BHS Group Ltd v Retail Acquisitions Ltd

This is a petition for the winding up of Retail Acquisitions Ltd (“RAL”) presented to the court on 7 September 2016. The petition was presented by BHS Group Limited (the “Company” or I shall refer to the individual company within the Group) acting by its administrators Philip Duffy and Benjamin Wiles of Duff and Phelps Ltd who were appointed by the directors of the Company on 25 April 2016. The petition as presented was based on an unsatisfied demand for the sum of £5,981,871.65 arising from a loan advanced by the Company in December 2015 (the “Loan”). The joint administrators claimed that RAL was unable to pay its debts as they fell due, pursuant to sections 122(1)(f) and 123 (1)(e) of the Insolvency Act 1986. The petition was amended by an order of the court dated 23 February 2017 to include a claim that RAL is balance sheet insolvent pursuant to section 123(2) of the Insolvency Act 1986.

Mr Duffy has provided two witness statements in support of the petition. He explains RAL was incorporated on 20 November 2014 as a special purpose vehicle to acquire the shares in the Company. It acquired the shares on 11 March 2015 for £1. The sole director of RAL is Dominic Chappell. He also controlled Swiss Rock Ltd which entered liquidation on 1 September 2016. The accounts of RAL dated 31 October 2015 disclose that Swiss Rock owed RAL £315,000 but due to the liquidation it will only be entitled to a dividend.

On incorporation RAL had no assets. It incurred liabilities to purchase and fund the Company. The liabilities came from two undisputed sources. The first was the Loan from the Company for £6,177,000. The second a loan from Arcadia Group Limited of £3.5m. The evidence of Mr Duffy is that shortly after the Company was acquired by RAL, there was a transfer of the money from the Company to RAL to enable it to pay various fees and other liabilities said to have been incurred by RAL in the acquisition of the Company, which included paying £2.8 million to its directors or commercial parties controlled by those directors. The transfer of money was recorded on an intercompany account between RAL and the Company which gave rise to a substantial debt due from RAL. Part of this debt became the Loan which is dated on its face December 2015, but all the parties agree it was executed on 3 March 2016. This was the day before BHS Limited (the main trading company within the BHS Group) sent out proposals to its creditors for a company voluntary arrangement. In his witness statement, Dominic Chappell qualifies the contention that RAL had no other sources of income and identifies the existence of the Management Services Agreement (“MSA”). However, the MSA did not come into existence until after the acquisition of the Company. I will turn to the detail of the MSA below.

Mr Parfitt for RAL submits that although the £100,000 instalment became due under the Loan on 31 August 2016 it has been paid by way of a set-off of liabilities due under the MSA. Ms den Beston, for the joint administrators, argues that the Loan prohibits set-off and there has been no variation of the Loan agreement. Mr Parfitt submits, that no winding up order should be made as there is a bona fide dispute on substantial grounds as to whether the set-off can be applied. Mr Parfitt further submits that when undertaking the exercise of valuing the assets of RAL at their present value and determining whether the amount of its liabilities (including contingent and prospective liabilities) is greater, the court should find that the balance sheet is positive and no winding up order should be made. Ms den Beston argues that such an analysis will result in a finding that RAL is insolvent on a balance sheet basis.

The MSA is expressed to be between “Those Companies listed in Schedule 2….(the “Target Group”). The schedule lists BHS Group Limited; BHS Limited; Davenbush Limited; BHS Properties Limited; Lowland Homes Limited; BHS Services Limited; Carmen Properties Limited and BHS (Jersey) Limited. BHS Limited and BHS (Jersey) Limited are now in liquidation, the rest (save for Carmen Properties Limited) are in administration. The recitals state that RAL acquired direct and indirect control of the Target Group on 11 March 2015, and following that acquisition agreed to provide certain management services to the Target Group. RAL “has continued to provide such services and the parties have agreed to amend and restate this Agreement having taken third-party advice and reached agreement in relation to the agreed fees (which was the subject of an agreement in or about July 2015) ….”.

