risk in the weak financial position of BML at the time. The BML board approved Rutland’s investment and the terms attached to it, aware that the alternative would have been the insolvency of the business. They would also have been aware that Rutland’s involvement and rights as secured creditor meant that the decisions taken from that point on would have factored in protecting Rutland’s investment - minimising their losses and maximising any possible return.
As well as approval for the transaction by the board of BML, the trustees of the company’s pension scheme had to give their agreement in view of the change to the scheme’s security. At no stage did Rutland itself assume any formal responsibility for the scheme, whose sole statutory employer remained BML.
We were not approached to give clearance for the transaction. Clearance is a voluntary process where, if approved, we agree not to use our anti-avoidance powers in relation to a transaction.
Efforts to turn BML around in the subsequent years were undermined by a decline in poultry prices in late 2015. In response, Rutland arranged for increased banking facilities of £10 million for BML, £5 million of which was guaranteed by Rutland, with the remainder being guaranteed by the Matthews family shareholders. However, the poor trading conditions continued and by early 2016 Rutland, assisted by professional advisers, decided to seek a buyer for the business while also considering restructuring options.
By July 2016, only two credible offers to purchase the Bernard Matthews group had been received. The higher offer was to purchase the share capital of BML which, if successful, would have meant that BML would continue to sponsor the pension scheme. This offer was from Boparan Private Office (BPO), an entity connected with Boparan Holdings Limited, which owns other food production businesses. This offer was sufficient to pay the bank with its first charge but would have involved Rutland writing off the majority of its original investment as well as the accrued payment in kind interest in its entirety. The other offer excluded all of the company’s liabilities, including the pension scheme, and would also have resulted in a material loss to Rutland.
Exercising its rights as secured creditor, Rutland rejected BPO’s offer and negotiations continued. Rutland advised it was considering its options, including carrying out its own recovery plan given that none of the offers it had received were acceptable. BPO subsequently made an offer of £87.5 million to acquire the business and assets of BML but not its debts, including the pension scheme liabilities. The BML board took the view, having taken professional advice, that a sale of the business via a pre-pack insolvency was the most appropriate option at the time, taking into account the interests of all of the group’s creditors. This meant that BML would enter administration and its business and assets would be immediately sold to BPO on pre-agreed terms.
BML entered administration on 20 September 2016 and, via the relevant court procedure, appointed administrators who sold the company’s business and assets to BPO on the same day. Rutland made a profit of £13.9 million on its investment, while the pension scheme received nothing under its third ranking charge and entered an assessment period with the PPF on BML’s insolvency.
In the weeks leading up to the pre-pack, we had been in contact with the chair of trustees of the pension scheme and with the PPF about the pension scheme’s position and available options as an insolvency event was looking increasingly likely. Following the pre-pack, we opened a formal investigation to determine whether use of our anti-avoidance powers would be appropriate.
Regulatory action
Our investigation focused on whether there were grounds to use our Contribution Notice powers, taking account of the actions of the relevant parties in:
- the lead up to Rutland’s initial investment in 2013
- the period when BML was under Rutland’s ownership between 2013 and 2016
- Rutland’s rejection of BPO’s initial offer and the pre-pack leading up to the insolvency
During our investigation we issued several statutory notices for information and reviewed several thousand documents. We also liaised with the pension scheme trustees and the PPF, which was undertaking a similar investigation.
When assessing whether there were grounds for pursuing a Contribution Notice we were looking to establish whether Rutland’s investment, the events leading up to it in 2013 and the events surrounding the pre-pack in 2016 were materially detrimental to the position of the pension scheme – and whether using our powers would be reasonable.
We did not seek to conduct a full Financial Support Direction investigation as our initial analysis suggested that the insufficiently resourced test could not be satisfied.
Rutland’s initial investment
We thoroughly investigated the events leading up to Rutland’s initial investment and the terms of their lending to assess whether these were materially detrimental to the position of the scheme.
