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Anthony John Wright and Geoffrey Paul Rowley & Ors v Dominic Joseph Andrew Chappell & Ors (Re BHS Group Ltd & Ors (in liquidation))

[2024] EWHC 1417 (Ch)

Approved Judgment: Leech J Re BHS Group Ltd CR 2016 0002220, 0002221, 002222, 002224

Neutral Citation Number: [2024] EWHC 1417 (Ch)

CR 2016 002220, CR 2016 002221, CR-2016-002222, CR-2016-002224

IN THE HIGH COURT OF JUSTICE

BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES

INSOLVENCY AND COMPANIES LIST

IN THE MATTER OF BHS GROUP LIMITED, SHB REALISATIONS LIMITED (FORMERLY BHS LIMITED), DAVENBUSH LIMITED, LOWLAND HOMES LIMITED (EACH IN LIQUIDATION)

AND IN THE MATTER OF THE INSOLVENCY ACT 1986

11 June 2024

Before:

MR JUSTICE LEECH

B E T W E E N:

(1) ANTHONY JOHN WRIGHT AND GEOFFREY PAUL ROWLEY

(LIQUIDATORS OF BHS GROUP LIMITED, SHB REALISATIONS LIMITED, DAVENBUSH LIMITED AND LOWLAND HOMES LIMITED (ALL IN LIQUIDATION)

(2) BHS GROUP LIMITED (IN LIQUIDATION)

(3) SHB REALISATIONS LIMITED (FORMERLY BHS LIMITED) (IN LIQUIDATION)

(4) DAVENBUSH LIMITED (IN LIQUIDATION)

(5) LOWLAND HOMES LIMITED (IN LIQUIDATION)

Applicants

– and –

(1) DOMINIC JOSEPH ANDREW CHAPPELL

(2) LENNART DAVID HENNINGSON

(3) DOMINIC LEONARD MARK CHANDLER

Respondents

MR JOSEPH CURL KC and MR RYAN PERKINS (instructed by Jones Day) appeared on behalf of the Applicants

MS LEXA HILLIARD KC and MS RACHAEL EARLE (instructed by Bark & Co) appeared on behalf of the Second Respondent

MR DANIEL LIGHTMAN KC, MS CHARLOTTE BEYNON and MR TIM BENHAM-MIRANDO (instructed by Olephant Solicitors) appeared on behalf of the Third Respondent

Hearing dates: 6-10, 15-17, 20-24, 27-29 November 2023

4-8 December 2023

Judgment circulated 15 May 2024

APPROVED JUDGMENT

Mr Justice Leech:

Table of Contents

I. Introduction [1]

A.

Preliminary Matters [1]

B.

Procedural Matters [18]

II. The Facts [31]

C.

Background [31]

D.

Project Harvey [56]

E.

Day One: 11 March 2015 [108]

F.

12 March 2015 to 17 April 2015 [130]

G.

18 April 2015 to 26 June 2015 [173]

H.

27 June 2015 to 7 September 2015 [238]

I.

8 September 2015 to 23 December 2015 [265]

J.

14 January 2016 to 25 April 2016 [326]

K.

Subsequent Events [424]

III. The Evidence [433]

L.

Witnesses of Fact [433]

M.

Expert Witnesses [454]

IV. The Law [461]

N.

Wrongful Trading [461]

O.

Misfeasance [519]

V. Knowledge [573]

P.

Completion [573]

Q.

Day One: The Realistic Financial Position [687]

R.

The 17 April Board Meeting [701]

S.

6 May 2015: The Second LOC Facility [741]

T.

26 June 2015: Ace II [746]

U.

13 July 2015: The July 2015 Turnaround Plan [774]

V.

26 August 2015: Atherstone [828]

W.

8 September 2015: The Grovepoint Facility [833]

VI. Wrongful Trading [852]

X.

Functions [854]

Y.

The Knowledge Condition [866]

VII. Misfeasance [949]

Z.

The Trading Misfeasance Claim [953]

AA. The Individual Misfeasance Claims [1006]

VIII. Causation [1108]

BB. Wrongful Trading [1110]

CC. The Misfeasance Trading Claim [1111]

DD. The Individual Misfeasance Claims [1115]

IX. Quantum [1131]

EE. The Trading Misfeasance Claim [1131]

FF. The Individual Misfeasance Claims [1133]

X. Section 1157 [1137]

XI. Discretion [1139]

XII. Summary of Findings [1153]

I. Introduction

A.

Preliminary Matters

1.

This is my reserved judgment after the trial of the claims brought by Mr Anthony Wright and Mr Geoffrey Rowley of FRP Advisory Trading Ltd (the “Joint Liquidators”) together with certain of the companies of which they are joint liquidators against the Mr Lennart Henningson, the Second Respondent, and Mr Dominic Chandler, the Third Respondent. Mr Dominic Chappell, the First Respondent, did not participate in the trial and is not bound by this judgment for reasons which I will explain. Mr Keith Smith, who was originally named as the Fourth Respondent, settled the Joint Liquidators’ claims and played no part in the trial either.

2.

Mr Joseph Curl KC and Mr Ryan Perkins represented the Joint Liquidators at trial instructed by Jones Day. Ms Lexa Hilliard KC and Ms Rachael Earle represented Mr Henningson instructed by Bark & Co and Mr Daniel Lightman KC, Ms Charlotte Beynon and Mr Tim Benham-Mirando represented Mr Chandler instructed by Olephant Solicitors (“Olephant”). I am grateful for the assistance which counsel and their teams gave me and where I refer to a submission or an argument advanced by leading counsel or by leading and junior counsel in this judgment, I do so as a form of shorthand and in the knowledge that those submissions were the product of the hard work and expertise of their entire teams.

3.

Mr Chappell represented himself in person. Mr Adrian Ring, who was formerly a partner in Lawrence Stephens, and who is now a consultant at New Media Law LLP, represented or assisted Mr Chappell at various stages of the proceedings. Paul Schwartfeger of counsel appeared on his behalf for the adjournment application below and Mr Chappell himself briefly appeared at the trial in person.

4.

The Joint Liquidators brought the claims on behalf of four companies in the British Home Stores Group (the “BHS Group”): British Home Stores Group Ltd (“BHSGL”), the holding company of the group, British Home Stores Ltd (“BHSL”), a subsidiary of BHSGL and the group’s principal operating company, Davenbush Ltd (“Davenbush”), a direct subsidiary of BHSGL and fellow subsidiary of BHSL, and Lowland Homes Ltd (“Lowland”), a subsidiary of BHSL. I will refer to them collectively as the “Companies”.

5.

On 25 April 2016 all four Companies went into administration. On 2 December 2016 BHSL went into creditors’ voluntary liquidation and the Joint Liquidators were appointed. It was renamed “SHB Realisations Limited” but I will continue to refer to it throughout this judgment as BHSL. On 15 and 16 January 2018 BHSGL, Davenbush and Lowland also went into creditors’ voluntary liquidation and on 18 January 2018 the Joint Liquidators’ appointment was filed at Companies House.

6.

Mr Chappell, Mr Henningson and Mr Chandler were directors of all four Companies and took office after the acquisition of the BHS Group by Retail Acquisitions Ltd (“RAL”). On 11 March 2015 Mr Chappell and Mr Henningson were appointed as directors of all four. On 18 and 20 March 2015 Mr Chandler was appointed as a director of BHSGL and BHSL respectively and on 17 April 2015 he was appointed a director of both Davenbush and Lowland. On 18 March 2015 Mr Smith, who was Mr Chappell’s uncle, was appointed a director of BHSGL but he did not hold the same office for any of the other three Companies. On 6 July 2016 Mr Chandler resigned as a director of all four Companies and on 8 September 2016 Mr Henningson also resigned. BHSGL had a fifth director, Mr Darren Topp, who was also a director and the CEO of BHSL. He gave evidence at the trial. But he was not a Respondent to the claims.

7.

By Application Notice dated 11 December 2020 (the “Application”) the Joint Liquidators commenced proceedings against the Respondents under section 212 (“S.212”) and section 214 (“S.214”) of the Insolvency Act 1986 (the “IA 1986”). They brought three categories of claim against Mr Henningson and Mr Chandler to which I will refer as the “Wrongful Trading Claim”, the “Trading Misfeasance Claim” and the “Individual Misfeasance Claims”. I will also use the term the “Misfeasance Claims” to describe the Trading Misfeasance Claim and the Individual Misfeasance Claims collectively. I briefly explain their nature before moving on to address certain procedural matters.

8.

The Joint Liquidators alleged that from the date of the acquisition and their appointment Mr Chappell, Mr Henningson and Mr Chandler either knew or ought to have known that there was no reasonable prospect of avoiding insolvent liquidation. This allegation formed the basis for the Wrongful Trading Claim under S.214. It also formed the factual basis for the Trading Misfeasance Claim. In summary, the Joint Liquidators alleged that even if the Respondents were not liable for wrongful trading, they failed to consider the interests of the creditors and if they had done so, they would have immediately filed for administration. Finally, they made nine individual claims in relation to individual assets or funds of the Companies. The Individual Misfeasance Claims largely (although not entirely) explain why Lowland and Davenbush are parties to the Application.

9.

By Order dated 22 February 2021 ICC Judge Barber gave directions for the service of Points of Claim, Points of Defence and Points of Reply and upon service of these statements of case Mr Chandler applied to strike out parts of the Joint Liquidators’ case by Application Notice dated 25 November 2021. Deputy ICC Judge Schaffer dismissed this application and Mr Chandler appealed against that decision.

10.

On 19 August 2022 Edwin Johnson J allowed the appeal in part: see [2022] Bus LR 1510. He held that it was necessary for the Joint Liquidators to plead the alternative dates at which they alleged the Wrongful Trading Claim should be tested and also to plead causation and quantum in relation to each of those dates. He gave them an opportunity to amend or the claims would be struck out. He held, however, that the Court had a degree of flexibility in relation to the date or dates on which the Joint Liquidators had to prove that the directors had the requisite knowledge for the Wrongful Trading Claim. He stated this at [101]:

“So far as the second question is concerned, the case law demonstrates that the court has a degree of flexibility, in terms of adherence to the pleaded date or dates on which the Knowledge Condition is said to have been satisfied. There is no hard and fast rule. Essentially the question is one for the trial judge, and ultimately depends upon what is fair to the parties. As both In re Sherborne and In re Continental demonstrate, there may be problems for a liquidator in relying upon an unspecified date or an unpleaded date, if the introduction of that date as the Knowledge Date will cause prejudice to the other party. In the present case, and by reference to both 17 April 2015 and the Alternative Dates, I understood both parties to accept that the trial judge would have some flexibility, if the trial judge was to consider that the Knowledge Condition was not satisfied on any of these particular dates, but was satisfied at a time falling around one of these particular dates. I use the deliberately vague expression “falling around one of these particular dates”, because the availability and extent of this flexibility will be matters for the trial judge. It seems to me that I cannot and should not, at this stage of the action and in the context of the Strike-Out Application, make any decision in this respect.”

11.

On 30 June 2023 I heard the PTR. By this date the Joint Liquidators had settled with Mr Smith. The principal issues which I had to decide were whether to permit Mr Henningson to give evidence in Swedish and whether to order the preparation of a second joint statement between the expert accountants. By this time the Joint Liquidators had served Re-Amended Points of Claim identifying six knowledge dates (the “Knowledge Dates” or “KD1” to “KD6”) on which they alleged that the Respondents had the requisite knowledge to fix them with liability under S.214. Those dates were 17 April 2015 (“KD1”), 6 May 2015 (“KD2”), 26 June 2015 (“KD3”), 13 July 2015 (“KD4”), 26 August 2015 (“KD5”) and 8 September 2015 (“KD6”).

12.

By the date of trial Mr Henningson and Mr Chandler had answered this case in their Points of Defence and interrogated it thoroughly. The Joint Liquidators had re-amended to add further particulars of certain of the Individual Misfeasance Claims and re-re-amended the Points of Claim to reflect the fact that the expert accountants had agreed the increase in net deficiency in the assets of the Companies at each of the Knowledge Dates (to which I will refer as the “IND”).

13.

The authorities show that the starting point for assessing the liability of a director for wrongful trading is the increase in the net deficiency in the assets generated by continuing to trade from the date on which the “Knowledge Condition” (as Edwin Johnson J described it) is satisfied until the date on which the company goes into insolvent administration or liquidation. This makes perfect sense since it is the continuing trading which causes loss to the company’s creditors as a class. In the present case, the experts were agreed that the consolidated IND of the four Companies between each of the Knowledge Dates and 25 April 2015 was as follows:

(1)

KD1 (17 April 2015): £70.1 million;

(2)

KD2 (6 May 2015): £103.7 million;

(3)

KD3 (26 June 2015): £133.5 million;

(4)

KD4 (13 July 2015): £118.5 million;

(5)

KD5 (26 August 2015): £58 million; and

(6)

KD6 (8 September 2015): £45.5 million.

14.

The principal reason why these figures fluctuate is because of changes in the amount of the pensions deficit of the BHS Group (which involves complex, technical rules of valuation). In opening, Mr Curl provided the Court with additional figures which stripped out the pensions deficit. These showed that the IND between KD1 (17 April 2015) and 25 April 2016 was £140.1 million reducing to £76.5 million on KD6 (8 September 2015).

15.

This seemed counter-intuitive to me when I saw the figures for the first time. But, as Mr Curl submitted, the trend is not difficult to understand with a little reflection. The increase in the deficiency reduced over time as the group liquidated its assets and used up the cash which they generated in order to keep trading. As those assets were used up the deficiency itself increased but the amount of the IND reduced and narrowed as there were fewer and fewer assets left to realise. Mr Curl also submitted that it was highly unusual for parties to agree the IND for a wrongful trading claim:

“It is probably unprecedented for IND figures to be agreed in a wrongful trading claim. The quantum of the IND is usually a major point of contention between the parties, since the existence of a large IND, particularly over an extended period of many months, is extremely problematic for anyone seeking to defend a wrongful trading claim. This remarkable position has arisen because the accountancy expert instructed by the Second and Third Respondents (Mr Pilgrem) has been forced to accept that there was a very substantial increase in the net deficiency from each Knowledge Date until the date of administration.”

16.

Ms Hilliard took issue with this submission on the basis that the essence of a wrongful trading claim is knowledge. But she did not suggest that Mr Curl was wrong in practice. My own analysis of the authorities supports Mr Curl’s submission. The Court has often dismissed wrongful trading claims not only because the directors did not have the requisite knowledge but also because the liquidator has been unable to prove that there was any IND: see, e.g., Re Ralls Builders Ltd [2016] Bus LR 555 at [268] (Snowden J). The Court may be prepared to adopt another measure where the directors’ own record keeping has made it impossible for the liquidator to calculate the IND: see Brooks v Armstrong [2017] BCC 99 at [67] to [74] (David Foxton QC). But in some cases the liquidator and his or her advisers have simply failed to appreciate the complexity of proving that there was any IND. This was not the case here.

17.

I therefore started the trial on the basis that the Respondents had a case to answer because their stewardship of the BHS Group’s assets had resulted in an IND of £140.1 million over just one year ignoring the pension deficit (or £70.1 million if one adjusts for the deficit). Put another way, if the directors had resolved to put the Companies into administration on KD1 there would have been £140.1 million (or £70.1 million) more in assets or cash to meet the claims of creditors. It was incumbent on the directors, therefore, to offer some explanation. On the other hand, I had to approach the evaluation of their evidence without hindsight or any regard to the ultimate outcome.

B.

Procedural Matters

(1)

Mr Chappell

18.

Mr Chappell was not legally represented before me at the PTR and he did not appear on the first day of the trial. Mr Ring provided him with some assistance (although he was not on the record) and on 10 November 2023 he applied to adjourn the claims against him for six months (although not the trial itself). I took the unusual step of severing the claims against him and the claims against Mr Henningson and Mr Chandler. Ms Hilliard and Mr Lightman both supported this case management decision and Mr Curl did not oppose it. His main concern was to preserve the trial date. I set out the procedural background and the reasons for my decision in my judgment: see [2023] EWHC 2873 (Ch).

19.

The principal consequence of this decision was that I had to make findings in relation to the conduct of Mr Henningson and Mr Chandler which were not binding on Mr Chappell and in his absence. In this judgment, I have tried to avoid making findings of fact against him unless they are necessary to my findings in relation to Mr Henningson and Mr Chandler. I stress that where I have made findings in relation to Mr Chappell’s conduct, they are not binding on him.

(2)

Mr Henningson

20.

Mr Henningson made two witness statements in Swedish dated 24 January 2023 (“Henningson 1”) and 1 August 2023 (“Henningson 2”) which were then translated into English. On 30 June 2023 I directed that he should be permitted to call a native speaker to assist him in giving evidence. By letter dated 11 October 2023 Bark & Co wrote to Jones Day stating that Mr Henningson was receiving treatment for cancer and enclosing a very brief report from his GP’s surgery stating that on 29 August 2023 he had undergone surgery for cancer and was scheduled to be treated with chemotherapy in the autumn and also two social insurance agency medical certificates one of which confirmed a diagnosis of metastatic colorectal cancer. By letter dated 12 October 2023 Jones Day replied offering their sympathy but making it clear that they challenged the veracity of his evidence.

21.

In the event, Mr Henningson did not give evidence in person or remotely. Ms Hilliard did not apply to adduce any expert medical evidence to establish that Mr Henningson was unfit to give evidence or to do so with reasonable adjustments. Nor did she suggest that Mr Henningson was incompetent to give evidence because, in that event, his witness statements would not have been admissible at all: see section 5(1) of the Civil Evidence Act 1995. In those circumstances, Mr Curl submitted that it was regrettable that Mr Henningson was not prepared to give evidence and that little or no weight should be attached to Henningson 1 and Henningson 2.

22.

I accept that Mr Henningson has had cancer and that he was (and, perhaps, still is) undergoing a course of chemotherapy. Although the medical evidence which Bark & Co sent to Jones Day was thin, I was not prepared to draw the inference that Mr Henningson chose not to give evidence or to draw any further inferences from his failure to do so. I had to decide, therefore, what weight to attach to Henningson 1 and Henningson 2 in the light of the contemporaneous documents and the inherent probabilities. I address this in section III (below).

(3)

Pleading Points

23.

By the trial the Joint Liquidators had served Re-Re-Amended Points of Claim (the “Points of Claim”) on 18 September 2023. Mr Chappell had served a three page document which stood as his Points of Defence and Mr Chandler and Mr Henningson had served Amended Points of Defence (“Points of Defence”) on 3 October 2023 and 10 October 2023 respectively. The Respondents advanced a number of pleading points in opening. In particular, Mr Lightman and his team took a number of points in relation to the way in which the Misfeasance Claims were pleaded. They also took a number of points during the trial about the way in which Mr Curl had put his case to Mr Chandler.