Clause 2 of the Agreement sets out the provision of services, clause 3 additional services, including the provision of fundraising services, and clause 4 the fees. The fees provision provides that in consideration for the services or for additional services RAL shall prepare and deliver an invoice to the relevant Target Group member who was the recipient of such services for the Agreed Fees or, where relevant, the additional services. It continues (where relevant):

Clause 5 concerns payments and clause 6 deals with termination. It provides:

Clauses 6.2 permits the parties to terminate the agreement on six months notice and 6.3:

Clause 7 concerns confidentiality, clause 8 liability for breach of contract, tort or statutory duty, and there is an entire agreement, governing law and force majeure clause. Clause 14 provides:

The Loan instrument (which is in the form of a letter but signed by all the relevant parties) states:

The Loan sum is stated as being repayable in full on 31 December 2020. In the period between the date of the letter and 31 December 2020 £2 million was payable in 20 equal instalments on quarter days. By clause 2 of the loan instrument the whole sum became due if there was a failure to pay any sum, clause 4 provided for a default interest rate. By clause 7:

The loan instrument expresses the Loan to be unsecured, clause 10 restricts assignments and clause 14 provides that there should be no modification or variation unless it is in writing and signed by and on behalf of the parties, and:

The instrument (letter) includes clauses concerning remedies, waiver, applicable law, and a jurisdiction clause.

As foreshadowed, the Company petitioned to wind up RAL on the basis that it did not meet the quarterly repayment on 31 August 2016 of £100,000 due under the Loan. According to figures produced by Mr Ring (then a partner in the firm of Lawrence Stephens acting for RAL) £147.76 was owed to RAL by the Company after 31 May 2016. The consequence of the failure to meet the quarterly repayment was to accelerate the sums, so that the balance of £5,977,000 fell due.

The parties agree that when construing the Loan instrument having regard to what the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties, in the situation in which they were at the time, RAL is not permitted to set-off any sums against the sums falling due. They also agree that on a proper construction the Loan instrument provides for there to be no variation without agreement of the parties and such agreement must be reduced to writing. Further there is no argument as to the meaning of the waiver provision which operates to preserve all the rights under the instrument to the date of a valid modification or variation. Mr Parfitt submits that the terms of the set off clause contained in the Loan instrument should be “ignored”. He argues that the evidence does not reflect the operation of the no set-off clause within the Loan instrument. He refers the court to the evidence of Mr Treacy who states that there was a netting off at all times between the quarterly payments due under the Loan and sums due from the Company to RAL pursuant to the MSA. He argues that the practice was so extensive that the court should treat the no set-off clause in the Loan instrument as of no effect.

Mr Treacy was the Chief Financial Officer of RAL from 2 November 2015 to 24 May 2016 and opposes the winding up petition. He says that prior to his appointment there was no clarity in relation to the financial affairs of RAL. After his appointment he set about a reconciliation of the intercompany position and “throughout the period March 2015 to March 2016 payments made by the parties were set-off against the intercompany debt". His evidence is that when the Loan instrument was drafted by solicitors no instructions were given to include an anti set-off provision. Due to the fact that monies would flow both ways (in one document this is described as “flowback”, but it means no more than set-off); Mr Treacy says it was “envisaged” that the sums would be capable of set-off, like the working of the intercompany account:

The budgets (including cash-flow forecasts prepared by RAL) exhibited do disclose an intention to set off on an inter-company account basis. In an email dated 3 March 2016 Mr Treacy wrote to BHS head of treasury attaching a schedule of management service invoices and said: “The cash flow forecast should include loan repayments of £100K per quarter – March, June, September, December." The day before he had written to the board of directors of the Company in respect of certain invoices and explained that they would be “submitted and payments due thereunder, exclusive of VAT, will be either paid by the Target Group and then repaid (as to 100% by RAL to Target Group members pursuant to outstanding loans from Target Group to RAL) or by way of set-off in relation thereto.” The evidence of Mr Treacy is that there had been discussions on several occasions in the week commencing 25 April 2016 (when theCcompany entered administration), and that RAL would continue to provide services notwithstanding the administration of the Company. His understanding is that as at May 2016 all the quarterly payments had been set-off and therefore no sums were owing to the Company in respect of the Loan. Mr Duffy for the administrators says no services were provided to the Company after it entered administration.

