BHS Ltd, Re

This application relates to BHS Limited (In Administration) (“the Company”). BHS stands for British Home Stores. The Company ran the famous national retailing business in the UK whose financial difficulties have been well publicised. The business is still currently trading in administration. By the application the original administrators, Philip Duffy and Benjamin Wiles (of Duff & Phelps Ltd), apply to the court for the appointment of two further concurrent administrators, Geoffrey Rowley and Anthony Wright (of FRP Advisory LLP). The essential objective is that once the concurrent administrators are appointed, the original administrators will remain in office so as to continue to trade the business albeit with a view concluding trading activities and assets realisations in order to obtain the best return for creditors while the concurrent administrators commence concurrent investigatory work into the Company’s affairs. The application has the overwhelming support of the creditors.

The background to the application is contained in the witness statement of Philip Duffy. I will refer to Philip Duffy and Benjamin Wiles as the original administrators and Geoffrey Rowley and Anthony Wright as the concurrent administrators.

The first exhibit to Mr Duffy’s witness statement consists of the Company’s accounts for the year ended 30^th August 2014. As the original administrators’ Report to Creditors and Statement of Proposals (“the Statement of Proposals”) explained, in these 2014 accounts the Company reported a loss of £69 million.

At that stage BHS Group of which the Company was a part was owned by the Arcadia group. The Statement of Proposals explains in section 3 that in early 2015 the BHS Group suffered further financial difficulties in that trade credit insurers cut or withdrew cover for a large number of BHS Group’s major suppliers. On 11^th March 2015 BHS Group Limited, the Company’s sole shareholder was sold by Taveta Investments (No 2) Limited (the owner of Arcadia group) to Retail Acquisitions Limited (“RAL”). Within the terms of the sale Arcadia Group Limited (AGL) wrote off £215 million of inter-company debt and took a floating charge in respect of the remaining £40 million loan to BHS Group Limited.

The Company continued to trade. The details of what took place in the rest of 2015 and early 2016 are set out in the Statement of Proposals. Mr Duffy explains that the trading at Christmas 2015 was poor and sales were £25 million below the sales for the same period in 2014. A Company Voluntary Arrangement was proposed by the Company on 4^th March 2016 and was approved by creditors on 23^rd March 2016.

On 18^th April 2016 Mr Duffy was asked by Sir Philip Green of AGL to attend a meeting with the directors of the Company. Although Sir Philip Green had been a director of the company, that was no longer the case. The 2014 accounts list the directors at that time (2014) as S Boyce, P Budge, I Grabiner and C Harris, in addition to Sir Philip Green. The company secretary was A Goldman.

On 19^th April 2016 Mr Duffy and Mr Wiles attended a meeting with the directors of the Company at which they indicated that the financing that was anticipated had not materialised and so asked Mr Duffy and Mr Wiles to be appointed as administrators.

On 25 April 2016, the directors appointed the original administrators as joint administrators of the company. Following their appointment the original administrators continued to trade the business of the Company with a view to achieving a better result for the Company’s creditors as a whole than would be likely if the Company were wound up (without first being in administration). They have tried to achieve a sale of the business and assets of the Company as a whole on a going concern basis, but this has not proved possible. The original administrators commenced investigations into the acquisition of the BHS group by Retail Acquisitions Ltd and the conduct of the directors in the period since the acquisition by RAL.

On 7 June 2016, the administrators provided the creditors with a copy of their proposals for the conduct of the administration.

The Pension Protection Fund (PPF) is the largest unsecured creditor of the Company with an estimated claim of £571 million. The PPF proposed certain modifications to the original administrators’ proposals. The proposed modifications included the requirement for the original administrators to apply to the court for the appointment of the concurrent administrators in order to commence concurrent investigatory work into the Company’s affairs, with the original administrators remaining in office in to conclude trading activities and assets realisations ahead of a Creditors’ Voluntary Liquidation.

The objective of the PPF is that this would ensure that there was no delay in the commencement of the investigations by alternative office holders into possible claims by the Company whilst at the same time enabling the Company to conclude its trading in administration.

On 23 June 2016, an initial creditors’ meeting was held to consider the original administrators’ proposals for achieving the purpose of administration. The proposals were approved with the modifications proposed by the PPF by 98.8% of the creditors present and voting at the meeting.

In their letter to the court dated 5^th July 2016 the PPF explains:

“Philip Duffy and Benjamin Wiles of Duff & Phelps (the “Administrators”) were appointed as joint administrators of the Company on 25^th April 2016. We understand that the Administrators were appointed by the directors of the Company with the consent of the former owner of the Company, which also has security over the assets of the Company.

One aspect of the administration will be to investigate the affairs of the Company, and the conduct of its former and current directors, prior to the administration. In circumstances where such investigations are required and the directors, who may be the subject of those investigations, appointed the Administrators, the PPF’s preference is that alternative liquidators be appointed to carry out those investigations.”

The PFF then explains its desire for the investigations to begin without delay and that it supports the appointment of the concurrent administrators for this purpose.

The original administrators and the concurrent administrators agreed the terms of a protocol to delineate their respective responsibilities for the conduct of the administration. Counsel submitted that this method had been adopted in a number of other large insolvencies in order to set out the respective roles and responsibilities of the officeholders and to eliminate any actual or perceived conflicts of interest which may arise in the conduct of the insolvency and referred to the judgment of Rose J in Re Angel Group Ltd [2015] EWHC 3624 (Ch) at paragraphs 26 to 32.