24.

For the purposes of closing submissions I invited the parties to focus on the oral evidence and to identify the key passages in the transcripts upon which they relied and the findings of fact which they asked the Court to make. In their written closing submissions dated 4 December 2023 Mr Curl and Mr Perkins accepted my invitation. However, Ms Hilliard and Mr Lightman and their respective teams took a root and branch objection to the way in which the Joint Liquidators had presented their case and submitted that it was not their pleaded case. For their oral closing submissions Ms Hilliard and Ms Earle also produced a document headed "Pleading knowledge: JL’s pleading vs. JL’s closing” in which they compared the Joint Liquidators’ pleaded case with their written closing submissions which had focussed on Mr Chandler’s knowledge. They submitted that I should strike through virtually the entirety of the Joint Liquidators’ closing submissions and that they had failed to prove most of the other allegations.

25.

In summary, both Ms Hilliard and Mr Lightman submitted that Mr Curl had put an unpleaded case of dishonesty to Mr Chandler and that his questioning of Mr Chandler was unfair. In particular, Mr Lightman submitted that Mr Curl had suggested to Mr Chandler that he deliberately mislead the BHS Group’s creditors and that his evidence was designed to mislead the Court. I invited Ms Hilliard and Mr Lightman to address me on whether I should dismiss the entire claim on the basis that the Joint Liquidators had advanced a different case from the one which they had pleaded. But they did not submit that I should do so. The position which I reached with counsel in closing submissions is probably best reflected in the transcript of Day 20. Mr Hilliard cited a number of passages from the judgment of Park J in Re Continental Assurance Co of London plc (No 4) [2007] 2 BCLC 287. The following exchanges then took place:

“MR JUSTICE LEECH: I mean, if you look at the length that Mr Justice Park has to -- has gone to, that's exactly what I'm going to have to do in my judgment. MS HILLIARD: Well, my Lord, you wouldn't have had to have done it if the liquidators had not, in their closing submissions, introduced -- and this is absolutely key -- introduced 59 -- 53 new allegations of knowledge. That's the key. Because this claim is all about what the directors knew or ought to have known in -- that's what -- that's what, if you like, controls the cause of action. MR JUSTICE LEECH: But when I've looked very closely at some of them I can see -- I can see it's actually not as clear cut as that. And when Mr Lightman got up to -- to address me yesterday, he said I've just got to disregard effectively the meat -- what I had asked Mr -- Mr Curl and, indeed, you to do was to present me with the key findings -- you know, the -- address me on the key findings of fact I had to make in what is not an easy case. MS HILLIARD: No. MR JUSTICE LEECH: And the evidence on which I was to decide this. So Mr Curl did that. He produced -- and now it's clear that the -- in a lot of cases, the individual knowledge elements of his -- his -- the individual – what you call the individual new allegations are actually wrapped up in a key part of the pleadings. They're not in exactly the same form. I take that. So what I'm going to have to do is to go away -- he's been given fair warning of the ones that -- and I want him to address me about them tomorrow. But I'm just going to have to do is go away and go through the same sort of exercise -- exactly the same sort of exercise that Mr Justice Park has done in Continental and in a much more complicated case. He's getting all worked up about an increase of nine pages in a 32-page pleading. MS HILLIARD: I know. MR JUSTICE LEECH: We've got 100-odd pages. No doubt if it had run to 300 you would have been complaining about that too. I mean, it cuts both ways -- MS HILLIARD: I understand that.”

“MR JUSTICE LEECH: And so it's -- that's the difficulty I'm having at the moment. It's not that you're not entitled to take pleadings points or that I don't accept the principles. I do. The problem is I'm going to have to go away and, in relation to every single allegation, in relation to the knowledge point, I'm going to have to look exclusively -- I'm going to have to look, very, carefully, at what they've pleaded, what I can reasonably treat as being within that. MS HILLIARD: Yes. MR JUSTICE LEECH: And I'm going to look at what the evidence on those issues is. MS HILLIARD: Yes. MR JUSTICE LEECH: That's a big task; and I'm just going to have to go away and do it. And what little help you can give me between now and the time that Mr Curl gets up in relation to the evidence is what's going to help me most. And the real -- I understand all of this. And I'm going to try the case on the pleadings. But the enormity of what I was faced with -- which is why I'm saying: what, are you just simply saying that I should non-suit the claimant? MS HILLIARD: No, I'm not saying -- because -- no, I'm not saying -- MR JUSTICE LEECH: In which case, at the centre of this are some core allegations which you've got to address, but I'm still -- MS HILLIARD: Which we have done; and what I wanted to say is what we have done -- MR JUSTICE LEECH: Can we get on to that then? MS HILLIARD: What we have done, from paragraphs 106 onwards -- I've got about three extras that were left out, but what we have done from paragraphs 106 -- MR JUSTICE LEECH: Is to address the pleaded case and the evidence on it. MS HILLIARD: Is to address the pleading and the evidence that -- what we rely on.”

26.

In the absence of any agreement about either the issues or the evidence which was properly relevant and admissible to decide them, I concluded that the only fair and practical way in which I could address Ms Hilliard’s and Mr Lightman’s pleading point was to make findings of knowledge on only those allegations which the Joint Liquidators had expressly advanced in the Points of Claim. In section V (below) I quote each allegation from the Points of Claim in turn, I then set out the evidence which I consider to be relevant and admissible on that issue and finally I make the findings of fact upon which I rely in determining the Wrongful Trading Claim in section VI and the Misfeasance Claims in section VII. This has necessarily increased the length of this judgment and involved some repetition.

27.

The question whether Mr Chandler misled creditors arose out of the company voluntary arrangement ("CVA") which the BHS Group’s creditors approved at a meeting of creditors on 23 March 2016 (the “Creditors Meeting”) shortly before it went into administration. The Joint Liquidators did not rely on the CVA themselves. On the contrary, in their opening submissions Ms Hilliard and Mr Lightman placed strong reliance on the CVA on the basis that it was reasonable for the directors to believe that the BHS Group would avoid insolvent administration or liquidation at all of the Knowledge Dates if they were able to put in place a CVA as late as the end of March 2016.

28.

The Joint Liquidators had a number of answers to that point. But one of the answers was that the creditors were misled at the Creditors Meeting. Mr Curl submitted, therefore, that it was open to him to cross-examine Mr Chandler on this basis. During Mr Lightman’s oral submissions I suggested that it would be unnecessary for me to decide whether Mr Chandler misled creditors if he no longer relied on the CVA and Mr Lightman agreed. However, Ms Hilliard, who followed him, did not agree with Mr Lightman and continued to place great emphasis on the CVA. It remained necessary, therefore, for me to make detailed findings in relation to the CVA. However, in making an overall determination, it was not necessary for me to decide whether Mr Chandler deliberately misled the BHS Group’s creditors. I have also discounted his evidence in relation to this issue in assessing Mr Chandler’s credibility.

(4)

The Carlwood Payment

29.

On 28 May 2015 Carlwood Capital SA (“Carlwood”) issued an invoice (the “Carlwood Invoice”) to a company called Allied Commercial Exporters Ltd (“ACE”) and on 19 June 2015 ACE gave instructions to HSBC to make a payment of £300,00 into the account at SEB Stockholm identified on the invoice (the “Carlwood Payment”). The Joint Liquidators allege that this was a secret commission which ACE paid to Mr Henningson. I address the law in section IV and the substantive allegations in section VI (below). In their written closing submissions Ms Hilliard and Ms Earle submitted that the Joint Liquidators deliberately withheld the invoice and payment instruction from Mr Henningson in breach of CPR Part 31.11(2):

“175.

Such conduct is not only a breach of CPR 31.11(2) (if documents to which the duty of ongoing disclosure applies come to a party’s notice at any time during the proceedings, he must immediately notify every other party) it is also inexcusable for JD to write that that the documents had been provided to the JLs/JD after Mr Henningson’s evidence was served when they quite clearly had not been. 176. The inescapable inference is that JD/the JLs took the tactical decision to hold back from disclosing these two documents so that they could see what Mr Henningson said in his witness evidence and then ambush Mr Henningson with them. That is reprehensible conduct and unworthy of licensed insolvency practitioners and their lawyers. It is a factor that the Court should take into account in considering what weight to give to those documents and whether the JLs have discharged the burden of proof. If the JLs’ have a strong case why play tactical and unfair games?”

30.

Ms Hilliard repeated this submission orally and she invited me to read all of the relevant correspondence. Following the conclusion of the trial, however, the issue was resolved. Mr Henningson accepted that the Joint Liquidators and Jones Day had not withheld disclosure of the Carlwood Invoice and payment instruction until after he had served his witness evidence and the allegation that the Joint Liquidators and Jones Day had engaged in reprehensible conduct by withholding the documents was expressly withdrawn. I am grateful to the parties that they were able to resolve this issue and I express no further views about it.

II. The Facts

C.

Background

(1)

The BHS Group

31.

I begin with a brief description of British Home Stores (“BHS”) which I have largely taken from the CVA Proposal (below). In 2015 BHS was a household name. Its primary activity was the retail of clothing, homeware, lighting and furniture in the UK and it employed about 11,500 people. The BHS brand had been established in 1928 and was one of the UK s most recognised brand names. In 2015 the BHS Group performed on average 1 million transactions a week across 164 stores and 67 franchise stores in 16 countries. BHSL also managed the international franchising operations and operated UK retail outlets through a network of premier high street and shopping malls, together with an online platform. However, over the previous decade the profitability of the BHS Group had declined. The retail market had become more competitive with the growth of value retailers such as Primark and supermarkets introducing clothing. BHS had also struggled to respond to changing consumer behaviours and did not capitalise on the growing trends of digital sales and retail park-based shopping.

32.

The BHS Group had been very successful under the ownership of Taveta and BHSGL had made operating profits of £99 million, £104 million and £89 million in the financial years 2003, 2004 and 2005. However, between 2009 and 2014 BHSL had made losses every year and by the date of sale it had a cumulative operating loss of £442 million. Management were optimistic, however, that they could turn the business around. Mr Richard Price, who was then the managing director, told the Work and Pensions Committee and the Business Innovation and Skills Committee (the “Select Committee”), which conducted an investigation and prepared a report after the collapse of the group that in 2013 and 2014 there had been like for like growth for the first time in eight years.

33.

Before 11 March 2015 the BHS Group was owned by the Taveta group of companies which were associated with Sir Philip Green and his wife Lady Christina or “Tina” Green. Taveta Investments (No 2) Ltd (“Taveta”) was the owner of the entire issued share capital of BHSGL. It also held the entire issued share capital of Arcadia Group Ltd (“Arcadia”) which owned and traded brands such as Topman, Topshop, Burton and Miss Selfridge. By 11 March 2015 Taveta had provided £256 million of support to the BHS Group and £72 million in the preceding seven months. Although Arcadia had a number of separate businesses it provided the finance function and senior management to the BHS Group (and charged management fees for these services).

(2)

The Pension Schemes

34.

BHSL was the sponsoring employer of two defined benefit pension schemes (the “Schemes”). The first was the BHS Pension Scheme (the “Main Scheme”), which had 20,462 members, and the second was the BHS Senior Management Scheme (the “Senior Scheme”), which had 233 members. Davenbush was a guarantor of both Schemes. Trustees of defined benefit pension schemes are required (subject to limited exceptions) to complete a triennial valuation of scheme assets and liabilities (the “Triennial Valuation”) and have a period of 15 months after the valuation date to complete and approve the valuation, agree the schedule of contributions and, if the scheme is in deficit, submit a recovery plan to the Pensions Regulator.

35.

As Mr Lightman and his team pointed out in their opening submissions, the obligation to pay members under the Schemes rested with the Trustees and not with BHSL itself. BHSL’s legal liability was limited to making agreed annual contributions to the Schemes. Section 75 of the Pensions Act 1995 (“S.75”) provided that if a “relevant event” occurred, then BHSL would have become liable in debt for the entire deficit. This included an “insolvency event”. I will describe this as the “S.75 Debt” and it was calculated as the amount of money estimated by the scheme actuary to be required to secure the Schemes’ liabilities by purchasing life assurance annuities for each member of the scheme to pay their benefits in full.

36.

The 2012 Triennial Valuation had disclosed a combined funding deficit for both Schemes of £253.2 million on a “PPF basis”, £232.5 million on an “ongoing basis” and £514.5 million on a “buy-out” basis. The “PPF basis” involved a valuation using the prescribed methodology of the Pension Protection Fund (“PPF”) under section 179 of the Pensions Act 2004 (the “PA 2004”). The “ongoing basis” involved a valuation based on a set of assumptions used to determine the Schemes accrued liabilities assuming they continued to operate on an ongoing basis. Finally, the “buyout basis” involved a valuation based on a set of assumptions used to estimate the cost of securing the Schemes’ pension benefit in full by purchasing annuities with an insurance company.

37.

On 3 September 2013 the trustees of the Schemes (the “Trustees”) agreed a recovery plan (“Recovery Plan”) for each of the Schemes with Mr Paul Budge, the finance director of BHSL, by which BHSL agreed to pay an annual contribution of £10 million to the Schemes from 1 September 2013 until 30 April 2036 of which £9.5 million was to be paid to the Main Scheme and £0.5 million to the Senior Scheme. These contributions are variously described in the contemporaneous documents as “Annual Contributions” or “Deficit Repair Contributions” or “DRCs”. These contributions were to be reviewed as part of the Triennial Valuation process which had to be completed and agreed by 30 June 2016.

38.

On 5 July 2013 Baker Tilly Tax and Advisory Services LLP produced a report which gave a negative assessment of BHSL’s ability to fund the Schemes. On 23 June 2016 Ms Margaret Downes, the former chair of the Trustees, wrote to the Select Committee giving her assessment of Baker Tilly’s advice which was that BHSL was unable to pay higher Annual Contributions than the £10 million which it was already paying into the Schemes. On 31 December 2013 Ms Downes retired and from 1 January 2014 Independent Trustee Services Ltd (“ITS”) became the corporate Trustee of each Scheme. Mr Christopher Martin was the Executive Chair of ITS and for ease of reference I will refer to the board of directors of ITS as the “Trustees” and Mr Martin as the chair of the Trustees. The Trustees were advised by KPMG LLP (“KPMG”) and Eversheds LLP (“Eversheds”).

(3)

Project Thor

39.

In January 2014 Taveta instructed Deloitte LLP (“Deloitte”) to advise it in relation to restructuring the Schemes under the code name “Project Thor”. The legal mechanism for restructuring such a scheme was a regulated apportionment arrangement (“RAA”) under Reg 7 of the Occupational Pension Schemes (Employer Debt) Regulations 2005. In a report dated June 2017 the Pensions Regulator issued a regulatory intervention report under section 89 of the PA 2004 describing what action it had taken in relation to the Schemes (the “TPR Intervention Report”). I set out some of the narrative and findings below. But for present purposes, it contains a useful introduction to the statutory framework:

“While the best security for a DB pension scheme is a strong, ongoing sponsoring employer, we recognise that in some situations this support may no longer be available, if an employer is at serious risk of insolvency. Where this is the case, it is important for employers, trustees and their respective advisers to explore the available options for the pension scheme. One such option, which offers an outcome other than insolvency for the employer, is a Regulated Apportionment Arrangement (RAA). In the Project Thor proposal, members would be given the opportunity to transfer to a new scheme with the existing schemes going into the PPF, while allowing the sponsoring employer to continue in business and to support the new scheme. RAAs are rare and must be approved by TPR. The PPF must also confirm it does not object. The continuation of a scheme (whether the existing scheme or a new scheme) following a RAA is even less common.”

40.

Both parties took me through the history of Project Thor in some detail in their written opening submissions and I read the relevant documents. It is unnecessary for me to set out the precise proposals which Sir Philip Green and his advisers debated other than to state that Deloitte originally calculated that it would require BHSL to make a contribution of £54 million to the new scheme and that the Trustees were also supportive of the restructuring of the Schemes. It was also necessary for Taveta to obtain clearance from the Pensions Regulator and before it would have given clearance for an RAA it would have been necessary for BHSL to establish that insolvency was inevitable. In practice, this meant that Taveta or Arcadia would have to provide the additional funding of £54 million.

41.

Sir Philip Green was not personally liable for the pensions deficit. Nor were Taveta or Arcadia. Indeed, BHSL was not immediately liable to pay more than its Annual Contributions unless an insolvency event occurred under S.75. However, the Pensions Regulator had what were described as “moral hazard” powers under which it could require individuals and entities to contribute to an under-funded scheme. The benefit to Sir Philip Green, therefore, of BHSL entering into an RAA with the Trustees was that he, Taveta and Arcadia would be released from any risk that the Pensions Regulator would exercise those powers. In the TPR Intervention Report the authors described those powers as follows:

Moral hazard assessment

When considering whether a better outcome for the scheme might be obtained by means other than a RAA, we will examine whether any of our other powers could be used. For example, we have power under the Pensions Act 2004 to issue either a CN or FSD, which are often referred to as our avoidance or moral hazard powers. We ask the trustees to conduct their own moral hazard assessment to consider whether, in their view, our avoidance powers could be used.

Anti-embarrassment assessment

The PPF has its own criteria for assessing whether it would object to a RAA proposal, which includes the PPF being given an equity stake in the surviving restructured company. This is a form of anti-embarrassment protection to make sure that, where the PPF has taken on a scheme from a company with a large pension liability, the PPF won’t lose out if the restructured company goes on to become profitable as a result of being released from its pension obligations. The PPF will generally seek at least 10% equity in the restructured company for the scheme if the future shareholders are not currently involved with the company. It will seek at least 33% if the future shareholders are parties currently involved with the business.”

Anti-avoidance powers

We have power under the Pensions Act 2004 to issue a CN under sections 38 and 47 and/or a FSD under section 43, which are often referred to as our anti-avoidance or moral hazard powers.

Contribution notice

A CN requires a cash payment to be made to a scheme (or, in some circumstances, to the PPF by the respondent(s), which might be the scheme’s sponsoring employer or a person(s) connected to or associated with the employer (including individuals). A CN creates a debt due from the respondent(s) to the trustees or managers of the scheme, payment of which can be enforced by those trustees or managers (or the PPF, where the scheme is in PPF assessment). Alternatively we may enforce on their behalf. In order for a CN to be issued under section 38 of the Pensions Act 2004, we must be of the opinion that the respondent(s) was party to an act, or failure to act, which either meets the main purpose test or the material detriment test.