There is no evidence (other than the “envisaged” right of set off) that there had been a mutual mistake capable of raising an argument of rectification. No argument for rectification has been advanced, but even if there was such evidence, there would be difficulties in pursuing rectification after the Company entered administration. The Loan instrument was professionally drawn and signed by the parties. No argument has been advanced on the basis that an estoppel by convention or representation arose as a result of the pre-administration dealings.

The method by which RAL may have been relieved from the effect of the set-off provision was to seek a variation before the Company entered administration. There is no evidence of a variation and no document has been produced showing compliance with clause 8 of the instrument. In my judgment, the Loan agreement represents, from an objective stand point, the intentions of the parties. I am not aware of any legal principle (and have not been taken to any such principle) that permits a breach or anticipated breach of contract simpliciter, to alter the meaning or change the terms of a contract. The Loan instrument has not been set aside for fraud, mistake, misrepresentation, undue influence or duress. I find that the contractual provisions, entered into by the parties, are binding and whatever the position was prior to March 2016 the August instalment was due without set off.

Mr Parfitt submits that if he is wrong on his submission that the Court can ignore the anti set-off clause contained in the Loan instrument there exists a genuine and serous cross-claim in respect of the MSA which exceeds the amount of the instalments due: R&S Fire and Security Services Limited v Fire Defence Plc [2013] EWHC 4222 (Ch). As in R&S it is common ground that, if a debt on which a winding-up petition is based is genuinely disputed on substantial grounds, the petition will generally be dismissed or struck out. A petition can also be struck out if the company has a genuine and serious cross-claim of an amount in excess of such (if any) of the petition debt as is otherwise undisputed. Mr Parfitt cites Re Bayoil SA [1999] 1 All ER 374. In R&S the Court found that the petition debt was properly due but, there was sufficient evidence to support a cross-claim which gave rise to a substantial dispute, and as a result the petition was dismissed.

Unlike the Court in R&S I do not find that there is a cross-claim that can give rise to a substantial dispute. The terms of the Loan instrument provide that the obligations of the parties are non-transferable and non-assignable. The MSA provides that the fees shall be calculated in accordance with schedule 3 and invoiced to the relevant Target Group member. The obligations of the relevant Target Group member are set out in clause 4.3 “upon receipt of a relevant invoice under clause 4.1 each recipient Target Group member shall be responsible for paying its relevant invoice. Should a different Target Group member pay an invoice or invoices on behalf of another recipient Target Group member, a relevant intercompany balance shall arise between such members.”

It has not been seriously argued that the sums due under the MSA should not be invoiced to any other company within the “Target Group” other than the one that received the relevant services. The paying party was intended to be the party receiving the invoice. The invoices relied upon by RAL were sent to and received by a Target Group member known as Lowland Homes Limited (“Lowland Homes”). I infer that the parties acted in accordance with their obligations and rights, and as a result of the invoices being sent to Lowland Homes, no relevant services were provided to the Company and/or that no sums were due from the Company but were due from Lowland Homes.

The general rule is that mutuality is required. Derham on the Laws of Set Off explains:

The claims are different (loan and services rendered arising under different instruments) and there is no mutuality. The lack of mutuality does not arise from the fact that the claims are generated from different contractual agreements and obligations but because the parties are different. It has not been argued that the Loan instrument is capable of rendering (using the example above) C (here the Company) liable for B’s (here Lowland Homes) debt to A (here RAL). The instrument expressly makes the recipient of the relevant invoice the liable party. There was probably a reason why RAL and the Company agreed to structure their arrangements in this way.

The evidence of Mr Duffy is revealing:

I conclude from this unchallenged evidence that the Company was not intended to be indebted to RAL for any services as it would breach the Grovepoint credit facility. Mr Chappell’s evidence on the issue is that the structure was “artificial”. Whether he is right or not, this is the structure that appears to have been created for deliberate reasons. Lowland Limited is the liable party and not the petitioner; there can be no set-off.