Rutland’s initial lending replaced part of the existing secured bank lending, so although the terms of lending differed, this was not materially detrimental to the scheme’s creditor position at the time when it gave up its second ranking security.
While the payment in kind interest rate of 20% is high compared to conventional bank lending, the financing provided by Rutland was high-risk given BML’s financial position. 20% was in line with what was on offer in the private equity market at the time. While the pension scheme trustees were aware that the future accrual of the interest could be detrimental to the scheme if BML did not perform in line with the business plan, there appeared to be a high likelihood that BML would go insolvent in the absence of Rutland’s financing. As noted earlier, the banking lenders at the time were looking to exit their relationship with BML.
In the circumstances, the trustees decided that it was preferable to allow the company an opportunity to turn around its performance in the hope that the scheme’s members would ultimately receive their accrued benefits in full.
The terms of Rutland’s investment were approved by the board of Bernard Matthews Holdings Limited and the trustees of the pension scheme approved the security arrangements, both parties having taken independent professional advice.
Rutland had no links or obligation to the scheme before its investment in Bernard Matthews. It negotiated the terms of its investment on an arm’s length commercial basis and we have seen no evidence of bad faith or unreasonable behaviour by any party involved in the process.
Given that the initial investment was not materially detrimental, that Rutland’s terms were in line with what was on offer in the private equity market at the time and that they were negotiated and agreed to by an independent BML board on an arm’s length commercial basis, we do not consider that the tests for a Contribution Notice were met.
Rutland’s investment between 2013 and 2016
We reviewed the period between 2013 and 2016, again with a view to establishing whether there was any material detriment to the position of the scheme and whether it would be reasonable to use our powers.
Under Rutland’s control, efforts were made to restructure the company by reducing the business’ cost base, and BML’s losses before tax were successfully reduced from £18 million in 2013 to £3.7 million in 2015. However, this progress was derailed when the business was hit by an unforeseen decline in poultry prices in 2015. In response, Rutland arranged further financing for BML and thereby increased its own exposure by providing a guarantee for £5 million of the additional lending. Despite management’s efforts to restructure the business, it continued to incur significant losses.
The further decline in the business’ fortunes was not attributable to Rutland’s performance as an investor during this time, so it could not be said that their actions were materially detrimental to the position of the scheme.
The events leading up to the insolvency and the pre-pack administration
We also thoroughly investigated the events leading up to the insolvency and pre-pack administration.
In 2016 Rutland had two options: either radically restructure the business which would have involved substantial additional costs with an uncertain outcome, or seek a buyer. It developed both strategies simultaneously but chose the option to sell the business to BPO to crystallise a profit on its investment. Rutland’s power to reject any sale or restructuring came directly from its position as secured creditor with a second ranking charge over BML
We found no evidence to suggest that the sales process and the pre-pack were carried out inappropriately or that Rutland sought to unduly influence or control either process. Rutland sought to maximise the return on their investment, and they have done so in line with the terms agreed back in 2013 by the BML board.
Outcome
We have concluded that there are no reasonable grounds to use our Contribution Notice power in this case. Our view is that Rutland’s profit was a legitimate consequence of the terms of its high-risk investment in BML which had been negotiated and agreed on an arm’s length commercial basis with the board of BML and the scheme’s trustees. We have no evidence of unreasonable conduct on Rutland’s part at any stage of its association with BML and the scheme or in respect of the sales and insolvency processes.
Our approach
We will thoroughly investigate pre-pack insolvencies to establish whether the use of our powers can and should be used. Our investigation will consider all relevant factors, which includes looking at the likelihood of a business’ survival and what the alternative scenarios might look like, as well as the conduct of all those involved and any related transactions.
Timeline
- August 2013 – Rutland provides £25 million funding to BML
- 2013-15 – BML losses before tax reduce from £18 million to £3.7 million
- Late 2015 – poultry prices decline, BML extends banking facilities by £10 million
- Losses in the year to 30 June 2016 increase to £26 million
- 20 September 2016 – BML goes into administration and the business and assets are acquired by BPO