The main purpose test is that one of the main purposes of the act (or failure to act) was either (a) to prevent the recovery of all or part of a debt due to the scheme under section 75 of the Pensions Act 1995, or (b) to prevent such a debt from becoming due. The material detriment test is met where we are of the opinion that the act or failure has detrimentally affected in a material way the likelihood of accrued scheme benefits being received by or in respect of members. We must also be of the opinion that it is reasonable to require the respondent(s) to pay the sum specified in the contribution notice. This will include, where relevant, consideration of issues such as the degree of involvement of the respondent(s) in the act or failure to act; the relationship the respondent(s) had with the employer; and the value of benefits which the respondent(s) receives or is entitled to receive from the employer.

We can initiate our Warning Notice procedure seeking a CN up to six years after the act in question occurred. A CN may also be issued under section 47 of the Pensions Act 2004 following non-compliance with a FSD.

Financial support direction

A FSD requires financial support for a scheme to be put in place by the respondent(s). If a FSD is issued by the PR, the form and amount of any financial support will then need to be proposed by the respondent(s) concerned and approved by us. If we do not approve the financial support offered, then the law allows us to take further action to impose a CN under section 47 of the Pensions Act 2004 to require specified support to be put in place. As with CNs, the respondent(s) can be the scheme’s sponsoring employer or a person(s) connected to or associated with the employer. In contrast to CNs, FSDs can only be issued to individuals in specific limited circumstances.

In order for a FSD to be issued, we must be of the opinion that the scheme’s employer was either (a) a service company or (b) insufficiently resourced, at a time chosen by TPR (referred to as the relevant time). Being insufficiently resourced requires that an employer’s resources are valued at less than 50% of its estimated section 75 debt to the scheme at the relevant time, and that there is an associated or connected entity (or entities) that have sufficient value to make up the difference. The respondent(s) must have been either an employer in relation to the scheme or a person connected to or associated with the employer as at the relevant time.”

42.

By email dated 28 August 2014 Arcadia’s general counsel, Mr Adam Goldman, wrote to Mr Budge after a call with the Pensions Regulator. It is clear that the Pensions Regulator had asked a number of very searching questions about Project Thor and was concerned that Arcadia might attempt to “cram down” the BHS Group’s creditors by a CVA. He also stated that the Pensions Regulator “would be asking KPMG to look at whether a better outcome could be achieved through use of moral hazard powers”. Mr Martin confirmed in his first witness statement dated 16 January 2023 (“Martin 1”) that the Pensions Regulator wanted to receive information from Sir Philip Green, Arcadia and Taveta which would allow it to conduct a moral hazard review including an examination of prior transactions and dividend payments.

43.

The Pensions Regulator also had information gathering powers. Section 72 of the PA 2004 (“S.72”) gave the Pensions Regulator a wide-reaching power to require the disclosure of information or documents which were relevant to the exercise of its functions. Failure to comply with a S.72 request was a criminal offence. It is one of the striking features of this case that the Pensions Regulator did not look favourably on the sale to RAL and exercised its power under S.72 almost immediately after the sale.

44.

In autumn 2014 Taveta decided to put Project Thor on hold and on 3 October 2014 the draft clearance application was withdrawn. By email dated 15 September 2014 Mr Martin wrote to Mr Budge expressing disappointment and confirming that the Trustees recognised the need for change whether this was Project Thor or some other form of restructuring. It is unnecessary for me to speculate about why Sir Philip Green put Project Thor on hold but one reason may have been changes in market conditions and gilt yields which meant that the contribution which Taveta or Arcadia would have to make to the Schemes had now increased. By email dated 7 January 2015 Mr Budge wrote to Sir Philip Green stating that Deloitte now advised that £97 million was required to secure full funding of the Schemes.

(4)

Project Albion

45.

In April 2013 Sir Philip Green began to make sustained efforts to sell the BHS Group. Ms Robin Saunders, a high profile entrepreneur, introduced him to Mr Paul Sutton as a potential purchaser and on 16 July 2013 a business plan was prepared using the code name “Project Albion”. Mr Sutton had a chequered history. In 1982 he was made bankrupt and his discharge was suspended for over 10 years because of his failure to cooperate with his trustee in bankruptcy. In 2000 he was adjudicated bankrupt in France for 15 years for his role in a transaction involving the Anglo-Irish Bank and in 2002 a French Court found him guilty of fraud and sentenced him to three years imprisonment (although Mr Sutton successfully resisted extradition to France on the basis that he had not been duly notified of the proceedings). On 10 February 2014 he was adjudicated bankrupt for a second time in England.

46.

In their first report dated 25 July 2016 (the “Select Committee Report”), the Select Committee found that Sir Philip Green continued to negotiate with Mr Sutton until at least March 2014. In May 2014 he terminated contact with Mr Sutton and Mr Chappell became involved. The Select Committee described the way in which he became involved in the acquisition as follows (footnotes removed):

“56.

Contrary to what he told Ms Saunders, Sir Philip or his team continued to work with Paul Sutton until Spring 2014, during which time he developed a business plan to purchase BHS called ‘Project Albion’. Paul Budge, Sir Philip’s Finance Director, told us that attempts to do a deal with Mr Sutton ended in March 2014. Contradicting this, we have seen copies of emails showing that Sir Philip’s office arranged a meeting with Paul Sutton for 13 May. It was only after it emerged that Paul Sutton was using Sir Philip’s name “as a reference in Monaco” that Sir Philip appears to have decided the risk to his reputation of continuing to discuss a deal was too great. Mr Budge was asked to investigate Paul Sutton and Sir Philip subsequently decided to terminate contact; Mr Budge told us that this had happened on 13 May 2014, the same date they were due to meet. The person who arranged the meeting on behalf of Mr Sutton was Dominic Chappell, who described the meeting in an email at the time as “conformation [sic] on the BHS deal with SPG [Sir Philip Green]”.

57.

Dominic Chappell started working with Paul Sutton in around January 2014 — initially as his driver then, later, as an associate in structuring the deal to purchase BHS. The discrediting of Paul Sutton enabled Dominic Chappell to take the reins of the deal; as Mr Sutton “stepped back” from BHS, “Dominic stepped forward”. Paul Budge confirmed that he met with Mr Chappell and Peter Graf (the man Mr Sutton had proposed as BHS’s new CEO) on 16 July 2014. By Autumn 2014, Mr Chappell was presenting his plan to purchase BHS as a done deal, advising River Rock and others that he would be acquiring BHS for £1 both debt free and pension free.

58.

In reality, Dominic Chappell had scarcely, if any, more credibility than Paul Sutton as a suitable buyer for BHS. Mr Chappell had a record of bankruptcy, of which Sir Philip was aware, and neither retail experience nor any experience of running a similar-sized company. It has subsequently been reported that Mr Chappell was forced out of a previous venture in the oil business “after taking around €400,000 (£315,000) from the company for his personal use”. It is amazing that his association with a convicted fraudster and previous bankruptcy did not lead to more thorough scrutiny of his credibility, not least when it became known that he had been misrepresenting the deal to his own advisers, as was made clear to Goldman Sachs in December 2014.”

47.

Mr Chappell’s conduct since 25 April 2016 bears out the Select Committee’s assessment of him. In October 2019 Mr Chappell was disqualified as a director for a period of 10 years. In November 2020 Mr Chappell was sentenced to a six-year custodial sentence for tax offences in respect of sums that he extracted from the BHS Group. The following passages from the sentencing remarks of Bryan J show that his appreciation of Mr Chappell was much the same as the Select Committee’s assessment:

“1.

Dominic Chappell, you have been found guilty of three counts of cheating the Public Revenue in relation to the fraudulent and dishonest non-payment of VAT, corporation tax and income tax over a sustained period of time. I must now sentence you for this catalogue of serious offending. 2. The backdrop to your offending is the acquisition, and subsequent management, of the British Home Stores (BHS) chain of department stores which you purchased from Sir Philip Green’s Arcadia Group for £1 on 11 March 2015 through your corporate vehicle Retail Acquisitions Limited (RAL).”

“15.

You did not pay your tax. Instead you holidayed in the Bahamas over the Christmas period on a yacht that was purchased in your name for €320,000 (albeit with money from RAL), and which you renamed “MAVERICK 6”. As you put it in contemporary emails, “I am having to slum it in the Bahamas for the next three weeks. I know you will all feel my pain”. On your return you did not pay the VAT, the corporation tax or your income tax. Rather the day after the latter should have been paid you purchased a Bentley Continental for £91,000 and purchased a pair of Beretta guns for £11,000 (net after a part-exchange).”

“25.

You have previous motoring convictions which I put to one side as not of relevance. But you are not of positive good character. Your offending occurred against a backdrop of successive bankruptcies (four in total, the last of which was in 2009 the bankruptcy sum being £24m) as well as company insolvencies. You were also convicted on 11 January 2018 under section 77 of the Pensions Act 2004 in respect of your refusal to provide information required under section 72 notices issued by the Pensions Regulator. Whilst these convictions post-date your current criminality there is some overlap in time given that they relate to your conduct between May 2016 and August 2017. I regard such matters as neutralising the suggestion that you have no relevant convictions as a mitigating factor but not as increasing the overall seriousness of your offending.”

“32.

Evading the Public Revenue is a very serious offence, and your offending in relation to three separate taxes involving substantial amounts of unpaid tax evaded over a substantial period of time is an egregious example of such offending. 33. Your offending is so serious that neither a fine alone nor a community sentence can be justified for it, and only an immediate custodial sentence is appropriate. This will be shortest sentence which in my opinion matches the seriousness of your offending, and takes into account the mitigating factors in your case and the period you will spend on licence following your release. 34. Having regard to the aggravating and mitigating features of your offending, and having had careful regard to totality as well as the current features of the pandemic, the sentence I pass is one of 6 years imprisonment on each of Counts 1 to 3, concurrent on each count, a total sentence of 6 year’s imprisonment. 35. You will serve one half of this sentence in custody. You will then be released on licence for the remainder of your sentence. While you are on licence, you must comply with all its conditions. At any time during your licence, the Secretary of State may withdraw it and order your return to custody.”

(5)

RAL

48.

On 31 January 2014 Swiss Rock plc (“Swiss Rock”) was incorporated under the name Containia Ventures plc. It was a company controlled by Mr Chappell and Olivia Investments Ltd, a Gibraltar company, and its board of directors consisted of Mr Chappell and his father, Mr Joseph Chappell. On 20 November 2014 RAL was incorporated under the name “Swiss Rock Ventures Ltd”. Between 20 November 2014 and 5 December 2015 Mr Eddie Parladorio was the sole shareholder. From 5 December 2015 Mr Chappell held 90% of the issued shares, Mr Parladorio held 5% and Mr Stephen Bourne and Mr Mark Tasker held the remaining 5% between them.

49.

Mr Parladorio was a solicitor and the principal of Manleys Solicitors Ltd (“Manleys”), a law firm originally located in Chester. He was a director of RAL from 10 November 2014 until 24 May 2016. He was also the ultimate beneficial owner of a company called Tamed Productions Ltd (“Tamed Productions”) which was paid substantial fees by the BHS Group and a director from 15 May 2015 to 13 June 2021. He had a very significant involvement in both the acquisition and management of the BHS Group but he did not give evidence.

50.

In an interview with the Insolvency Service on 18 January 2017 Mr Parladorio stated that in 2010 he met Mr Sutton and that at the end of 2013 or beginning of 2014 Mr Sutton introduced him to Mr Chappell. Mr Parladorio is now the senior partner of a law firm called Hanover Bond Law. Mr Chandler is a practising barrister. He was self-employed between 1996 and 2011 and became an employed barrister thereafter. He gave evidence in his first witness statement dated 19 January 2023 (“Chandler 1”) about the beginning of his relationship with Mr Parladorio and Mr Chappell:

“11.

During 2011, 1 commenced a gradual transition away from criminal advocacy. In 2013, I worked with Mr Parladorio to set up a London office for Manleys Solicitors ( “Manleys”), a firm of solicitors based in Chester. In around early 2014, Mr Parladorio informed me that a client of his, Mr Paul Sutton, was exploring a potential opportunity to acquire the BHS group of companies. I met Mr Sutton around this time as I acted for him in an unrelated personal bankruptcy matter. I was aware that Mr Parladorio was working to assist Mr Sutton with the potential acquisition. The BHS acquisition occupied a significant amount of Mr Parladorio’s time and so I focused on my work at Manleys’ London office. 12. During that year, I became aware in general terms that Mr Parladorio, together with Mr Chappell, had begun to explore the possibility of making the acquisition without the involvement of Mr Sutton. However, I was not involved in the negotiations or with the purchasing company (Swiss Rock Ventures Limited (“Swiss Rock”), which changed its name to RAL shortly before the acquisition). I did not know Mr Chappell, but Mr Parladorio told me that he was an entrepreneur and commercial property expert. In around mid-2014, 1 met Mr Chappell for the first time. The meeting was a short one, but it left me with the impression that Mr Chappell was driven, energetic and keen to ensure the success of BHS should the proposed acquisition complete. 14. In early 2015, I was aware that Mr Chappell and Mr Parladorio were continuing to explore the opportunity. During this time, Mr Parladorio was spending increasing amounts of time working on the proposed transaction, whilst I continued to look after the legal practice at Manleys. Although I was aware in very general terms that this work was being done by Mr Chappell and Mr Parladorio, and others associated with Swiss Rock, including Mr Mark Tasker and Mr Stephen Bourne, I was not involved in the negotiations. I was also not involved in the preparation or review of any documentation.”

51.

Mr Stephen Bourne was a chartered accountant and director of RAL from 5 December 2014 until he resigned on 11 March 2015. He was former head of corporate finance at BDO Stoy Hayward with over 30 years’ experience in advising on corporate transactions. His wife, Mrs Zoe Bourne, was a financial consultant to the BHS Group following the acquisition. Mr Mark Tasker was a solicitor and partner in Bates Wells Braithwaite LLP. He was a director of RAL from 5 December 2014 until his resignation on 11 March 2015.

52.

Finally, Mr Henningson was a director of RAL from 6 March 2015 to 23 February 2016 and from 21 April 2016 to 25 May 2016. Mr Henningson’s evidence in Henningson 1 is that for most of his working life he has advised companies on corporate finance and he gave the following description of his experience:

“I was a senior advisor on structured finance, real estate and corporate finance at HSH Nord Bank, which is a commercial bank, between 2000 and 2009. After that I was a director at LHKX Capital AG, which was a start up company, between 2009 and 2011. I then became a senior advisor on corporate finance at River Rock Securities Limited ("River Rock"), which was in the business of managing funds and providing investment solutions from 2013 until 2015. 11. I have acted as a professional director of one company in Switzerland, LHKX Capital AG, together with Jonathan Clelland and Martin Graham, both of whom have been engaged in the AIM list in London, where the latter was the managing director. The rest of the companies, in which I was a director, were my own companies. 12. My work has always involved international travel and, as a result, I have contacts all over the world particularly in the fields of investment and finance.”

53.

Mr Henningson’s evidence was that he had known Mr Chappell since the mid to late 1990s and that Mr Chappell first told him about his intention to acquire the BHS Group in mid to late 2014. His evidence about the involvement of River Rock Securities Ltd (“River Rock”) was as follows:

“Mr Chappell explained to me in or about December 2014 that River Rock had not presented him with any workable solutions as to the financing or investment needed but he said that he was in active discussions with Sir Philip Green in relation to the intended acquisition of BHS Group. Around this time, Mr Chappell told me that if he managed to complete the acquisition then he wanted to invite me to join the project in some capacity. During this period, I was still employed by River Rock but I was content to keep the door open with Mr Chappell to see how matters progressed as I thought the opportunity sounded interesting. During this period, I understood from Mr Chappell that BHS was underperforming, and that he believed he could tum the business around to become very successful, but I did not have any real or detailed knowledge of the group's financial position. We never discussed the details such as figures or specific issues.”

54.

The Select Committee formed a different view about the reason why River Rock withdrew from the transaction. They also had a general view about the involvement of advisers more generally which has a particular resonance in this case (and again I have removed the footnotes):

“63.

Large numbers of advisers were involved at various stages of the deal acting for Sir Philip Green and Dominic Chappell. Some were engaged formally, some informally, and some existed on paper alone. Many of those closely involved claim to have drawn comfort from the presence of others. For River Rock, who stood down from the deal on realising they had been misled by Mr Chappell, the presence of Linklaters and Goldman Sachs had given comfort. Linklaters appear to have taken comfort from Olswang. Taveta and Sir Philip Green argue that the presence of Olswang and Grant Thornton helped give Dominic Chappell credibility.”

55.

Mr Curl put a number of questions to the witnesses about River Rock’s decision to withdraw from the transaction as reported by the Select Committee. It is unnecessary for me to decide whether Mr Chappell misled River Rock or whether that is why it chose to withdraw from the transaction. Nor is it necessary for me to decide what (if any) role external advisers had in the acquisition or subsequent events apart from the following four firms. Olswang LLP (“Olswang”) and Grant Thornton (UK) LLP (“GT”) advised RAL on the transaction and then acted for the BHS Group. Weil Gotshal & Manges LLP (“Weil”) and KPMG acted for the group in relation to the CVA. In passing I note that Linklaters LLP (“Linklaters”) acted for Taveta and Arcadia in relation to the acquisition and subsequent transactions. Various other firms of solicitors acted in relation to property and finance transactions and I will introduce them as and when necessary.

D.

Project Harvey

(1)

Early Negotiations

56.

Project Harvey” was the code name which Mr Chappell gave to the acquisition of BHS Group. In their written opening submissions the parties took me through the negotiations in some detail. Again, it is unnecessary for me to recite those negotiations in detail given the issues which I have to decide. For present purposes, it is sufficient to note that Mr Chappell made two proposals to Sir Philip Green to purchase the BHS Group which he originally turned down. It is also important to note that the first involved the proposal that RAL would invest £120 million and Mr Chappell would contribute £5 million by a shareholder’s loan. The second involved the proposal that RAL would obtain £100 million to inject as senior debt and that RAL would invest £35 million unencumbered equity into the group. These terms formed the basis for the final deal (as agreed).

57.

On 15 January 2015 Sir Philip Green informed Mr Budge that he had decided to put the group up for sale. In an interview with the Financial Times on 18 September 2015 he gave as the reasons the fact that he was personally spread too thin and that he wanted to focus on the future of Topshop and Topman outside the UK. In his oral evidence to the Select Committee on 23 May 2016 Mr Budge also gave the following explanation for Sir Philip Green’s decision:

“One of the key issues here is the cost base. There is this perception that BHS has the covenant strength of the group, so if we were to go to the landlords to renegotiate terms as Taveta, associated with Arcadia and BHS, the landlords, who also dealt with Arcadia, wouldn’t really take us seriously. However assertively we wanted to negotiate, we would not be taken seriously because there was always this perception – wrong legally, but it was in people’s minds, such as the landlords’ – that there was always the covenant strength of the wider Taveta group, which didn’t allow us to be able to make the kinds of changes to our cost base that we actually required.”