Broadly the protocol provides that the concurrent administrators are to be responsible for all investigations and the conduct of any consequential claims and the original administrators are to be responsible for all other functions in the conduct of the administration. The only exception to this assignment of roles relates to the investigatory work already conducted by the original administrators in relation to potential claims against RAL and the current directors of the company. For those claims the protocol provides that the concurrent administrators will review the work conducted by the original administrators and agree a proposed strategy for continuing such investigations with the original administrators. The protocol also provides that the original administrators and concurrent administrators will cooperate fully in the exercise of their respective functions and will meet at no less than 14 day intervals to discuss and update each other on the exercise of their respective functions.

Notice of the application has been given to Arcadia as the holder of a qualifying floating charge over the Company’s assets. It is anticipated by the original administrators that there will be sufficient realisations from the administration to repay Arcadia in full. Notice has also been given to the directors of the company, who appointed the original administrators and to the FCA, as the company is a regulated entity. There is no opposition to the relief sought by the application.

The relevant legislation is in Sch B1 of the Insolvency Act 1986. The relevant provisions are as follows:

Para 103(1) Sch B1 confers the jurisdiction to appoint concurrent administrators where a company is “in administration”. Paras 111 and 1(2)(a) Sch B1 provide that “a company is “in administration” while the appointment of an administrator of the company has effect”. This requirement is satisfied by the appointment of the original administrators.

The original administrators were appointed by the directors pursuant to para 22(2) Sch B1. Accordingly, para 103(5) Sch B1 is the provision governing the appointment of concurrent administrators. It provides that such an appointment may be made by the Court on the application of the persons acting as the administrators of the company. The application is made by the original administrators and so this requirement is satisfied.

Paragraph 103(6) Sch B1 provides that an appointment of concurrent administrators may only be made with the consent of the persons acting as administrators of the company. The original administrators have consented to the appointment of the concurrent administrators and so this provision is satisfied.

Para 68(1)(a) Sch B1 requires the Administrators to conduct the administration in accordance with the terms of the proposals approved by the creditors. That has been done. The proposals of the original administrators, as approved by the creditors, require the original administrators to make the application for the appointment of the concurrent administrators.

Para 100(2) Sch B1 provides that the appointment of a number of persons as administrator must specify the functions which are to be exercised by the persons acting jointly and the functions which are to be exercised by any and all persons appointed. The proposal before the court is that the functions of the concurrent administrators are to be exercised in the manner set out in the protocol. The order sought on this application includes a term at paragraph 2 as follows:

“2.

The functions of each of [Geoffrey Rowley and Anthony Wright] whilst in office as Concurrent Administrators be limited, pursuant to paragraph 100(2) of Schedule B1 to the Act, in the manner set out in the protocol at Appendix 1 hereto, and [Geoffrey Rowley and Anthony Wright] shall have no other functions as Concurrent Administrators.”

As I mentioned above, Re Angel Group is a case in which a similar kind of protocol governing the respective functions of liquidators was sanctioned by the court. In that case the basis on which they were to be appointed and were going to act was somewhat different but nothing turns on that. Also the circumstances were rather different in that the two sets of liquidators were what Hoffmann J referred to as “conflict liquidators” (see Re Angel Group paragraph 28). Nevertheless, the concept is the same.

In my judgment the court has the jurisdiction to approve an appointment of the kind envisaged in this case including an order making the protocol a formal part of the appointment.

The applicants submitted that this is an appropriate case for the Court to exercise its jurisdiction to appoint concurrent administrators. They relied on the following major points:

Subject to two matters below, I accept these submissions. The reason the appointment is in the best interests of the creditors of the Company is because it will enable an investigation into possible claims it may be entitled to bring against former directors of the Company in the most timely and efficient manner. The same goes for possible claims against current directors. Real progress will be able to be made in these investigations before the Company enters into liquidation at which time the concurrent administrators will be appointed as joint liquidators. This approach also has the significant benefit that it will allow a delay on the entry of the Company into liquidation so that the Company is able to conclude its trading in the administration.

The two further matters are the terms of protocol and cost.

I have summarised the main provisions of the protocol above. It sets out a clear delineation of the functions of the original administrators and the concurrent administrators.

There are some differences between the memorandum of understanding (MOU) as it was in Re Angel Group and the protocol in this case but they reflect the different circumstances in each case. Unlike the MOU in Re Angel Group, (paragraph 31(c)) the protocol expressly provides that the two sets of administrators will have unfettered access to all the documents generated during the course of the administration by either set of administrators in their capacity as agents for the Company.

The protocol also includes a provision to allow for its terms to be amended by agreement. The effect of paragraph 2 of the order is therefore potentially open ended since it defines functions of the concurrent administrators by reference to terms which can be amended. I discussed this with counsel. It clearly makes good practical sense that the administrators as a whole can agree variations to the protocol and on the footing that they are minor in nature there is no need to return to court. On the other hand, anything which amounted to a significant change to the basis on which the court has appointed the concurrent administrators or any other significant change ought to be brought back to court. I am satisfied that I can leave it to the good sense and judgment of the administrators themselves to determine whether the court’s sanction ought to be sought.

As regards cost, the original administrators' and the concurrent administrators' costs and expenses will be an expense in the administration. Mr Duffy’s witness statement did not address the extent to which appointing concurrent administrators would be likely to increase the overall costs of the administrators in the administration. The Fee Estimate in the Statement of Proposals was about £3.5 million (paragraph 13.1.7 and appendices 5 and 7). On instructions Mr Allison informed me that since this estimate included investigations as a whole and not only the investigations which the original administrators have so far conducted, it was not anticipated that there would be a significant increase in the overall cost of the administrators even though there are to be both the original administrators and the concurrent administrators. Accordingly I am satisfied that this appointment will not materially add to the costs already estimated in the administration.

For these reasons I will approve the order appointing concurrent administrators of BHS Limited.