In Bucci v Carman (Liquidator of Casa Estates (UK) Limited) [2014] EWCA 383 the Court of Appeal heard a second appeal concerning an undervalue transaction. The leading judgment was provided by Lewison L.J. I quote the useful passage which summarises the test under consideration:

Applying these principles RAL has no present income stream from which to pay the debt due to the Company. The financial position of RAL cannot be described as suffering from a momentary inability to pay as the result of temporary illiquidity. It cannot pay the petition debt and there is no working capital available to meet other quarterly payments due after 31 August 2016. To use the words of the higher courts there is an “endemic shortage of working capital”. I find that RAL is cash-flow insolvent as it is unable to pay its debts as they fall due. One consequence of this finding is that a debt of £3.5m in favour of Arcadia Limited, triggered as a result of the presentation of the petition, is extant.

Having found that RAL is cash flow insolvent it is not strictly necessary to make a finding that the assets of RAL are less than its liabilities (including contingent and prospective liabilities). In his evidence Mr Treacy takes the view that RAL is balance sheet solvent as it has the following assets (I set them out as expressed in his first witness statement, although they have changed since that time):

An investment in Todex (a US listed subsidiary);

A secured loan of £1.5m; and

Proceeds of sale from Marylebone House due from Sir Philip Green/Taveta Investments Limited (“Taveta”).

He says:

Three balance sheets have been produced. The first is dated as at 31 October 2015. That balance sheet showed a positive balance of £583,186. The assets listed were a property loan of £1.5m, a loan to Swiss Rock (now in liquidation) of £315,000, cash in the bank of £241,349 and sums held in a “VAT Control Account”. This is usually an accounting method used to reflect the net balance due from, or payable to the Revenue. The liabilities included a loan from BHS of £400,000, amounts owed to BHS (current account) of £2,345,564 and a director’s loan of £10,000. Long term liabilities included the Loan and a sum said to be owed to Tina Green of £3,500,000. I assume this later debt is the sum owed to Arcadia Limited.

After the presentation of the petition a new balance sheet was produced dated 31 January 2017. It looked quite different from the 31 October 2015 balance sheet. The assets include an investment in Chaplake Investments SA (“Chaplake”), sums due from the Company and an amount due from Taveta. Mr Parfitt submits that the vast number of liabilities are non-current liabilities owed to the Company pursuant to the Loan and to Arcadia (£9.2m). As a result of my finding above these sums are current liabilities. In respect of the investments Mr Parfitt says that the investments in Chaplake and Taveta amount to £10.1m and that the value of these assets is based on a net present value.

The Taveta claim arises from an agreement with another company within the control of Sir Philip Green. The agreement (in basic terms) between the parties is said to be (by Mr Chappell) that RAL would be paid part of the profits arising from a sale of a property known as Marylebone House. Newly admitted evidence from Mr Chappell gives the Taveta claim a net present value of £5.525m. The Chaplake asset is a 43.24% stake in a Portuguese development company that has land to develop. Mr Chappell exchanged the secured debt of £1.5m (set out in the October 2015 balance sheet) for the interest in Chaplake. The evidence is that the £1.5m secured debt was secured against his parents’ home, and his father held the Portuguese development company interest. The net present value of the Chaplake investment, according to Mr Chappell, is £5.083m.

The recently admitted evidence includes a third balance sheet dated 31 March 2017. The Chaplake investment and Taveta claim are said to have the same value as entered on the January 2017 balance sheet. Amounts due from the Company are said to be £1,824,221. The notes to the balance sheet form an important part of RAL’s argument that its assets are greater than its liabilities, as the notes set out to justify, in particular, the values attributed to the Chaplake investment and Taveta claim. I shall deal with these below.

Section 123(2) of the Insolvency Act 1986 provides that:

I have already set out Lewison L.J.’s summary of the Supreme Court’s decision in BNY Corporate Trustee Services Limited above. Those principles and that summary are applicable when considering the value of the assets of RAL. A useful analysis of the approach taken to the section is found in the same case but at first instance. The Chancellor explained in BNY Corporate Trustee Services Limited v Eurosail UK [2011] 1 WLR 1200 at 1212:

The higher courts did not find fault with the Chancellors’ reasoning or analysis. In respect of the assets of RAL, the first question for the court is whether the purported assets are present assets, and if so their value. In Rococo Developments Limited [2017] Ch 1, the Court of Appeal found that the asset in question was not known at the relevant time, and therefore not a present asset.