58.

On 2 February 2015 Mr Budge met Mr Martin and confirmed the press reports. He told Mr Martin that the change was driven by a number of factors but primarily that Project Thor was now considered to be too expensive but also personal factors. By email dated 6 February 2015 Mr Tony Clare of Deloitte wrote to the Pensions Regulator to provide further information about Project Thor:

“In January the shareholders of the Thor business considered the Christmas trading and prospects for the company. Thor continues to be loss making. Further consideration was given to the Thor Pensions Restructuring disclosed to tPR [the Pensions Regulator] pre-Christmas trading. It was noted that the reduction of gilt yields since last Autumn had increased the deficit significantly and that a full actuarial valuation is due as at 31 March 2015. The cash demands on Thor would clearly increase post the valuation if current market conditions extend to the valuation date. As Thor is loss making on both an accounting and a cash flow basis, these anticipated cost increases would not be affordable.”

“The wider group has supported the Thor business over many years. Without the financial support to Thor it is likely there would be an immediate insolvency of the Thor business. This remains a possible outcome. However, the shareholders decided to market the Thor business with a view to obtaining a solvent disposal of the company. This will allow new investors to seek to improve its performance and to finance the pension benefits. Subsequent to deciding to market the Thor business for sale, the details of this exercise have appeared in the press and various parties have expressed an interest in the business. To date, two parties have expressed an interest in a solvent transaction and negotiations remain ongoing with both of them. Thor is committed to keeping the Trustees and tPR [the Pensions Regulator] informed of progress as matters develop.”

59.

Whilst Sir Philip Green was attempting to market the BHS Group, the negotiations with RAL continued. On 29 January 2015 Ms Gillian Hague, the financial controller of Arcadia and director of Taveta, sent Mr Chappell a set of slides called “BHS Information Pack”. This contained very detailed financial information about the group including a number of routes to break even from an annual loss of £49.1 million calculated by reference to earnings before interest, tax, depreciations and amortisation (“EBITDA”).

(2)

The Points of Principle

60.

Mr David Roberts was the engagement partner at Olswang and the principal point of contact with Mr Chappell, Mr Parladorio, Mr Henningson and the other directors of RAL. By email dated 27 January 2015 he wrote to the Olswang deal team stating that following significant press over the past three days, Mr Chappell had confirmed to him that he believed that he had reached terms with Sir Philip Green for the purchase of BHS and set out the terms of the deal as he then understood it.

61.

By email dated 6 February 2015 Mr Roberts wrote to the Olswang deal team again attaching a number of draft documents. In the covering email he stated that terms were almost agreed and once they were, the parties would then negotiate a lock-out agreement. He stated that “our client” would acquire all the issued shares in BHS Group for £1 debt free and “with a normalized working capital position which will be trued up via completion accounts”. Under the heading “Funding (in case you are interested)” he gave the following explanation:

“* The client has an equity investor in the form 'Black Jack' Jack Dellal whose property investment company 'Allied Commercial Exporters Ltd' (Ace) has placed £35m into our client account. The £35m will be used to subscribe for £35m of loan notes in Swiss Rock plc (the parent company of Bidco) and on completion the parent will subscribe for £35m of shares in Swiss Rock Ventures Limited (the Bidco).

* On completion, Bidco will procure SPG to sell-on of his freehold property asset Marylebone House, for £10m to Bidco and who will sell it to Ace for £45m and that purchase price will be satisfied by redemption of the £35m of loan notes and Ace paying £10m in cash, which will go to SPG.

* That leaves Bidco with £35m of equity funding at completion.

* The £35m is held in our client account pursuant to an undertaking given by Olswang to Ace’s lawyers, Mishcon (attached) which envisages the parties enter into a more formal undertaking the terms of which are explained in the attached undertaking.

* Bidco will also need to have a £120m working capital facility in place. We have now agreed terms with Farallon Capital to provide that funding package.

* Charles and I have also negotiated a term sheet (attached) and letter of comfort (attached) from Farallon Capital, a billion dollar US asset manager for a £120m working capital facility to support the capital needs of the business for the next 3 years. The deal involves us selling BHS real estate and repaying chunks of cash each year and re-drawing down in three tranches of £40m per year.”

62.

Mr Roberts attached a draft of the “Points of Principle” (below) and a term sheet dated 4 February 2015 issued by Farallon Capital Europe LLP (“Farallon”). It was headed “Term Sheet for £120,000,000 Loan Facility in connection with the acquisition of BHS” and was also expressed to be confidential and subject to contract. It provided for a loan of £120 million to be advanced to Swiss Rock or an affiliate in three tranches of £40 million. However, the term sheet expressly provided that tranche 2 could only be utilised if tranche 1 was paid in full and tranche 3 could only be utilised if both tranches 1 and 2 had been repaid in full. Moreover, the loan was repayable in full within 36 months and carried interest at LIBOR plus 5.5% per annum and “Payment in Kind” or “PIK” interest of 7.5% per annum compounded quarterly and added to the principal. Finally, one of the conditions precedent to commitment was “satisfactory resolution and consent of the pension regulator with respect to the BHS pension issues”.

63.

On 16 February 2015 Sir Philip Green and Mr Chappell signed a document headed “Points of Principle Subject to Contract” on behalf of Arcadia and Swiss Rock respectively (the “Points of Principle”). The first eight points were as follows:

“1.

Swiss Rock demonstrates that it has £35m of provisional funding at Olswang on shore to acquire Marylebone House in its lawyer's client account and produces a letter of comfort from Farallon Capital in respect of a three year £120m working capital facility.

2.

Swiss Rock will undertake to use all reasonable endeavours to continue to trade the BHS Group for at least three years to effect the turn around and put in place a new business plan.

3.

In return for the above, Arcadia Group shall enable Swiss Rock and its advisers and lenders to conduct focussed due diligence to enable them to complete the transaction as soon as possible.

4.

At completion, Arcadia Group shall procure the sale and Swiss Rock shall purchase all the issued shares for £1.00 and deliver the BHS Group on a debt free basis (including assigning or cancelling all inter group loan between Arcadia Group and BHS or assigning such to Swiss Rock).

5.

At completion, Swiss Rock (or its nominee) will acquire Marylebone House for £35m (unencumbered).

6.

On Completion, Swiss Rock shall inject £10m of new equity into the BHS Group and shall, within 120 days, put in place a staff incentive bonus scheme for senior management on terms to be agreed.

7, Arcadia Group will make annual contributions for each of the next three years to the DB pension scheme of the BHS Group of £5m per annum.

8.

Swiss Rock will use its reasonable endeavours to reach a settlement, as soon as reasonably practicable, with the pension scheme trustees as envisaged under Project Thor (or similar) following a favourable change in interest rates for instance. Arcadia Group shall contribute the balance of any unpaid contributions as referred to in paragraph 7 above to any settlement up to a maximum £15m.”

64.

Point 13 provided that BHS would be debt-free on completion and that Arcadia would ensure that on completion all debt owed by BHS would be either capitalised, released or transferred to Swiss Rock. Point 20 provided that Swiss Rock would have exclusivity to complete the acquisition by 9 March 2015 and for extending the exclusivity period.

(3)

ACE: Heads of Terms

65.

RAL had no funds with which to comply with the very first of the Points of Principle itself and Mr Roberts’ email dated 6 February 2015 explained how Mr Chappell intended to do it. Mr Henningson gave evidence in Henningson 1 that in October or November 2014 he introduced Mr Chappell to Mr Alexander Dellal of ACE. He described the Dellal family as a high profile and wealthy family and stated that Mr Dellal, his father (Mr Guy Dellal) and his grandfather (Mr Jack Dellal) were in the business of high value property investment and providing high value loans. Mr Alexander Dellal and Mr Guy Dellal were the ultimate beneficial owners of ACE and Mr Alexander Dellal was a director.

66.

By letter dated 30 January 2015 Mr Dellal wrote to Mr Chappell on behalf of ACE setting out Heads of Terms (subject to contract) for the purchase of Marylebone House, 129-137 Marylebone House NW1 5QD (“Marylebone House”) for £45 million (the “Heads of Terms”). Marylebone House was the BHS Group’s corporate headquarters which it held on a long lease from Wilton Equity Ltd (“Wilton”), a company which was ultimately owned or controlled by Lady Tina Green. The Heads of Terms included an undertaking by ACE or a subsidiary to place £35 million into the client account of Olswang, who were acting for Swiss Rock, to be held to the order of Mishcon De Reya LLP (“Mishscon"), ACE’s solicitors, in return for a fee of £1 million.

67.

This arrangement was unusual to say the least. The apparent purpose of the undertaking was to enable RAL to give the appearance that RAL had the ability to fund a £35 million cash injection in the BHS Group before completion, to sell on Marylebone House to ACE immediately and then to use £10 million of the proceeds of sale of Marylebone House to make a capital injection into BHSGL. In the event, I did not have to consider whether such an arrangement would have been lawful because Sir Philip Green refused to sell Marylebone House to RAL.

68.

However, the Heads of Terms also included a “put option” under which Swiss Rock could require ACE to purchase a second property, North West House, 119 to 127 Marylebone Road London NW1 5PY (“North West House”), the BHS Group’s office building next door, for £30 million together with a share of any profit above that figure:

Put Option: - Swiss Rock will have a 12 month put option on the Purchaser with regard to the Property known as North West House which is located at 119 Marylebone Road London W1. The option will be for the Purchaser to acquire the Freehold interest of the property with Vacant Possession, for an agreed price of £30,000,000 (Thirty Million Pounds). The Purchaser will have the right to seek an alternative buyer should they wish. In the event that the Purchaser procures an alternative buyer at a higher price, the net amount over and above £30,000,000 (Thirty Million Pounds) will be split 50/50 with Swiss Rock. In the event that the Purchaser does procure an alternative buyer without having to pay any agents fees, the Purchaser will receive a payment of 1 % of the purchase price which will be deducted from the gross proceeds. The net proceeds will then be split 50/50 with Swiss Rock. For the avoidance of doubt, the net proceeds will be the Gross proceeds less all costs associated with the transaction. At the expiration of the Put option the Purchaser will still retain the ability to collect 50% of the net overage amount together with the ability to procure the 1% fee. This will last for a further period of 12 months.”

69.

By 3 February 2015 Mishcon had transferred £35 million into Olswang’s client account and Olswang had given a series of undertakings to hold it to their order. By letter dated 5 February 2015 Mr Chappell wrote back to Mr Dellal on behalf of Swiss Rock agreeing subject to contract to the Heads of Terms contained in the letter dated 30 January 2015. He also stated that in consideration for the payment of £35 million by Mishcon to Olswang to be held to their order, Swiss Rock would pursue negotiations for the purchase of BHSGL.

(4)

Due Diligence

70.

By letter dated 20 February 2015 Mr Roberts wrote to the directors of Swiss Rock confirming that Olswang had been instructed on its behalf in relation to the acquisition of BHSL. On 4 March 2015 Mr Roberts sent an updated engagement letter this time addressed to the directors of both Swiss Rock and RAL. In Schedule 1 Mr Roberts set out the services which Olswang had agreed to provide and these included high level due diligence on a wide range of matters including Marylebone House and the provision of advice in relation to the Schemes. Schedule 2 set out a detailed breakdown of costs and billing. But in the event Olswang charged Swiss Rock and RAL a fee of £1 million (plus VAT of £200,000) for their services and on 12 March 2015 they issued an invoice for that amount.

71.

On 5 March 2015 Mr Mikael Brantberg of Farallon sent Mr Chappell and Mr Henningson a revised term sheet and on the same day Mr Henningson circulated it to Mr Parladorio, Mr Tasker and Mr Bourne. It contained the same or substantially the same terms as the earlier term sheet and Mr Roberts asked Mr Charles Kerrigan, a member of the deal team, to review its contents. By email dated 6 March 2015 he wrote back to Mr Roberts with the following comments:

“I don't think there's anything to say. It's the same form as they had before, just reverses the recent changes about property diligence. It still talks about all asset security though. Now this will go in place after completion all the points I made earlier in the week apply - there is no commitment, generic CPs and the ability for lender to make changes to terms. I don't know if you have or want to pass that on. The pensions issue will be difficult. I understand we think it's ok and no consents required but lenders are cautious. It is possible for a secured lender to inherit liabilities of a DB pension fund of a business it lends to.”

72.

Under cover of an email dated 7 March 2015 Mr Roberts sent the directors of RAL and Swiss Rock, including both Mr Chappell and Mr Henningson, a draft of their due diligence report (the “Olswang Report”) and a letter dated 7 March 2015. In the covering email Mr Roberts stated as follows:

“I attach a first draft of our due diligence report. As that is quite a large document, we have included a key findings section to point out the key issues that have emerged from the diligence exercise. In order to try to encapsulate the risks associated with proceeding, I have also prepared a letter (pdf attached) addressed to the boards of both companies which seeks to point out (at a general level) the risks associated with the transaction that is being contemplated so that the board can be fully appraised of the situation and make a balanced assessment before making a decision to move forward. I have sought to balance the risks with the comfort that the board has also received. The letter is not meant to be a substitute for the due diligence report which needs to be read and understood by the board.”

73.

Olswang do not appear to have issued a final signed report and the Joint Liquidators relied on the terms of the draft which Mr Roberts sent to the directors on 7 March 2015. In particular, they relied on the following passages (and in the extracts below I have ignored the changes tracked in the draft):

“Given that there will be no ongoing access to Arcadia support, it is critical that prior to Completion, the Buyer is confident that it understands the cashflow needs of the Group and further confirms that it will have sufficient cash to fund the current loss making trading of the Group until such time as the turnaround plan presented by management can be effected. Given the size of the loan account in favour of Arcadia (circa £240m), we recommend that the SPA contains a provision to ensure that the intercompany debt from Completion is extinguished in full or it is otherwise assigned to a Buyer entity. We note that an assignment will create a £25m corporation tax change in the Group. We note that the final draft of the SPA provides that £200m of this sum is to be extinguished, with £40m being left outstanding, such sum to be secured over assets of the Group, as agreed between the parties and to be used by the Seller in negotiations as regards to the Group’s pension schemes.”

“Please see Appendix 9 of this Report in respect of our pensions analysis. The Buyer should note that, amongst other matters arising from the pensions issues within the Group, there is a high insolvency risk in respect of the Group should the Acquisition proceed without adequate funding in order to meet the Group's liabilities post Completion. We strongly recommend that the Buyer receives separate insolvency advice and continues to do so post Completion.”

74.

Appendix 9 contained a number of further appendices dealing with the risks associated with Project Thor. The Joint Liquidators alleged that both Mr Chandler and Mr Henningson acquired knowledge of certain facts by reading the Olswang Report and, in particular, Appendix 9. I set out or describe the relevant passages in section V (below) when I come to consider those allegations in detail. However, in an internal email dated 6 March 2015 Mr Roberts wrote to three members of his team stating: “leave a big skull and cross bone [sic] in the exec summary section.” Mr Curl submitted that this accurately captured the tone and substance of the Olswang Report.

75.

In the accompanying letter dated 7 March 2015 (the “Olswang Letter”) Mr Roberts summarised the due diligence which Olswang had been able to carry out in the limited time available. Under the heading “Solvency Issues” he stated as follows:

“7.

We note from the Seller's disclosures in the Data Room that the Group remains solvent due to the ongoing financial assistance provided by the Arcadia group, hence the existence of a £240 million inter-company debt owning from BHS to upstream entities including the Arcadia Group. As such, the Buyer is on notice that there is a funding gap prior to the turnaround being successfully implemented and thus it is critical that the Buyer will be able to ensure the Group remains solvent pending the turn-around.

8.

To get comfort on this issue, as mentioned, you have undertaken an extensive cash flow modelling process to get clarity on the cash flow needs of the business for the next 12 months and have negotiated a working capital facility to be available to ensure that the Buyer will have sufficient working capital to enable the Group to remain solvent.

9.

It is crucial that the directors of the Buyer have confidence in the working capital analysis and believe that they will have sufficient working capital to ensure that the Group remains able to pay its debts as and when they fall due, which is the test in the Insolvency Act, 1986 that the directors must continue to be cognitive of post Completion.

10.

We note however that the working capital funding that is expected to be put in place at Completion is not currently in place and the directors will be relying on a £40 million bridging loan from Sir Philip Green on Completion. If it is not possible to procure refinancing for this loan, the directors should be aware that the Group may well be in a situation where it is unable to meet its debts (i.e. the refinancing of the bridge) and could be exposed to insolvency concerns.

11.

Hence, we are urging the directors not to transact until they have maximum commercial comfort that they will be able to satisfy the terms of the proposed £120 million working capital facility from Farallon. Ideally, you would postpone completion until the funding was in place.”

76.

Under the heading “Pension Deficit” Mr Roberts stated that the pension deficit in the Schemes was “perhaps the most material issue for the directors of the Buyer to understand”. He pointed out the limited access which had been given to RAL’s professional advisers and that most of the material pensions warranties had been removed from the draft of the SPA (below). He then continued:

“13.

The best case scenario will be that the Group continues to meet its annual pension contributions for the foreseeable future (currently £10 million but likely to increase in 2015) without interference by the trustees of the schemes and the quantum of the deficit diminishes due to the recovery of interest rates.

14.

The worst case scenario is that the Group's balance sheet deteriorates post Completion to the point where the Group is unable to continue to trade on a solvent basis which could trigger an acceleration of the funding obligation of the schemes and an almost inevitable collapse of the schemes and an insolvency.

15.

We note however, there is a suggestion that following Completion, the Group may able to effect a restructuring of the schemes in the form of Project Thor which would result in the relevant schemes being transferred to a new company and restructured to a point where there is a chance that they will be self-funding going forward. There is no guarantee that Project Thor will be capable of being effected as the Group would need to be able to demonstrate that it is close to insolvency - which may well have knock on effects to the trading operations of the Group, in particular it could affect the ability of the Group to purchase trade credit insurance.”

77.

Mr Roberts also ran through the possible changes which the Trustees and the Pensions Regulator might demand and stated that Olswang was unable to give the directors of RAL any material assurance that Project Thor would be implemented or that it would be possible to deal with the deficit adequately. Finally, after dealing with other issues, he stated as follows:

“25.

Finally, we note however the commercial comfort that the directors are taking from the representations from Sir Philip Green that he will continue to support the business post Completion and that he has a big commercial interest in ensuring that the Group continues to trade (given the large concession arrangements with Dorothy Perkins, Wallis and Evans) and also due to the reputational risk he is exposed to should BhS fail. We do not doubt these commercial matters and note that great comfort could be drawn from such. 26. That being said, there is no legal obligation on him to do so.”

78.

