On 8 October 2020, the Insolvency 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 defined benefits scheme, its insolvency as the employer (as a result of going into administration) triggers the start of PPF assessment period. The new company trades on after the employer’s administration, hopefully going on to save jobs and rescue the business, but now free from any DB pensions liabilities.

This report follows and builds upon the new legislation in the recently enacted Corporate Insolvency and Governance Act 2020, which introduced measures to help businesses survive the impact of Covid.

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 be often be unheard until after the sale has taken place. The Pensions Regulator and PPF will investigate pre-packs (and TPR published section 89 reports on the outcomes of 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 / 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. Wouldn’t it 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.

What the Insolvency Service has concluded is the pre-pack sale 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 (ie to address the fear that the best price for the business, in all the circumstances, is not always being obtained). New law has been drafted (intended to come into force ‘when Parliamentary time allows’ before June 2021) that would mean that an administrator cannot sell a business via a pre-pack to a connected party within the first 8 weeks of the administration starting without either” (a) the approval of its creditors; or (b) an independent written opinion obtained by that connected buyer. Now 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.

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 1 December 2020 (and this will therefore include those following on a pre-pack sale), certain unpaid taxes due to HMRC will rank ahead of, and therefore reduce the claims of unsecured creditors. This leapfrogging by HMRC is called the Crown Preference. The outcome under the insolvency distribution waterfall could therefore by reduced for trustees of defined benefits schemes.

Read Anne-Marie’s article in Pensions Expert.