The query raised by the Chancellor as to whether the assets in question are to be assessed on a going concern or break-up basis is relevant to the claim against the Company for £1,824,221. RAL claims the whole sum arising from the MSA on the basis of set-off. I have found that RAL is not entitled to set-off sums claimed under the MSA against the Loan. There is no asset. If set-off in the matter can be categorised as a present asset, its value is speculative at best. The Company is insolvent, not trading and in administration. The value of the claim is further reduced by the contention by the joint administrators that RAL has provided no services. Mr Duffy says “There can be no basis upon which RAL can purport to levy charges against the Company for services that have not been provided either to it or at all”. This further challenges whether, or not the claimed set-off is an asset at all. It is not possible to determine the dispute at this hearing, nor do I need to. Taking account of these difficulties it would be illogical to attribute the full value entered in the 2017 balance sheets. If I am wrong about my finding that the claimed set off is not an asset, then due to the dispute of fact (no work done), and the administration of the Company and other BHS companies (and liquidation in respect of BHS (Jersey)), any ascribed value is hope value.

In Eurosail the Supreme Court explained that the Court is required to make a judgment as to whether balance sheet insolvency has been established, and that judgment is to be undertaken having regard to the available evidence and circumstances of the case. The value attributed to the asset by RAL has been successfully challenged by the Company; I find the value given in the draft balance sheet to be unsustainable. Having regard to the available evidence I find this asset has no value for the reasons I have given.

The note to the March 2017 accounts explains the basis of the Taveta investment claim in the following terms:

The professional advice mentioned in the notes to the accounts comes in the form of a letter addressed to the board of directors of RAL from solicitors, Bark & Co dated 27 April 2017. That letter reveals that there was a discussion between Mr Chappell and Giles Bark – Jones following which he was content to state that he is “prepared” to enter into a conditional fee arrangement with RAL to pursue the claim.

As Ms den Beston argues, it is not clear what instructions were given to Bark & Co. I have seen no other advice. On the other hand, I have seen a letter from Linklaters acting for Taveta and a detailed letter from Linklaters acting for Arcadia Group Limited concerning the claim. Insofar as it is possible to form a view of the competing arguments, the detailed reference to the purchase documentation entered into between RAL and the Company provides a firmer platform than the letter provided by Bark & Co. I remind myself that it is incumbent on the Court to place a value on present assets. Where there is a dispute the evidence has to be weighed and the Court has to do the best it can. I make clear that I make no conclusions as to viability of the claim but the following reasoning taken from the Linklater letters is persuasive (when put against the reasoning (if any) provided by RAL) for the purposes of valuing this asset:

Pausing there, it is not in dispute that there was a failure to inject £10 million of capital but the sale and purchase agreement went ahead in any event. The letter continues:

Reference is then made to (i) the handwritten note not being signed (ii) Marylebone House not forming part of the SPA and (iii) the existence of an entire agreement clause in the SPA.

I conclude that the claim which is treated as a present asset in the balance sheet is disputed on serious and substantial grounds and whose success must depend on an uncertain future event on evidence that is unsatisfactory. In his witness statement, Mr Duffy points to how Mr Chappell, Mr Bourne, Mr Treacy and Mr Tasker of RAL dealt with the issue when questioned by Parliament’s select committee. They each accepted that following the sale of BHS to RAL money was paid to RAL. Mr Chappell says that RAL received £6.5m; Mr Bourne says the sum provided was £8.5m; Mr Treacy said that after the sale to RAL £10m was received from Arcadia; and Mr Tasker said “Marylebone House was intended to be sold as a parallel transaction to Retail Acquisitions. Retail Acquisitions was going to onward sell it. That didn’t happen. My understanding is that Sir Philip Green said, “I’ve had a better offer, and ..I’m going to sell it to whoever that was but I will ensure that you will receive compensation for my withdrawal of that proposal. I think that is where the £8.5million was arrived at”.