On 7 March 2015 Mr Henningson forwarded Mr Roberts’ email attaching both the Olswang Report and the Olswang Letter from his River Rock email account to his gmail account. A few minutes earlier he had forwarded another email to his gmail account from Mr Andrew Campbell of Olswang enclosing an updated pensions matrix for discussion the following morning. On 11 March 2015 Mr Henningson also forwarded an email from Roberts to his gmail account attaching a draft of the SPA. The covering email also identified the commercial points which remained outstanding.

79.

GT had carried out the cashflow modelling process referred to in the Olswang Letter and I return to it in more detail below. On 16 February 2015 Mr Chappell instructed GT to start work and on 26 February 2015 GT produced a report in the form of an Excel spreadsheet setting out a detailed analysis of the BHS Group’s suppliers and whether they were covered by trade credit insurance. Under cover of an email dated 27 February 2015 Mr James Dewey of GT sent Mr Chappell and Mr Parladorio a slide deck entitled “Project Harvey Interim Update” and under cover of an email dated 7 March 2015 Mr Paul Martin, who was the engagement partner, sent Mr Chappell, Mr Bourne, Mr Tasker, Mr Parladorio and Mr Henningson a draft of GT’s final report dated 8 March 2015. His covering email stated that there was a meeting at 9 am on the following day to discuss the draft.

80.

Under cover of an email dated 3 March 2015 Ms Leanne Staines of the Arcadia Group sent Mr Matthew Woodgate, a GT senior finance manager, a business plan which the Operations Board had prepared. The parties described it as the “Legacy Turnaround Plan” and I adopt the same description. The plan identified the key members of the BHS management team who had prepared it:

Richard Price Managing Director

Richard started his career with Next where he held various positions in Merchandising. Most latterly he was Head of Merchandising for Menswear. He moved to M&S as Head of Merchandising for Womenswear in 2006. He then took the role of Trading Director for Menswear in 2010. Richard joined BHS as MD in September 2013.

Darren Topp COO

Darren spent 23 years at M&S in the Retail division. He held various roles across Retail and Operations including senior roles in Food and Store Development. His last position at M&S was as Divisional Executive for Operations. Darren joined BHS in 2008 as Retail Director, he was later promoted to Commercial Director where in addition to Retail he was responsible for Digital and International. In 2012 he was promoted to COO.

Kathryn Morgan Finance Director

Kathryn joined the Arcadia Group in 1999 as a graduate. She worked across various brands including Topshop and Wallis. Kathryn moved into property and held various senior roles including Financial Controller in 2006, she was promoted to the role of Head of Finance, before moving to BHS in 2014 as Finance Director.”

81.

Mr Price did not remain in post at the BHS Group once the acquisition had taken place. Mr Topp chose to remain, however, and he was appointed the interim CEO and then CEO. He explained the genesis of the plan in his first witness statement dated 19 January 2023 (“Topp 1”):

“In or around 2015, I was aware that, in its current set up, BHS would struggle to make money and that there was a need for a turnaround. There had been discussions between Sir Philip Green, Mr Richard Price (the then CEO of BHS) and Mr Ian Grabiner (Arcadia’s CEO) and me about the steps that would be necessary to turn the business around. We all recognised the need to identify, and plan for, initiatives that would help in this way. This included (amongst other things) developing a new offering and closing loss-making stores. I was shown a document dated March 2015 which I understand has been referred to in these proceedings as ‘the Legacy Turnaround Plan’. Sir Philip Green had asked me and the Operations Board to put this together in order to present to potential purchasers of the business. This was not a fully costed plan, but rather a guide to what the management team were getting on with, as well as further ideas for what a new owner might do to successfully turn the business around. It was some thoughts and ideas on how to transition the business from loss-making to profitable.”

82.

GT’s final report was dated 11 March 2015 and entitled “Project Harvey Phase 1 Report” (and I will refer to it as the “GT Report”). It consisted of 81 slides and a number of Appendices including GT’s engagement letter dated 7 March 2015 (the “First GT Engagement Letter”). The Joint Liquidators alleged that both Mr Chandler and Mr Henningson acquired knowledge of certain facts by reading the GT Report. I set out or describe the relevant slides and passages in section V (below) when I come to consider those allegations in detail. But in opening Mr Curl and his team described the following statements on slide 9 as a “big skull and crossbones” (using Mr Roberts’ language). That slide stated as follows:

“If Project Thor can be delivered, the deficit could reduce to c.£80m on a self-sufficiency basis (based on Deloitte figures). This will still leave residual risk in the remaining pension scheme that would need funding. All execution risk in Project Thor will lie with the Employer/Buyer. There remains a risk that the Trustees/tPR/PPF may not agree to it from a point of principle or that if they do they will require an equity stake in Bhs Ltd and/or additional financial mitigation. Without Project Thor or a similar exercise it would appear that the scheme size and funding needs present a real threat to the viability of the business. As things stand the Buyer should assume it is acquiring a business that is struggling to fund a pension scheme with a funding deficit of c.£300m (subject to imminent review at upcoming triennial valuation) and a buyout deficit in excess of £500m and which is under the close scrutiny of the Pension Regulator.”

83.

The trial bundle does not contain an email circulating or enclosing the GT Report to the RAL board. But by email dated 11 March 2015 Mr Martin wrote to the board of directors of RAL (including both Mr Chappell and Mr Henningson) stating as follows:

“Later today you will receive the final version of our Project Harvey report that has been updated from our draft of 8 March to reflect the currently proposed funding structure and SPA/TSA. The cash flows in this report have assumed a £5m equity injection from RAL. We understand that the specific terms of this funding source are not yet final. To the extent that this funding is repayable or is otherwise withdrawn from the business, then then cash flows and subsequent headroom will be reduced by an equivalent amount. This has not been reflected in our report.”

84.

The First GT Engagement Letter set out the scope of the engagement which GT had undertaken during what was described as “Phase 1” from 16 February 2015 to 13 March 2015 at the latest: see paragraph 3.1. The scope of the engagement was described as “assistance with due diligence, negotiations with the Vendor and completion of the work set out in Appendix 2”: see paragraph 2.1. The fee which GT charged for Phase 1 was £1 million (plus VAT of £200,000): see paragraph 5.2. On 12 March 2015 GT issued an invoice for that amount plus the VAT. Ms Hilliard relied on paragraph 7.1 which stated as follows:

“You acknowledge that we will rely on the commercial assessment by you of the benefits and risks associated with the Transaction and you will be responsible for that assessment accordingly. We will advise you in what we consider to be your best interests in the light of the circumstances at the time we give our advice which may mean that our advice may be subject to change. We do not expressly or by implication warrant it will be possible for the Transaction to proceed. Should you wish to proceed against our advice in a manner which we do not consider to be in your best interests we may seek to discuss and re-negotiate the terms of this engagement to protect our position (which may involve an underwriting of part of our fees or an increase in fee level to reflect the perceived increase in risk to us). We reserve the right to terminate this engagement should you and we be unable to agree suitable terms following such discussions.”

85.

Appendix 2 stated that the information contained in the report was based primarily on information provided by BHS and Arcadia management. GT also stated that they had not carried out an audit and that the responsibility for the BHS management plan, the cash flow forecasts and the assumptions on which they were based was solely that of BHS and Arcadia management.

(5)

Trade Credit Insurance

86.

Trade credit insurance or supplier credit insurance became an important issue for the BHSGL board immediately after completion. As Mr Topp explained in evidence, this was not insurance taken out by the BHS Group itself but by its principal suppliers, who would supply goods to the group on credit and take out insurance cover against the risk of insolvency or non-payment. Mr Topp also explained that the suppliers would pay the premiums rather than the BHS Group itself. Nevertheless, BHSGL had an indirect but powerful interest in ensuring that the insurers continued to provide cover because the alternatives were far less attractive. BHSL would either have to accept less advantageous payment terms from its suppliers or provide letters of credit upon which the suppliers could call if BHSL failed to pay.

87.

Mr Topp also explained that the withdrawal of cover by trade credit insurers was not an all or nothing event. The cover which suppliers had obtained would gradually unwind but once it had expired, suppliers would either demand new payment terms or require BHSL to arrange letters of credit. But the effect of the withdrawal of trade credit insurance had a significant effect on the BHS Group’s cashflow. As cover expired and BHSL had to arrange letters of credit to cover future payments, it had to provide cash as collateral which was then locked up until the board was able to persuade the trade credit insurers to restore cover or the letters of credit expired.

88.

On 24 February 2015 Euler Hermes SA NV (“Euler Hermes”), which now trades in the UK under the name Allianz Trade, withdrew cover from the BHS Group’s suppliers. On 26 February 2015 Atradius NV (“Atradius”) also withdrew cover to be followed by Nexus CIFS Ltd (“Nexus”) on 3 March 2015. Euler Hermes and Atradius were two of the leading trade credit insurers. Mr Roberts made two witness statements dated 7 March 2019 (“Roberts 1”) and 11 January 2023 (“Roberts 2”). He did not give evidence but the Joint Liquidators served a hearsay notice in respect of his evidence. In Roberts 1 he gave evidence that Sir Philip Green had given an assurance to sort out trade credit insurance:

“RAL indicated that SPG had agreed to put in place working capital loans from Goldman Sachs immediately on completion. Also, SPG had indicated in a meeting a week prior to completion that he would "sort" the trade credit insurers. This was in reply to a request that we had made during an all parties meeting where RAL asked for comfort (either via diligence or a warranty) that completion would not affect the willingness of trade credit insurers to continue to offer trade credit insurance on the BHS covenant. SPG also agreed that annual contributions would be made to the BHS group pension scheme and executed a side letter on behalf of Arcadia Group Limited addressed to Dominic Chappell and BHS Group Limited on completion of the SPA on 11 March 2015.”

(6)

The Pensions Position

89.

On 19 February 2015 the Trustees met Mr Chappell and Mr Parladorio for the first time. Mr Martin made notes of that meeting together with notes of an earlier meeting with Sir Philip Green and Mr Clare of Deloitte. Mr Martin’s notes record that Sir Philip Green and Mr Clare told him that the purpose of the meetings was to ask whether the Trustees would support the sale process. He also recorded that they told him that RAL had undertaken to provide £120 million of working capital. His notes of the meeting record that the meeting with Mr Chappell and Mr Parladorio was a short one and his evidence in Martin 1 was that it lasted only 15 to 20 minutes. His notes also record that Mr Chappell told him that RAL would recapitalise the business and that funding of £120 million was lined up.

90.

On 4 March 2015 Mr Martin attended a meeting with Sir Philip Green and the Pensions Regulator and, once that meeting had finished, Sir Philip Green invited Mr Chappell to join the meeting. By letter dated 5 March 2015 Mr Geoff Cruikshank of the Pensions Regulator wrote to Sir Philip Green recording what he had been told at the meeting in paragraph 7 of his letter:

“a.

The share sale of the Arcadia Group's holding in BHS Limited to a new investor. As we understand it, the new investor is to provide £10m of equity to the business and will raise £120m of new debt within the business. This finance is to be secured by the new investor's lenders taking a fixed charge over certain parts of BHS Limited's property only, and not over the floating charge assets (stock, debtors etc). The Schemes’ position is to be subordinated below the new lender's fixed charge. In return the Schemes are to receive a £15m dowry from the Arcadia Group over a three year period to support proposed deficit recovery contributions totalling £10m pa. The scheme will also receive a floating charge over current assets (stock, debtors etc). This charge will secure £80m of existing debt from BHS to the wider Arcadia Group, ownership of which will be transferred to the Schemes. This charge will sit pari passu to that securing the £160m of existing intra-group debt. which will be transferred to the purchaser. The current intention is for this transaction to complete on Monday 9 March 2015.

b.

The potential for the new investor to execute a modified version of Project Thor after this transaction has been completed is being considered. Instrumental to the success of Project Thor as previously proposed is a Regulated Apportionment Arrangement (an RAA), though it was unclear yesterday whether this will still be central to the proposal.”

91.

In his letter, Mr Cruikshank also explained how the Pensions Regulator approached the exercise of its powers. He stated that it sought to be risk-based and proportionate and that its approach was to educate, enable and enforce. He also explained that two of the powers which it had were to grant “clearance” for materially adverse events and the approval of an RAA (above). He confirmed that no application for clearance of the acquisition or approval of an RAA had been made. He also provided the following guidance which is relevant in the present case:

Clearance

14.

We provide 'clearance' (clearance statements) in respect of certain events. Clearance is relevant for corporate transactions or scheme-related events which are materially detrimental to a defined benefit pension scheme and its members (these we call Type A events). It is a voluntary process.

15.

A clearance statement is not approval of a transaction such as an acquisition or merger, rather it gives assurance that we will not use our anti-avoidance powers in relation to that transaction based on the information contained in the clearance application. We only give clearance if we have received an application and if we consider it reasonable to do so. Whether we choose to do so will be fact-sensitive.

16.

It is also for the trustees to identify if it believes there has been any material detriment. If the trustees do form the view that a Type A event has or will taken [sic] place, it needs to raise this with the employer and seek mitigation. It would be for the employer to then apply for 'clearance'.

17.

If a Trustee is left unsatisfied that any material detriment has not been (or is unlikely to be) mitigated, the Trustee should then report to the regulator setting out its reasons for this view.”

RAA

19.

The best form of support for a pension scheme is an ongoing sponsoring employer. We recognise that in some situations this form of support may no longer be available where the sponsoring employer is at serious risk of insolvency. Where this is the case, it is important for employers, trustees and their advisers to engage in discussions at an early stage to explore the available options, including any which may offer an outcome other than insolvency. We are also willing to engage at this early stage.

20.

An RAA is such an option. It is effectively a means for a scheme's controlled entry into the Pensions Protection Fund (the "PPF”), or continuation of the scheme without recourse to the original employer, usually involving a buy-out of scheme benefits, whilst allowing for its sponsoring employer to continue.

21.

RAAs are extremely uncommon; the expectation when they were introduced into legislation was that they would be used rarely, which has proved to be the case.

22.

Both the regulator and PPF have regulatory functions as part of the RAA process. An RAA must be approved by the regulator, and the PPF must confirm that they do not object to the RAA. The regulator can only approve an RAA if it believes it would be reasonable to do so. The PPF and the regulator have, therefore, always worked very closely together on any RAA application and the PPF would need to be involved in any discussions. Importantly, a 28 day referral period must pass after approval, before an RAA takes effect.

23.

In order for the Regulator to approve an RAA, the circumstances that would need to be considered, include (to our satisfaction): a) Whether insolvency of the employer would be otherwise inevitable or whether there could be alternative solutions which would avoid insolvency; b) Whether the scheme might receive more from an insolvency; c) Whether a better outcome might otherwise be attained for the Scheme by other means, including the use of the Regulator's powers (for example, anti-avoidance powers) where relevant (following the draft application made for Project Thor we have asked the Trustee for this analysis and we understand this is hand); d) The position of the remainder of the employer group; and e) The outcome of the proposals for other creditors.”

“25.

Where there is an application for an RAA we also expect there also to be an application for 'clearance'.”

(7)

A New Deal

92.

In December 2014 Sir Philip Green and Mr Chappell were discussing an equity injection of £35 million. The capital which Mr Chappell would be required to inject into the BHS Group came to be described as “hurt money”: see, for example, an email dated 15 December 2014 which Mr Chappell sent to Mr Budge. By the time Sir Philip Green and Mr Chappell signed the Points of Principle the amount of the capital injection was £10 million. Moreover, the way in which Mr Chappell intended to raise this was by buying Marylebone House for £35 million and selling it on to ACE for £45 million.

93.

This remained the position until a few days before completion. On 3 March 2015 Mr Bourne recorded in his note book under the heading “RAL”: “Lends £35m from ACE Buys BVI/M House for £35m Sells [for] £45m Pays £1m fee to ACE Has net £9m Pays £5m fees Cash £4m”. Over the night of 5 March 2015 Mr Paul Wareham, who was an adviser to RAL but later became an employee of BHS, circulated a “Points of Principle” tracker which was designed to show how RAL would satisfy each one. Against “SR inject £10m of capital” it stated “Sale of MH for £45 million”.

94.

Mr Bourne’s notes (above) show that even on the existing terms Mr Chappell would have found it difficult to fund both the hurt money and the costs of the transaction out of the proceeds of Marylebone House. Mr Henningson was, therefore, trying to raise the additional funds to pay the acquisition costs. He approached Mr Johann Robb, executive chairman of MMV Investments Ltd, for a loan of £1 million but by email dated 5 March 2015 Mr Robb turned down the opportunity on the basis that it was an unsecured loan backed only by Mr Chappell’s personal guarantee.

95.

On Saturday 7 March 2015 the acquisition team met together to discuss the outstanding points and Mr Bourne recorded “Points to Completion” in his notebook. Item 6 was “M House to Arcadia £400k? When payable?” In a different pen he had later crossed through this note and recorded “M House now sold”. In an email dated 9 March 2015 to Mr Benjamin Shore, his associate, Mr Roberts explained the reason (or, at least, the reason which he had been given):

“We have communicated to ACE that SPG has decided to sell Marylebone House to a third party. It has been agreed that we will sell them NWH for £32m plus a £5m loan to DC (to be documented separately). As we hold more than the £32m in the client account, we have been instructed to proceed asap with the NWH sale.”

96.

Mr Roberts also recorded that Mishcon had asked for a sales pack together with the existing drafts of an option agreement and an agency agreement. He also asked Mr Shore to confirm that ACE would grant a lease to BHSL immediately on completion and that it would operate as an overriding lease. By this time Mr Chappell was also being put under pressure to complete immediately. Mr Roberts was asked why Sir Philip Green had accelerated the sale and he gave the following answer in Roberts 1:

“While I cannot know for sure, I believe there were a few factors that might have been responsible for the Acceleration including (i) the existence of a story in the Times by Oliver Shah on 25 January 2015 that leaked the fact that SPG was planning to sell BHS (ii) the fact that the leak might make BHS's trade credit insurers nervous about its financial covenant post completion and (iii) the possibility that SPG wanted the deal done prior to having to meet the rent and VAT obligations for the next rental quarter (30 March 2015).”

97.

By email dated 10 March 2015 Mr Matthew Wentworth-May, a senior associate at Olswang, wrote to the deal team to explain the consequences of the withdrawal of Marylebone House from the acquisition:

“Our expectation (on the assumption that we are still acquiring Carmen tomorrow) is that the headlease of Marylebone House which is currently between Wilton Equity and Carmen will be surrendered by Carmen before completion. BHS will then, immediately following completion of the acquisition of BHS, surrender its existing 25 year occupational lease to Wilton Equity, in return for the grant of a new 2 year rent free occupational lease. This would then reflect what we believe to be the new commercial deal Arcadia keeps Wilton Equity and will sell Marylebone House to a third party following completion subject to a two year rent free lease to BHS (with £14.5 million of the proceeds of sale being gifted to BHS through the existing share premia mechanism). I hope that this makes sense, perhaps we can review the relevant documentation together to make sure it all works from a tax perspective.”

