Vol 8 (2011) - Issue 5

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Silentnight: A Wake-up Call

The recent Silentnight failed company voluntary arrangement (CVA) and consequent pre-packaged administration sale of the business (pre-pack) to HIG has attracted considerable media attention because of the impact on the company’s pension scheme. Much of this appears to be misinformed, which perhaps reflects the complexity of insolvency and pensions law and practice, but more importantly I believe it reflects a misunderstanding of the commercial realities underlying employer insolvency.

For example, The Telegraph reported that the transaction is being investigated by the Pensions Regulator 'on concerns that HIG took advantage of apparent loopholes allowing buy-out funds to shed pension liabilities'. According to The Telegraph, 'too many HIG-style deals will bankrupt the PPF'. The FT also picked up on the transaction, reporting that the Pension Protection Fund (PPF) and Regulator 'are concerned that investors may have found a route around 'moral hazard' provisions in law which are aimed at blocking corporate restructurings that allow them to shed pension liabilities from otherwise profitable businesses'.

I will argue in this bulletin that there are no 'loopholes', that if the PPF is going to be bankrupted it will be due to economics, not the 'style' of the HIG deal and that if the Pensions Regulator is indeed arguing that the scheme has been prejudiced, the tools are available to redress matters.


The deal

In summary:

– HIG was the senior secured creditor of Silentnight, having earlier acquired the debt from Clydesdale Bank;

– Silentnight proposed a CVA, offering trade creditors 65p in the pound and the pension scheme trustees/PPF 6p in the pound and a 10% equity interest;

– the PPF/trustees rejected the proposals, presumably either because they judged that they would receive a better return in administration or for reasons of policy; and

– consequently the company filed for administration and the administrators immediately sold the business to HIG for a consideration that 'will generate between £8.6m and £12.0m for unsecured creditors after costs'.

The pension scheme has therefore now entered into PPF assessment and creditors will receive dividends from the estate according to statutory priorities. It is not yet certain what rate of dividend the ordinary unsecured creditors, including the PPF/trustees, will receive, but the Administrators estimate a rate of between 7.1p and 10.1p in the pound. This appears to represent a better cash return to the scheme than offered by the CVA, but further value may ultimately have been available through the 10% equity stake.



Observations

As sometimes happens in restructuring, the parties apparently couldn’t find common ground for a consensual solution and negotiations broke down. When that happens and the company is insolvent with no available fresh sources of capital, it is necessary for the directors or the secured creditor to take steps to initiate formal insolvency proceedings. Presumably, HIG declined to inject further capital and instead funded an acquisition of the business and assets out of administration, leaving the creditors behind. They may opt to compensate creditors who are judged to be critical suppliers, so some may do better overall than the pension scheme. The scheme can only rely on the dividend from the employer’s estate, unless there are grounds for it to recover more elsewhere.