It is not clear the basis upon which the claim will be made and the identity of the parties has been left open (in the letter from Bark & Co). The letter offering funding by CFA fails to set out who will be responsible for costs and disbursements (such as a £10,000 court issue fee) in the course of any litigation. There has been no mention of whether after the event insurance has been obtained. RAL is very likely to be exposed to a security for costs application. According to the notes in the accounts a sum of £8.5m is due in respect of the sale of Marylebone House but Mr Chappell, Mr Bourne, Mr Treacy and Mr Tasker all appear to accept that RAL received monies in lieu of the sale of the property and in the sum of between £8.5m to £10m. In addition to this the first time Linklaters were informed of the claim was shortly before the hearing of this petition. Linklaters responded noting that during the course of the select committee hearing Mr Chappell accepted that a “Framework Agreement dated 26 June 2015” acted as a release of “the alleged non-written contract for the provision of funds in respect of Marylebone House”. In these circumstances, I find that reducing the £8.5m purported claim to 65% (the same percentage provided for the chance of success) by relying on the letter produced by Bark & Co fails to provide a proper basis for valuing the claim.

In Rococo Developments Limited the parties had the benefit of an expert accountant and insolvency practitioner to guide them on the value of the company’s assets. The expert referred to Financial Reporting Standards 12. Lord Justice Lewison found that although FRS 12 did not apply directly to the company, equivalent provisions did. FRS 12 provides that “Where it is not clear whether a present obligation exists, a past event is deemed to give rise to a present obligation if, taking account of all available evidence, it is more likely than not that a present obligation exists at the balance sheet date”. Section 123(2) itself bears a similar test: “proved to the satisfaction of the court that the value of the company’s assets…” The civil test of proof is employed to make judgments on obligations and values. In my judgment, when reviewing the available evidence before the court, there is sufficient evidence to find, on the balance of probabilities, that this asset does not have the value attributed to it by RAL. There is insufficient evidence to determine its precise value. I have serious doubt whether this chose in action exists. I am unable to determine this doubt on the evidence currently available. On balance of probabilities I find that there is a chose but as Ms den Beston submits, it is uncertain in value, and dependent on many contingencies. I shall attribute a nominal value of £1.

Lastly the ascertainable value of the Chaplake investment is insufficiently grounded in evidence. There is no evidence that RAL has ownership of the shares in the Portuguese company; there is no professional valuation; proper costings, production of a valuation of the present value without the benefit of planning, evidence of planning advice, costs of obtaining planning, the potential outcome or outcomes in respect of any development potential from a qualified practitioner, and a failure to produce a development analysis including time scales. There is no or insufficient evidence as to how RAL (which is insolvent) could fund or assist in funding any such development; and no evidence as to how RAL could purchase more shares (as claimed) in the Portuguese company. Any return to RAL in such circumstances I assess as contingent and uncertain. Again, there is some doubt as to whether the Chaplake Investment is an asset of RAL; but it is not possible to determine its existence on the evidence before the Court.

The Supreme Court Eurosail explained that the valuation of assets is not an exact science. In my judgment as the asset was acquired in the recent past, it is open to the Court to attribute the acquisition value this asset. On the balance of probabilities, the asset exists. I am unable to attribute the value given to it by RAL due to a failure to produce the evidence I have set out above. Taking into account the many uncertainties of a positive financial outcome I am required to exercise my judgment and fix upon a value. It may have a value of £1. For the purpose of this hearing, I shall attribute the exchange value RAL was prepared to agree to obtain the asset. The bargain struck exchanged a loan of £1.5m secured against the home of Mr Chappell’s parents in or around September 2016. It is the best available evidence of the current value as (i) it is bargain was made in a time frame close to the presentation of the petition (ii) it is not distant in time from the date of this hearing (iii) the director of RAL (Mr Chappell) would have acted in the best interests of RAL to obtain the most advantageous bargain, but (iv) as the investment was owned by one or both of his parents or their businesses, he was more likely than not to have been motivated by fairness and not avarice at his parents’ expense.

The burden rests with the party asserting insolvency. For the reasons given above the Company has discharged the burden of proof. RAL is cash flow and/or balance sheet insolvent. It is unable to pay its debts as they fall due, and it has been proved to the satisfaction of the court that the value of the RAL’s assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities.

I shall make the usual winding up order.