98.

The inference which I draw from Mr Bourne’s notes and these emails is that on or shortly after 7 March 2015 Sir Philip Green told Mr Chappell that Marylebone House would no longer form part of the deal because he had received a better offer but that he would agree to pay a substantial sum out of the proceeds of sale to Mr Chappell. I also infer that Sir Philip Green agreed to postpone the payment of £5 million of the hurt money until Marylebone House was sold. This is consistent with the evidence of both Mr Chandler and Mr Topp. It is also consistent with the Completion Statement (below) and the negotiations leading up to the variation of the SPA on 26 June 2015 (below).

(8)

Hurt Money

99.

This new deal still required Mr Chappell to find £5 million of hurt money by completion and, although he appeared to have a deal with Mr Dellal by 9 March 2015, he and Mr Parladorio continued to look for an alternative source of funds. They approached Mr Mahmood Ismailjee who had been introduced to Mr Chappell by Mr Paul Sutton. By a loan agreement dated 29 September 2014 Mr Ismailjee’s wife, Ms Sara Ismailjee, had lent Swiss Rock £500,000 for nine months at a rate of interest of 10% per annum and in an email dated 9 March 2015 Mr Roberts described him as a director of ASM Investments (UK) Ltd, a Dubai backed property investment company. On 19 January 2017 Mr Ismailjee was interviewed by the Insolvency Service and he gave evidence that he was introduced to Mr Sutton and Mr Chappell and that he advanced money to them to buy shares in AIM listed companies.

100.

By the end of 9 March 2015 Mr Chappell and Mr Parladorio appeared to have reached agreement with Mr Ismailjee instead of ACE and at 12.05 am on 10 March 2015 Mr Parladorio wrote to the other directors of RAL (including Mr Henningson) commenting on the current state of negotiations:

“Dallal ludicrously and disgustingly greedy and the proposed structure will be transparent to SPG because of the requested property charge. Mo far more reasonable. On the basis the the [sic] Mo option will now be pursued ( £3m to DC in return for option to buy NWH for £32m) tomorrow I will also pursue a private loan of £2m to get us to where we want to be. Will report back on this tomorrow.”

101.

By email dated 10 March 2015 and timed at 08.37 Mr Chappell wrote to Mr Roberts stating that he had agreed terms with Mr Ismailjee and forwarded on his email to Mr Ismailjee himself. Mr Roberts also emailed Mr Ismailjee’s solicitor, Mr Rohan Campbell of Irwin Mitchell LLP (“Irwin Mitchell”). However, at 10.13 Mr Parladorio sent an email to Mr Paul Martin of GT, Mr Tasker and Mr Roberts:

“It seems we truly are at squeaky bum time on the £5m. The Mo prospect is around 50/50. Delal/ACE is a non starter. Can the three of us have a ten minute telecom asap as I am very urgently trying to find the £5m for DC but I need to know what can be offered (DC has told me what I can offer commercially but I need to get advice on whether this can work before offering it out. Can we say now or say 10-30am latest. Can we do a dial in via Olswang conference call to make it easier ?”

102.

Mr Parladorio also asked Mr Chandler to approach a contact of his, Mr Wayne Davis, to see if he was prepared to lend the hurt money of £5 million. By email dated 10 March 2015 and timed at 12.23 Mr Chandler wrote to Mr Davis as follows:

“As discussed, an opportunity has arisen for an investor, prepared to loan £2m (or possibly £5m will know this shortly) to a bid company which is involved in the forthcoming acquisition of all the shares in a privately owned UK company. The target company is well known and has a turnover of around £800m p/a. The bid co has arranged all its senior and mezzanine funding (circa £100m) and has been badly let down at the 11th hour (in the last 24 hours) over a small (but important) loan of £5m necessary to get the deal done. Accordingly the individual behind the transaction needs to borrow £5m very quickly on a very short bridging basis (days /weeks not months) and is prepared to offer an extremely attractive return (see below) for the loan as he appreciates that time is short. The negotiations for the acquisition are at a very advanced stage (with major law and accountancy firms preparing documents for signature tomorrow), and so any investor would need to be able to act today, or at a push, tomorrow morning. This would mean transferring the loan monies to the well-respected city firm acting for bidco today to be held to order pending security documentation being agreed and finalised and with a view to the loan being effective and drawn down tomorrow (Wednesday). Given the lateness of the hour (and the requirement arriving out of the blue and at the last moment with a deadline date of tomorrow the for reasons which are complex) alternatives are naturally being sought (first come first served), so any interested person would need to be able to reply and move very quickly.”

103.

Mr Chandler accepted that Mr Parladorio drafted this email and asked him to send it. He also accepted that he later discovered that it contained a number of material inaccuracies although he did not accept that Mr Parladorio knew that they were untrue at the time or deliberately asked him to lie to Mr Davis.

104.

By email dated 10 March 2015 and timed at 16.39 Mr Roberts wrote to members of his team stating that he was expecting £2.5 million in two tranches from ASM and that the first tranche should already be with Olswang. By email timed at 17.30 and headed “hurt money” Mr Roberts wrote to Mr Parladorio stating that an agreement had been reached:

“I am in good shape on this. We have provisionally agreed a deal with ACE for 32m NWH and a £5m loan backed by security over the Atherstone DC. They will allow us to put the £5m into links account tomorrow am and I have sent an undertaking to links to hold it to our order - so that such can go tomorrow first thing. Mishcon are preparing the loan between DC and ACE. We are preparing the SPA and lease back on NWH. Mischons are preparing a legal mortgage and draft fixed charge that BHS Properties Ltd would need to give ACE. ACE also would like a £1m loan note from RAL - which we would draft.”

105.

Under cover of an email timed at 17.35 Mr Shore wrote to Mr Kirpal Kaur of Mishcon enclosing drafts of a contract for sale and transfer of North West House together with official entries from the register of title. In the covering email Mr Shore made it clear that Olswang had been instructed to send the papers to two parties:

“Further to my voicemail message, please find attached the draft Sale and Purchase Contract and Transfer in respect of North West House, these follow the form of documents agreed in respect of Marylebone House. As your client is aware we have also been instructed to issue papers in respect of the sale of North West House to a third party; my client is not obliged to exchange upon the sale of North West House with either party.”

106.

At 18.59 Mr Roberts forwarded this email together with its attachments on to Mr Chappell and Mr Henningson and at 20.22 Mr Henningson forwarded it on to his gmail address. Negotiations appear to have continued with both parties because Mr Roberts did not tell Irwin Mitchell that the deal with Mr Ismailjee was off until late that night. By email dated 11 March 2015 and timed at 03.32 he wrote to Mr Campbell stating: “With apologies for the delay in getting back to you, we have been negotiating hard all night and have run out of time and bandwidth to get your deal done I am afraid.” By email dated 11 March 2015 Mr Campbell wrote back asking Mr Roberts to return the funds which he had received. He also stated as follows:

“ASM have confirmed that they have spoken to Dominic Chappell and that he has agreed to cover our fees in this matter. I assume payment will be made by Swiss Rock plc, but please confirm. Our fees as at close of business yesterday were £9,138.50 (plus VAT and disbursements). Please can you confirm that you have monies on account to pay our fees and that you are instructed to do so. I will send through our invoice by email later today. I look forward to hearing from you with confirmation of the transfer of funds back to ASM and in respect of the payment of our fees.”

107.

Indeed, Olswang must have received £5 million from Mishcon first thing that morning because they were able to pay that sum to Linklaters and by email timed at 11.14 Mr Roberts wrote to Mr Chappell to confirm that Linklaters had acknowledged receipt. I will have to return to the timing of the agreement between RAL and ACE in greater detail below.

E.

Day One: 11 March 2015

(1)

Appointment of Directors

108.

The Joint Liquidators referred to 11 March 2015 as “Day One”. On that day a series of board meetings took place at which Mr Chappell and Mr Henningson were appointed to be directors of the four Companies and also of BHS Properties Ltd (“BHSPL”), the group’s principal property company, and I refer to a number of these meetings below. On the same day both Mr Bourne and Mr Tasker resigned as directors of RAL and on the following day, 12 March 2015, Mr Smith was appointed to be a director of RAL. A week later, on 18 March 2015, Mr Smith and Mr Chandler were also appointed to be directors of BHSGL and on 20 March 2015 Mr Chandler was also appointed to be a director of BHSL. Finally, on 9 April 2015 Mr Topp was also appointed to be a director of BHSGL and on 17 April 2015 he was appointed to be a director of BHSL.

(2)

The SPA

109.

By an agreement dated 11 March 2015 and timed at 5 pm Taveta agreed to sell and RAL agreed to buy the entire issued share capital of BHSGL. The agreement was executed by Mr Budge on behalf of Taveta and by Mr Chappell on behalf of RAL and it provided as follows (so far as is relevant to the issues between the parties):

(1)

The term “BHS Loan” was defined as a loan of £3.5 million made to BHSGL.

(2)

The term “Capital Injection” was defined as the amount of £10 million to be paid by RAL to BHSGL as a subscription for additional shares in the company.

(3)

The term “Completion Statement” was defined by reference to Schedule 10, which contained a very detailed mechanism for drawing up the statement in accordance with UK GAAP and the BHS Group’s current accounting principles and practice (including the appointment of an expert accountant).

(4)

The term "Deed of Release" was defined as a deed also dated 11 March 2015 between BHSGL and Arcadia in relation to the release of monies owed between the BHS Group and the Arcadia Group.

(5)

The term "Fixed and Floating Charges" was defined as the first ranking fixed charge over the BHS store in Bristol, 19 The Mall, Cribbs Causeway Regional Shopping Centre, Patchway, Bristol BS34 5GF (“Cribbs Causeway”) to secure a debt of £15 million owed by BHSGL to Arcadia and the floating charge over the non-property assets of the BHS Group to secure a debt of £25 million owed by BHSGL to Arcadia.

(6)

Clause 2.1 and clause 3 provided that Taveta should sell and RAL should buy all the issued shares of BHSGL for £1.

(7)

Clause 4.1 provided that completion would take place at the offices of Taveta’s solicitors immediately after the execution of the Agreement.

(8)

Clause 4.2 provided that at completion Taveta would procure that there was an amount of cash in the BHS Group of £23,660,000 (clause 4.2.1), procure the making of the BHS Loan (clause 4.2.2) and procure that the BHS Group companies’ debt was zero (clause 4.2.3).

(9)

Clause 4.3 provided that at completion RAL would pay the purchase price to Taveta (clause 4.3.1), procure that the Capital Injection took place (clause 4.3.2), procure that the Fixed and Floating Charges were granted (clause 4.3.4).

(10)

Clause 5 provided that the Completion Statement shall be drawn up in accordance with Schedule 10 and that Taveta and BHSGL would comply with their respective obligations under Schedule 10 pursuant to which the Completion Statement was to be prepared and become final and binding on the parties.

(11)

Clause 6.1 provided that within 120 days from completion RAL would put in place a senior management incentive plan. Clause 6.2 also provided that all funds available on completion (including the proceeds of sale of properties) were to be used for the sole purpose of the day to day running of the BHS Group:

“The Buyer shall procure that: 6.2.1 all monies in or available to the Group Companies at Completion, including the Group Cash Amount, the Capital Injection and the BHS Loan shall be used for the sole purpose of the day-to-day running of the business of the Group Companies; 6.2.2 all proceeds realised by the Group Companies from the sale of the Properties shall be retained by the Group Companies and used for the sole purpose of the day-to-day running of the business of the Group Companies until the compromise with the BHS Pension Scheme and the BHS Senior Management Scheme described in paragraph 1.1.1 of Schedule 8; and 6.2.3 no steps are taken by the Buyer or the Group Companies that would reasonably be expected to adversely affect the ability of the Group Companies and the BHS Business to continue to operate as a going concern and to pay their debts as they fall due.”

(12)

Clause 28 provided that the SPA and the documents referred to in it were to constitute the entire agreement of the parties and RAL agreed and acknowledged that, in entering into it (and the documents referred to in it) it was not relying on any representation, warranty or undertaking not expressly incorporated into it.

(13)

Schedule 8, paragraph 1 imposed an obligation upon RAL to reach agreement with the Trustees to compromise the liabilities of the Schemes and to agree and implement that compromise as soon as reasonably practicable.

(14)

In Schedule 8, paragraph 2 Taveta agreed that it would pay £5 million to the Trustees in each 12 month period following completion up to a maximum of £15 million over a 36 month period and RAL agreed to procure that BHSL would also pay £5 million to the Trustees up to a maximum of £15 million over the same period.

(3)

The Side Letter

110.

By a letter dated 11 March 2015 (the “Side Letter”) Sir Philip Green wrote to Mr Chappell on behalf of Arcadia referring to the Fixed and Floating Charges which were ultimately contained in the Arcadia Security Agreement (below). The Side Letter stated as follows:

“I confirm that the £15m fixed security over Bristol Cribbs Causeway and the £25m floating security over the stock and debtors of the Bhs Group is held to your order: a) To secure the ongoing £10m per annum contributions to the Bhs Pensions Schemes, £5m of which is to be paid by us and £5m of which is to be paid by you; and b) In the event of a compromise or winding up. The floating charge will reduce pro-rata as contributions are made. Should you wish to sell Bristol Cribbs Causeway, it must be replaced with £15m cash or a suitable asset, to be mutually agreed.”

111.

I did not find the Side Letter easy to understand. But Mr Chandler gave evidence that after speaking to Mr Parladorio he understood it as a commitment to transfer the security of £40 million into the Schemes. It appeared to me to provide security for the obligations of both Arcadia and BHSL to pay £5 million a year and to reflect either an express or implied agreement between Sir Philip Green and Mr Chappell that Arcadia would either release the security or transfer it to the Trustees at the direction of BHSGL as part of a wider resolution of the pension deficit.

(4)

Completion

112.

Despite the complexity of these arrangements and the very last minute changes to the deal the parties did not undertake the exercise set out in Schedule 10 to the SPA. Instead, Sir Philip Green and Mr Chappell signed a handwritten document headed “Final Statement” (the “Completion Statement”). It was in fact more of a Day One balance sheet than a completion statement and it recorded that RAL had received – or would receive – a “dowry” of £64.16 million (the “Dowry”). This consisted of £18.64 million of miscellaneous cash and assets, £32 million for North West House, £4.92 million for the BHS Group’s store at The Lanes Shopping Centre, Carlisle CA3 8NX (“Carlisle”) and £8.50 million for Marylebone House. Beneath the Dowry total were two additional numbers: first, £5 million of “Equity” and secondly, an additional £25 million which was explained on the left hand side of the page as a “Goldman’s Facility” of £40 million “less Jersey” of £15 million. This produced a grand total of assets of £94.16 million which was what RAL had either received or inherited on Day One or which it would receive in the coming days.

113.

The Completion Statement shows that Sir Philip Green did not insist on strict compliance with the SPA and agreed instead that the BHS Group would receive £8.5 million out of the proceeds of sale of Marylebone House and that RAL would use that money both to pay for the BHS Loan and the second £5 million of the hurt money or the “Capital Injection” as it was described in the SPA. This is not spelt out in the Completion Statement but is the only obvious way to reconcile this document with the SPA. The SPA did not impose an obligation upon Taveta to sell Marylebone House to RAL (or to pay over any part of the proceeds of sale) and the Completion Statement did not refer to the balance of £5 million of the Capital Injection. Nor did it refer to the BHS Loan of £3.5 million. 11 March 2015 was a Wednesday and it is clear from Ms Hague’s email dated 12 March 2015 (below) that on completion the parties expected the balance to be paid the following Monday, 16 March 2015. Mr Roberts also gave evidence in Roberts 1 that there were two key changes in the structure of the sale which caused him to reassess the risks:

“There were in my view two key changes that increased the risk to RAL, being (i) the removal of a formal completion statement mechanic and (ii) the removal of the sale of Marylebone House as a completion matter.”

(5)

The Security Agreement

114.

By a deed of release also dated 11 March 2015 and made between the Companies, BHSPL and Arcadia, Arcadia unconditionally released BHSGL from any indebtedness other than in respect of an aggregate amount of £40 million which remained owing to Arcadia. The deed also contained mutual releases by Arcadia and each of the other Companies and BHSPL. By letter dated 14 April 2015 BHSGL acknowledged the debt of £40 million and by a deed also dated 14 April 2015 the Companies, BHSPL, BHS (Jersey) Ltd (“BHSJL”) and Epoch Properties Ltd (“Epoch”), another Jersey company, entered into a security agreement with Arcadia (the “Arcadia Security Agreement”). BHSL agreed to grant a first legal charge over Cribbs Causeway and BHSGL and the other companies charged all of their assets (both present and future) by way of first floating charge. There was no dispute that the Security Agreement created a qualifying first charge (“QFC”) which gave Arcadia the right to appoint an administrator and priority over other floating charge holders if the debt was not repaid.

(6)

North West House

115.

On 9 March 2015 Cushman & Wakefield LLP (“C&W”) produced an Excel spreadsheet containing desktop valuations of 54 of the BHS Group’s property. It is clear from an invoice dated 26 March 2015 that C&W undertook these valuations for Farallon as part of its due diligence. It is also clear from the spreadsheet that Vail Williams LLP (“Vail Williams”), a firm of estate agents and advisers in Reading, had provided information to C&W for the purpose of the exercise and that C&W had been provided with Arcadia’s own valuations of the properties.

116.

C&W valued North West House at £45 million which was the same as Arcadia’s valuation. Vail Williams’ comments were: “Short term rent to be agreed. Heads of terms issued at capital value of £45,000,000.” C&W also valued the group’s flagship store at 252-258 Oxford Street and 16 and 17 Princes Street London (“Oxford Street”) at £50 million which was also Arcadia’s valuation. Again, Vail Williams’ comments were: “Freeholder verbally offered circa £50m on 13 February 2015, for insertion of a LL break clause in 2018. Open market rent would be circa £6,750,000 plus premium.” I understood “LL” to be a reference to the landlord. C&W valued the BHS Group’s entire portfolio at £167 million (compared with Arcadia’s valuation of £212 million).

117.

At 12.05 pm on 11 March 2015 a BHSGL board meeting took place at which the Arcadia directors appointed Mr Chappell and Mr Henningson to be directors and then resigned themselves. At 12.15 pm a Lowland board meeting took place and at 12.30 pm a BHSPL board meeting took place at which the same thing happened. The Arcadia directors appointed Mr Chappell and Mr Henningson and then resigned themselves. By 12.30 pm, therefore, on Day One Mr Chappell and Mr Henningson were the sole directors of BHSGL, Lowland and BHSPL. Mr Smith was not appointed until the following day and Mr Chandler a week later. Mr Topp was not appointed until 9 April 2015.

118.

At 2 pm on 11 March 2015 a RAL board meeting also took place at which Mr Chappell, Mr Tasker, Mr Bourne, Mr Parladorio and Mr Henningson were all present. The minutes record as follows:

“The Board noted that BHS had retained Vail Willlams to advise on a property strategy and to confirm valuation of the property estate and it was noted that the Directors had comfort that (absent the property portfolio held by Carmen Properties Limited – which was encumbered to RBS but which was being refinanced to HSBC for £70 million and the Jersey property which was encumbered as to £20 million, but which was being refinanced post completion) the balance of the property portfolio was unencumbered. The Directors confirmed that Vail Williams has prepared a property valuation report for the benefit for circulation.

The Board was ultimately satisfied that a combination of the dowry left on the balance sheet by Sir Philip Green (' SPG"), the availability of the sale proceeds of North West House (which was to happen for £32m immediately on completion), the agreement by SPG to contribute further funds from the sale of Marylebone House and also the offer from SPG to help to procure a cheaper form of working capital facility than the facility that the Company was proposing with Farallon, meant that there was not only sufficient cash and assets available to meet the Group's cash flow needs, there was a reasonable buffer.”

119.

The property valuation referred to in these minutes was set out in a letter dated 11 March 2015 from Mr Mark Sherwood who was a partner in Vail Williams but was about to be engaged by the BHS Group as its property director (although he was never appointed to be a de jure director of any of the Companies). He advised Mr Chappell on behalf of Swiss Rock about the value of the BHS portfolio of properties:

“As requested, we have undertaken a desktop review of the BHS Property Portfolio. We set out below a summary of our views on the likely price achievable if they were to be offered for sale in the current investment market. In formulating our advice, we have relied upon the information on tenure, floor areas and lease details supplied by Arcadia. We have not undertaken detailed planning enquiries and some of the lower value properties have not been inspected by Vail Williams.

As you are aware there are three significant assets within the portfolio. Marylebone and North West House are office buildings fronting onto the Marylebone Road with net internal floor areas of 63,674 sq ft and 41,933 sq ft respectively. We would anticipate Marylebone House achieving a price for the freehold with a 16 month leaseback at nil rent of approximately £62,000,000. The freehold interest in North West House with a 16 month leaseback to BHS at nil rent is likely to achieve a figure in excess of £40,000,000.

252/258 Oxford Street is a retail leasehold interest until 2061. This property has the potential to generate a significant premium from either the landlord or another occupier as the lease has the benefit of being at a significant discount to the open market rental value. In our view, this leasehold interest is likely to generate a premium of between £50,000,000 and £60,000,000. Thus the three principle [sic] assets are likely to generate capital receipts in excess of £150,000,000.”

120.

I was not taken to the executed contract or transfer but it was common ground that on 11 March 2015 Lowland exchanged contracts and completed the sale of North West House to J9 Properties Ltd (“J9”), a company owned or controlled by ACE, for £32 million. Immediately before the sale Lowland granted a lease of North West House to BHSL for a term of two years expiring on 10 March 2017 at a peppercorn rent. The Joint Liquidators’ pleaded case was that completion took place at 7.18 pm and Ms Hilliard and Mr Lightman and their teams did not dispute this. It is common ground that no minutes were kept of any Lowland board meeting to approve the sale of North West House.

121.

By an agreement also dated 11 March 2015 and made between Lowland, J9 and Olswang (the “Escrow Agreement”) Lowland and J9 jointly instructed Olswang to hold £750,000 in their client account subject to the joint instructions. The email correspondence between the solicitors states that the purpose of the Escrow Agreement was to provide security for the obligations which Lowland had agreed to guarantee under the lease of North West House.

(7)

The ACE Loan Note I

122.

On 11 March 2015 a BHSGL board meeting took place at which Mr Chappell and Mr Henningson were present to approve the following transaction. By a deed dated 11 March 2015 and made between BHSGL and ACE (the “ACE Loan Note I”) BHSGL agreed to issue a series of loan notes to the value of £3,465,000 which were repayable in tranches of £1,075,000, £1,285,000, £642,000 and £642,000 at six monthly intervals. The principal sum of £3,320,000 represented two years rent at an open market rack rental value for North West House (which Lowland had let to BHSL at a peppercorn rent immediately before the sale). The balance was made up of the £1 million fee payable under the Heads of Terms dated 30 January 2015, the £750,000 held by Olswang under the Escrow Agreement and £75,000 for professional fees. On 27 March 2015 BHSGL issued a certificate recording that J9 was the registered holder of £1,075,000 unsecured loan notes in respect of the first repayment.

(8)

ACE I

123.

At 5.10 pm on 11 March 2015 another RAL board meeting took place at which Mr Chappell and Mr Henningson were present and at which they resolved to enter into a loan agreement with ACE. By that agreement (the “ACE I Loan Agreement”) ACE agreed to make available to RAL a loan facility of £5 million for the purpose of funding a subscription for shares in BHSGL. Clause 5 provided that £2 million was repayable 5 days after the date of the agreement and £3 million was repayable after 60 days. Clause 7 provided for default interest at 10% per annum and clause 8 provided for the payment of an exit fee of £1 million on the final repayment date. It also required RAL to pay Mishcon’s costs of £25,000.

124.

By a legal charge also dated 11 March 2015 and made between BHSPL and ACE (the “ACE I Charge”), BHSPL charged the freehold of the BHS Group’s principal distribution centre at Unit 8, Carlyon Road, Atherstone, Warwickshire CV9 1LQ (“Atherstone”) to secure repayment of the loan facility. Where I refer to “ACE I” in this judgment, I intend to refer to the ACE I Loan Agreement and the ACE I Charge as amended from time to time (as I explain below). ACE I was the source of the £5 million Capital Injection which RAL was required to make to complete the SPA although the payment itself had been made to Linklaters earlier in the day.

(9)

Proceeds of Sale

125.

Olswang’s client account entries show that on 4 February 2015 they received £35 million from ACE pursuant to the Heads of Terms and that on 10 March 2015 they returned £3 million to Mishcon leaving the balance of £32 million which represented the proceeds of sale of North West House. It was common ground that Lowland sold the property directly to J9 and that RAL was not itself a party to the sale. It follows that Olswang held the proceeds of sale of £35 million in their client account on behalf of Lowland and not RAL after 7.28 pm on Day One.

126.

By email dated 12 March 2015 Ms Hague wrote to Mr Matt Crane, an Associate Director in GT’s Business Consulting division, confirming that BHSGL had received the £5 million Capital Injection together with other payments which represented the £18.6 million cash and assets forming part of the Dowry. However, she also stated that it had not received the proceeds of sale of North West House which was due to be sold that same day for £32 million. She also stated that the proceeds of Carlisle and Marylebone House were due to be received on the following Monday, 16 March 2015:

“Balances at close of play today are shown below: key movements being the +£5m equity injection into the first account listed (BHS Group Ltd); £(3.6)m having been paid out of the AP account (2nd on the list) which is primarily the three transfers to Hudson Road that we discussed (ie the up-front payments); £19.8m having gone into the BHS Ltd No 1 account (the £18.66m transferred from us+ some sales receipts). You will note that we have not received the £32m relating to NWH which was due to be transferred from Olswang - we chased Olswang and left a message on your voicemail Stephen to ensure that you were aware, but I know you were in meetings - not sure what happened to this today? I believe that the Carlisle proceeds and £8.5m re MBH is due to be received on Monday.”

127.

By email dated 12 March 2015 Mr Parladorio instructed Olswang to pay £5 million into RAL’s account at Metrobank and on the same day Mr Chappell also sent an email confirming those instructions. By email dated 13 March 2015 Mr Chappell also gave instructions to transfer £25 million to BHSGL’s bank account (and not the £32 million which Ms Hague had expected). Olswang’s client account ledger confirms that these two payments were made on 12 and 16 March 2015 respectively. Olswang’s client account entries also establish that they made the following additional payments:

(1)

Mrs Ismailjee: On 13 March 2015 Olswang paid £11,484.29 to Irwin Mitchell LLP in relation to their legal fees and in accordance with the agreement recorded in Mr Campbell’s email to Mr Roberts on the morning of the 11 March 2015.

(2)

ACE I: On 20 March 2015 they paid £1,028,415 to Mishcon in part repayment of the first instalment of £2 million which was due within five working days.

(3)

RAL: On 25 March 2015 they paid £211,495.62 into RAL’s bank account.

(4)

The Escrow Agreement: On 27 March 2015 they paid the escrow amount of £750,000 to Mishcon.

128.

These arrangements have taken a considerable amount of print to explain. But in simple terms the position on completion was as follows. RAL paid £1 for the entire issued share capital of BHSGL and it borrowed £5 million from ACE to make the Capital Injection. Olswang were also holding £35 million to ACE’s order until completion of the purchase of North West House when they released £3 million back to Mishcon. They then paid £25 million of the proceeds of sale to the BHS Group and £5.2 million to RAL. RAL then used £1 million to pay part of the first instalment of ACE I and £0.75 million to pay Mishcon pursuant to the Escrow Agreement. RAL provided no funds itself and even the loan which it received to make the Capital Injection was secured on the assets of the BHS Group (and ultimately repaid out of those assets).

(10)

Mr Henningson’s SMS Messages

129.

It is possible to piece together the sequence of transactions on Day One from the minutes of the various board meetings, the transactional documents and the emails sent that day. However, the trial bundle also included an Excel spreadsheet containing text and iMessages passing between Mr Dellal and Mr Henningson. On 11 March 2015 there were 20 messages which Mr Henningson either sent to or received from Mr Dellal or which Mr Dellal sent to or received from Mr Chappell and to which either or both of them copied Mr Henningson. I will have to consider them in greater detail below.

F.

12 March 2015 to 17 April 2015

(1)

Noah I

130.

Despite the change of control, HSBC Bank plc (“HSBC”), the BHS Group’s primary lender, agreed to roll over the group’s existing facilities. Historically, it had made its facilities available to Carmen Properties Ltd (“Carmen”), which was registered in Jersey and a fellow subsidiary of Taveta. Both companies were owned by Taveta Investments Ltd (“TIL”) which was ultimately owned and controlled by Sir Philip and Lady Green.

131.

On 12 March 2015 BHSGL and BHSPL board meetings took place at which Mr Chappell and Mr Henningson approved the new arrangements. By a facility agreement dated 13 March 2015 (“Noah I”) HSBC agreed to provide a facility of £70 million to Carmen for the purpose of re-financing the existing facility. BHSGL, BHSL and 18 group property companies guaranteed the facility which was secured by first legal charges over 12 BHS stores. It was common ground that Noah I did not involve any “new money” and was no more than a continuation of the existing facilities.

132.

Some, or perhaps all, of the legal charges which BHSGL and its subsidiaries were required to grant, however, were not put in place until the negotiations with Arcadia over the Security Agreement had been completed. On 13 April 2015 a BHSL board meeting took place at which Mr Chappell and Mr Henningson approved the relevant documents and on 15 April 2015 BHSL and BHSPL granted a legal mortgage over six BHS stores including Oxford Street to secure Carmen’s obligations under Noah I. On 15 April 2015 BHSL also granted a third party legal charge over the BHS store in Milton Keynes to secure the repayment of Noah I. On 17 April 2015 a BHSPL board meeting took place at which it was proposed that Mr Chandler be appointed a director.

(2)

Mr Bourne

133.

On 13 March 2015 Mr Bourne recorded a conversation with Mr Chandler in his notebook in which he discussed why he had not agreed to join the board of any of the Companies and why it might be risky for Mr Chandler to do so. He stated his reasons succinctly: “didn’t know the deal, didn’t know the people, seen erratic behaviour, cast of weird advisers swimming around, lack of clarity on all sorts of issues.” By email dated 13 March 2015 he expressed similar views to Mr Parladorio under the heading: “We must pay Olswang and GT today Eddie”:

“Lots of reasons for this. Volatile owner who changes his mind, poor track record on fees and has little respect for professionals - until cash moves all fees are at severe risk of not being paid We cannot pretend that this is not damaging all of our reputations. We need total commitment form GT and O going forward. We have to draw a line with Dominic who seemed to have had the time to make some sort of payment to himself! Things are kicking off, we don't need this grief and will be in a stronger position when this is done.”

134.

The concerns which Mr Bourne had raised with Mr Chandler were clearly a matter of concern to him and were still in his mind a week later. By email dated 18 March 2015, and shortly before he was appointed a director of BHSGL and BHSL, Mr Chandler wrote to Mr Parladorio in the following terms:

“Just been doing lots of reading. If there is an insolvency event, then there will be an investigation into the company's affairs. This could lead to directors disqualification proceedings. This has to be reported to the bar council. This could lead to disbarment. Which would be bad. I think there are steps that could be taken that would inoculate me from risk sufficiently to assuage my concerns: importantly I think around company secretarial support, but other things too.... I urgently need to discuss all this with you. I know we are all busy but this is critical to me/us. I will be at Marylebone house early reading the BHS articles ready for the board meeting.”

(3)

Marylebone House

135.

The C&W spreadsheet shows that before the acquisition took place Carmen owned the freehold or long leasehold interests in a number of stores which were leased to BHSL or other group companies including Marylebone House. On 13 March 2015 it surrendered its 25 year head lease of Marylebone House to Wilton Equity Ltd (“Wilton”), which was also ultimately owned or controlled by Lady Green, and on the same day Wilton granted a short two year lease to BHSL at a peppercorn rent. By email dated 13 March 2015 Mr Roberts wrote to Mr Chappell shortly before the surrender and asking about the Capital Injection:

“Before we confirm Carmen can take place, we are just trying to sort out definitively where the £5m of cash coming into the business following the sale of Marylebone House come in. The Seller had agreed to contribute £5m into the business following the sale of Marylebone House. We thought that this £5m was going to be delivered in the Carmen bank account. Linklaters tell us that you and SPG had reached a separate agreement as to how the £5m comes into the group. All that we need to know is that you are happy to confirm that £5m of cash will come into the business via the agreement that you reached with SPG. We don't need to know the agreement, merely that the cash will come into the business as it is needed in the business. If you are happy to confirm the £5m is coming into the business, that is all we need to know and we can then complete Carmen. We need that confirmation now(ish) so that Linklaters can move forward and complete Carmen.”

136.

I was not taken to a reply to this email and it is clear that the question how RAL would raise the second £5 million of the Capital Injection remained unresolved until 26 June 2015 (below). Moreover, I was not taken to any documents to suggest that there were any other negotiations for the sale of Marylebone House (whether for the freehold or the head lease) or that it was ever sold on the open market. Mr Curl and Mr Perkins stated in their written opening submissions that all that appears to have happened is that the share capital in Wilton was transferred to Arcadia for £35 million. Ms Hilliard and Mr Lightman did not dispute that this was correct.

(4)

The MSA

137.

Shortly after Day One BHSGL also agreed to pay RAL for its own services. By a Management Services Agreement dated 13 March 2015 (the “MSA”) and made between RAL and BHSGL, RAL agreed to provide the services set out in Schedule 1 to BHSGL and other members of the BHS Group in a form and manner to be agreed from time to time between them. The MSA did not provide a fixed fee or fee structure either but provided for the fees to be agreed from time to time between the parties. The “Services” set out in Schedule 1 included general administration, marketing, finance, treasury, human resources, procurement, taxation, legal, health, safety, environmental and quality services.

138.

RAL also used the £5.2 million proceeds of sale of North West House to pay the costs of acquisition and to reward its own management or consultants for their services to RAL. In particular, RAL’s ledger confirms that it made the following payments to the following parties:

(1)

Swiss Rock: Between 12 March 2015 and 26 June 2015 RAL paid a total of £1.25 million to Swiss Rock or to Mr Chappell personally under seven invoices which stated that the payments were for: “Agreed success fee on the completion of the purchase of BHS LTD”. The invoices were also in evidence.

(2)

Mr Tasker: On 17 March 2015 RAL paid £465,000 to Mr Tasker under an invoice dated 16 March 2015 for consultancy services including a success fee of £325,000. Again, the invoices were in evidence.

(3)

Mr and Mrs Bourne: On 17 March 2015 RAL paid £465,000 (including VAT of £77,500) to Moreton Acquisitions Ltd in respect of fees for Mr Bourne’s services as a director until his resignation and £36,000 (including VAT of £6,000) in respect of the services of Mrs Zoe Bourne after Day One. Again, the relevant invoices were in evidence.

(4)

Mr Parladorio: On 19 March 2015 and 18 June 2015 RAL transferred £634,500 to EWP1 Ltd (“EWP1”) to pay an invoice dated 18 March 2015 raised by Tamed Productions for services described as: “strategic/business consultancy services (non-legal) in relation to the acquisition of BHS”. Mr Chandler had been the sole director and shareholder but he confirmed in evidence that the invoice was reissued in the name of another company and that these sums were paid into the account of Mr Parladorio.

(5)

GT: On 17 March 2015 RAL paid £1,200,000 (inclusive of VAT) to GT under an invoice dated 12 March 2015 for their “professional services in connection with Project Harvey”.

(6)

Olswang: On 17 March 2015 RAL also paid £1,200,000 (inclusive of VAT) to Olswang under an invoice dated 12 March 2015 for their professional services. On 19 March 2015 RAL also paid Olswang’s disbursements of £5,628.95 (including VAT).

139.

By email dated 13 March 2015 Mr Budge wrote to Ms Hague, stating that he had spoken to Sir Philip Green a number of times and that he was “quite jumpy that only 25 of the 32 coming in, apparently 7 in Bank of China according to Dominic as they may be looking for finance from them too!” The inference which I draw from this email is that on or before 13 March 2015 Mr Chappell told Sir Philip Green that he had put the missing £7 million on deposit at the Bank of China. This inference is supported by a number of other documents to which I refer below.

140.

By email dated 14 March 2015 Mr Mark O’Sullivan, a GT advisory partner, wrote to Mr Bourne asking why the proceeds of sale were so much lower than anticipated and Mr Bourne replied informing him that £5 million was being retained “for adviser fees etc”. Arcadia were still providing the accounting and treasury functions for the BHS Group after completion and by email dated 25 March 2015 Ms Morgan wrote to Ms Hague stating that the proceeds of sale should have been transferred to Lowland and asking for instructions to transfer the £25 million between BHSGL and Lowland. By an internal email dated 31 March 2015 Ms Hague also asked where the remaining £7 million had gone and Mrs Bourne was asked to follow it up.

141.

By email dated 9 April 2015 Mr Crane of GT reported to Mrs Bourne that £5 million had been used to pay transaction costs and £2 million to repay ACE I. His breakdown of the various transaction costs was not an accurate one and no doubt reflected his instructions. He described the loan repayment issue as a “somewhat sensitive one” and he stated as follows:

“The £2m, per the loan agreement summary I have from Olswang, is an initial repayment of a £5m loan from Allied Commercial Exports Limited. We’re not yet sure exactly what has been paid of this as yet, but understand this is why the £2m was not transferred to Lowland or RAL. I believe there is some connection between this and the new owners of NW House, the Dellal’s, but currently don’t have any more information.”

(5)

13 to 25 March: Board Meetings

142.

On 13 March 2015 a BHSGL board meeting took place at which Mr Chappell and Mr Henningson were present and at which the existing bank mandates were brought to an end. On 20 March 2015 a further board meeting took place at which Mr Chappell, Mr Henningson and Mr Chandler were present and at which all three became authorised signatories together with Mr Topp and Ms Morgan. For any payment between £25,000 and £1,000,000 two of their five signatures were required and for any payment between £1,000,000 and £5,000,000 two of the four signatures of Mr Chappell, Mr Henningson, Mr Chandler and Mr Topp were now required.

143.

On 14 March 2015 GT prepared an updated report on trade credit insurance in which they set out the total of outstanding payments covered by each insurer and the total of outstanding commitments immediately after completion. On 17 March 2015 Mr Chappell, Mr Topp, Ms Morgan and Mr O’Sullivan of GT met Euler Hermes and on the same day Mr O’Sullivan circulated an email summarising the meeting. He recorded that the representatives of Euler Hermes had been unhappy to learn about the acquisition from the press. They had also made it clear that they had written cover on the basis that the Arcadia Group was cash rich and that it would now take weeks (not days) to get to a decision whether to restore cover after the separation of the BHS Group from Arcadia. Mr O’Sullivan identified one way to expedite the process:

“Clearly we can’t wait for them to jump through their internal hoops and therefore at the same time as complying with their request, we need to see if we can accelerate a decision by raising it up the chain within EH. This may involve pulling on SPG’s commitment to DC to provide a bond guaranteeing the EH exposure to BHS. DC is also looking into potential other sources of a bond to back up the EH exposure to BHS. However, need to consider if others get wind of this whether they will come asking as well.”

144.

On 18 March 2015 a BHSGL board meeting took place at which Mr Chappell and Mr Henningson appointed Mr Chandler to be an executive director and Mr Smith to be a non-executive director. The board also resolved to appoint Mr Topp as interim CEO. The minutes of the meeting also record that Mr Chappell set out his reaction to the meeting with Euler Hermes:

“DC1 reported that the meeting had been difficult. EH had asked for a substantial amount of information that GT and Katherine (KM) Morgan would now be working on. Even if there was any decision to begin offering cover again it would take a few weeks to process. DC1 indicated that HSBC has begun to offer cover again, and that SPG had offered to provide a bond. DC1 also had a contact in Dubai who might also be able to assist in the provision of a bond.”

145.

On 25 March 2015 a BHSGL board meeting took place at which Mr Smith, Mr Chappell, Mr Chandler and Mr Henningson were all present. The minutes record that at that meeting the board resolved to appoint Ms Emma Reid as the company secretary and to pay Mr Chappell remuneration of £300,000 per annum and Mr Smith and Mr Henningson £150,000 per annum. The minutes also record that the board agreed to pay Mr Michael Morris, who was a corporate finance professional engaged to raise finance, remuneration of £125,000 per annum pro rata. The minutes also record that Mr Chappell reported to the meeting about the meetings with the Trustee and the Pensions Regulator:

“DC1 reported that the meetings with the Pension Trustees and the Pension Regulator had been difficult. The Regulator in particular reported that it had been trying to obtain answers to questions from the previous owner of BHS for many years, without any success. It was felt that there was a real intention to fix liability for the pension deficit on the previous owners, and that this might hamper any potential deal with the Trustees to rectify the deficit.”

(6)

Noah II

146.

Although the Points of Principle required Swiss Rock to produce a letter of comfort from Farallon, the SPA was not conditional upon RAL entering into a working capital facility for any amount. Indeed, by completion it appears that the negotiations with Farallon had come to an end because the Completion Statement contemplated that RAL would obtain a facility of £40 million from Goldman Sachs. However, there was no evidence before me that Goldman Sachs was ever willing to provide a loan facility and by 17 March 2015 BHSGL was in further negotiations with HSBC. On that day Mr Roberts sent an email to Mr Keith Hinds, a pensions partner at GT, stating as follows:

“It is certainly the case that given the deal RAL was able to negotiate with SPG, it was not necessary to utilize the very expensive £120m working capital facility that was being considered from Farallon and, instead, a smaller £25m facility is being considered and meetings have been held this week to help progress such a deal.”

147.

On 24 March 2015 BHSGL and BHSL board meetings took place at which Mr Chappell, Mr Henningson and Mr Chandler approved a working capital facility of £40 million to be granted by HSBC. By a facility agreement dated 26 March 2015 (“Noah II”) HSBC agreed to grant a facility of £40 million to BHSGL in two tranches of £15 million and £25 million. Tranche A was to be used for the purpose of repaying an existing facility agreement dated 18 April 2013 between BHSGL and Bank of Scotland plc (“BOS”). Tranche B was to be used for the purpose of BHSGL’s working capital requirements. Epoch, BHSJL, BHSL and BHSPL all guaranteed BHSGL’s obligations under Noah II.

148.

The term of the loan was three years and after two initial payments of £250,000 it was to be repaid in monthly instalments of £500,000. It carried interest at 3 months LIBOR plus 1.6% and BHSGL was required to pay an arrangement fee of £280,000 and a commitment fee of 1.05% on any undrawn element of the facility. The loan was secured on Oxford Street and the BHS stores in Manchester, Jersey, Carmarthen, Sunderland, Taunton and Grimsby. Tranche A was drawn immediately to repay the existing BOS facility. On 26 March 2015 BHSGL drew down an initial £597,150 of Tranche B to pay the arrangement fee and legal fees for Noah II and on 30 April 2015 BHSGL drew down £3 million. On 21 May 2015 it drew down a further £10 million. But this was the extent to which the facility was utilised and according to GT’s weekly cashflow updates £12.8 million remained undrawn. On 26 June 2015 BHSGL repaid £15,907,474.12 to discharge Noah II in full.

149.

By a deed of guarantee and indemnity also dated 26 March 2015 Arcadia agreed separately to guarantee Noah II. Although Arcadia was not a party to Noah II, the facility agreement provided that BHSGL was not permitted to submit a drawdown request without the consent of Arcadia (which was defined as the “Corporate Guarantor”):

“(a)

To use the Tranche A Facility the Borrower must give to the Lender a duly completed Drawdown Request not later than 10.00am on the Drawdown Date or such other time as may be agreed between the Lender and the Borrower. (b) Subject to paragraph (c) below, to use the Tranche B Facility the Borrower must give to the Lender a duly completed Drawdown Request not later than 10.00am 3 Business Days prior to the Drawdown Date. (c) The Borrower may not submit a Drawdown Request in respect of the Tranche B Facility without the prior written consent of the Corporate Guarantor, such consent not to be unreasonably withheld or delayed.”

150.

On 24 March 2015 members of the BHSGL board also attended a meeting with Mr Roberts who advised them about the detailed terms of Noah II. Mr Chandler took handwritten notes of the meeting which show that it took place immediately after the board meeting. Mr Roberts advised the BHSGL board that Arcadia’s consent was required under clause 2.1 but that it could not to be unreasonably withheld. He also advised them that it would be reasonable for Arcadia to withhold its consent if BHSGL was in breach of the existing facility or in the event of insolvency. He also advised that there was no upside to Arcadia letting the BHS Group go under and that it was “not a bad facility.”

(7)

The S.72 Notice

151.

As I have already stated, the Pensions Regulator has extensive powers to give notice require a sponsoring employer to provide documents under S.72 of the PA 2004 and it was a criminal offence not to comply with such a notice. By letter dated 27 March 2015 Ms Claire Boorman of the Pensions Regulator wrote to Olswang on behalf BHSL giving notice under S.72 requesting a detailed list of documents in relation to the acquisition and any security which had been offered to the Schemes. I will refer to the letter as the “S.72 Notice” and Ms Boorman explained its purpose as follows:

“The Regulator is currently investigating whether or not the use of its power to issue a financial support direction (“FSD”) under section 43 of the Act or issue a contribution notice ("CN") under section 38 of the Act is appropriate. In particular the Regulator currently is interested in the sale that took place of BHS Group Limited ("BHS") to Retail Acquisitions Limited ("RAL”), the steps that were taken in the build up to that sale and the subsequent impact that the sale might have had on the Schemes. Additionally, we anticipate that we will subsequently be seeking information to assess the flows of value between BHS, and Arcadia and Taveta and between BHS and its ultimate beneficial owners since 2000.”

152.

Mr Parladorio instructed Mr Ashley Hurst of Olswang to act on behalf of RAL in relation to the S.72 Notice and by an engagement letter dated 30 March 2015 Mr Hurst wrote to Mr Parladorio agreeing to act for RAL in relation to the information requests. He described the engagement as “Project Rubus" and he confirmed that Olswang were also acting for BHSL and Mr Chappell.

(8)

The Second GT Engagement Letter

153.

On 30 March 2015 GT produced a draft engagement letter addressed to RAL, BHSGL and BHSL (the “Second GT Engagement Letter”). The copy in the trial bundle was unsigned and I was not taken to any covering email under which it was sent. Nevertheless, Ms Hilliard and her team placed considerable reliance on it and for that reason I set out its principal terms. The letter stated that GT would work to support the BHS management in relation to the separation of the BHS Group from Arcadia and that this assistance would cover the following areas:

“● Business separation and development of operating model

● Monitoring of short term cash flows and development of a working capital and funding monitoring team

● Providing advice and support in respect of the Group's defined benefit pensions schemes (the Schemes)

● Providing advice on tax related matters including separating the Group from the Seller Group's VAT registration, ad-hoc advice as required eg in relation to property transactions and development of an in-house group tax team

● Supporting the development of the Group's three-to-five year strategy including the business plan and underlying financial model”

154.

In Appendix 2, GT set out their detailed scope of work. They identified as a key work area the development of robust business cases and plans for EBITDA growth initiatives which would feed into the 3 to 5 year business plan (above). Under the heading “Funding, cash flow and monitoring” they identified as “key work areas” working closely with management to do the following:

“● Meet with Seller Group finance and treasury teams to agree processes and flow of data and reports to allow daily tracking of Group cash balances

● Update the weekly cash flow forecasts to reflect variances between planned and actual cash flows

● Provide advice on the preparation of presentations for, and attend meetings with, relevant external stakeholders (eg, credit insurers and suppliers) to discuss funding, headroom and cash flow matters

● Support Management in considering the working capital assumptions to be incorporated as part of the integrated business model and in considering where there may be opportunities to drive working capital improvement as part of any future business initiatives

● Work with Management to develop internal capability in relation to weekly cash flow monitoring and forecasting with the finance function on a standalone basis

● Based on the activities above, prepare and discuss with RAL and Management a 2-3 page weekly cash flow and headroom paper summarising current position, any potential issues or challenges and actions being taken to mitigate”

155.

Under the heading “Business plan development and Model development” GT also identified as "key work areas” the following in relation to both the management’s turnaround plan and also the 3 to 5 year business plan and financial model:

“● Analyse the like for like historical performance (revenue, growth, contribution) of each division, relative to each other and to space allocated taking into account impact of concessions/inserts

● Compare historical performance of each division to relevant market/ competitive benchmarks

● Work with each of the divisional management teams to explain causal factors underlying historical performance, and to understand/challenge/ develop their plans for growth (including food store rollout)”

“● Synthesise analyses above together with carve-out and operational/ supply chain strategies to develop with Management a comprehensive plan and implementation timing taking into account resource requirements, inter-dependencies, pilot testing, etc

● Design/develop divisional financial model driven by actionable drivers

● Work with management to populate these drivers with robust, evidence-based assumptions

● Review and test reasonableness of financial forecasts, conduct sensitivity analyses, and iterate as appropriate

● Finalise business plan and financial forecasts for presentation to the Parent's board for its consideration and approval”

(9)

The GT weekly cashflow updates

156.

By the date of the Second GT Engagement Letter, GT had already begun to produce a weekly cashflow update which usually consisted of about 7 slides and was produced during the relevant week or within a day or so after the week in question had ended. The weekly cashflow update for the week ended 28 March 2015 was dated 24 March 2015 and it contained the following:

(1)

Headroom key issues as at 28 March: These were identified by a traffic light system of red for “critical”, amber for “urgent” and green for “monitor” with a description of the issue and the action required. The only red or critical issue identified in this week was “Supplier credit insurance” and the action required was for daily updates with follow up calls to all insurers and the development of a reporting format.

(2)

Cashflow variance analysis: This slide contained a breakdown of the variance against forecast together with commentary explaining why the forecast had been missed. This week there was a positive variance of £26.5 million which was explained by a number of factors.

(3)

Cashflow forecast w/e 4 April: The next slide consisted of a cashflow forecast for the coming week showing that the total closing cash balance was forecast to be a negative balance of £15.8 million.

(4)

Revised headroom forecast: This slide contained a graph showing the forecast cashflow for a year comparing a “Base Case” against a “Revised Forecast” and setting out the key assumptions on which it was based. This headroom forecast assumed the sale of Marylebone House at the end of May, the sale of Carlisle at the end of August and the sale of Oxford Street in September 2015.

(5)

Important Information: On the final slide GT set out the basis for the forecast, the extent to which GT had been able to test the assumptions and the adjustments which they had made.

157.

GT continued to produce weekly cashflow updates until 1 September 2015 when Mr Harry Carver began to produce internal BHS cashflow forecasts on a similar basis. Throughout the period between April and September 2015 GT adopted the same format with some minor modifications (including the introduction of a much more detailed forecast in tabular form). For present purposes, it is sufficient to describe the general form of the GT weekly cashflow updates. The Joint Liquidators alleged that both Mr Chandler and Mr Henningson acquired knowledge of certain facts by reading the weekly updates and that at various times they knew (or ought to have known) that GT’s instructions were inaccurate or false. I set out or describe the relevant updates in section V (below) when I come to consider those allegations in detail.

158.

Finally, it is important to note at this stage that the “Base Case” shown in the headroom forecast in each weekly cashflow update was based on the Base Case in a similar graph in the GT Report preceding the acquisition. This graph contained a conventional line for the “Base Case” together with two further lines based on two sensitivities: first, a 5% sales sensitivity and, secondly, a “no working capital facility” sensitivity. It is important that I should record that this Base Case was not the same as the Base Case described in the July 2015 Turnaround Plan (below).

(10)

9 April 2015: BHSGL Board Meeting

159.

On 9 April 2015 a BHSGL board meeting took place at which Mr Smith, Mr Chappell, Mr Chandler and Mr Henningson were all present and Mr Parladorio was in attendance. The minutes record that in addition to Mr Topp’s appointment, Mr Sherwood’s package was discussed, that there was discussion about the property portfolio and that the board approved Vail Williams’ terms of engagement. The minutes then record under the heading “BHS Pension”:

“EP reported that there were two issues that needed to be addressed: i) a comfortable dialogue needed to be established with the trustees and ii) the Company had been served with a S72 notice by the Pensions Regulator (the Regulator).

With regards to the s72 notice, it seemed the Regulator's view was that it needed to understand the motives and know more about the sale of BHS as their request included information relating to why and how the purchase of BHS had taken place. To assist with the supply of information, external assistance had been arranged. It would take until the end of the month to complete the data collection. Olswang would provide a road map that laid out the motives and reasons for the purchase of BHS along with where the pension trust sat within that. This would then be presented to the Regulator, as well as used for discussions with the trustees over arrangements for the deficient reduction.

KS suggested that at some point the Regulator would need to consider the distraction that this was having on the business itself and the way in which the S72 notice was using valuable funds that would otherwise have been available to put towards the deficit. DC2 had queried why the Regulator had not served the S 72 notice to SPG despite their asking questions of him for many years and those not having been answered. The board noted despite these observations, the immediate supply of information needed to be dealt with.

160.

At the meeting on 9 April 2015 Mr Chandler also arranged for Olswang to provide presentations to the board on the duties of directors. Mr Roberts gave a presentation on directors’ duties generally, Mr Julian Turner gave a presentation on insolvency law matters and Mr Ron Burgess gave a presentation on pensions law. Olswang also produced two memos on directors’ duties and their duties and potential liabilities in relation to insolvency. The minutes of the meeting record that Mr Roberts explained the general duties of directors to the board members and that Mr Turner then gave the following explanation about insolvency and wrongful trading:

“JT then explained to the directors what their duties were if the company became financially vulnerable and likely to be heading towards liquidation or administration. He explained that the actions of the board leading up to administration were crucial and would determine to what extent creditors would be paid. If the company were to go into a formal process, the issue that the board would be faced with was one of Wrongful Trading. Whereas, when a company went into liquidation, a case could be brought against directors individually.

Wrongful Trading depended upon whether there was a reasonable prospect of avoiding liquidation and the action taken to avoid that situation. If found liable the individual director could be required to personally contribute for the shortfall in the amount owed to creditors. The amount that a director could be liable for depended upon their role. This formed an objective test whereby a different standard of care and level of duty was expected according to the directors' experience and role. Returning to the liability that could rest on wrongful trading, JT explained the test was whether there was a reasonable possibility of avoiding involuntary liquidation. If the board had reached that point, they needed to minimise loss to potential creditors and address what steps they could take to achieve that.

There were 2 stages for the board to keep in mind:

1.

Had the company reached the threshold where involuntary liquidation could no longer be avoided?

2.

If so, had the board done all they could to avoid this?

The company's creditors were the bank, the landlords, trade creditors, pension funds, Arcadia and employees. On reaching the threshold, the board should bring in an insolvency practitioner to advise them on what actions to take. The board needed to ensure they continued to hold meetings, that all meetings were minuted and that no unnecessary expenses were incurred. This would provide evidence that the board were seeking to protect creditors from any further loss. The board queried how likely it was for a director to be found liable. JT explained there was little case law around this. In practice, a director would have insufficient funds to justify a case being pursued or a settlement would be reached.”

161.

The minutes also record that Mr Turner gave a detailed explanation about administration and that Mr Burgess then explained the duties of the directors in relation to the Schemes before discussing the concept of “moral hazard”:

“RB then introduced the concept of moral hazard. The board heard how the regulator could compel a company to contribute to its pension scheme and how moral hazard could be avoided. The board needed [to] keep under consideration its obligations to fund the pension scheme when entering into discussions around financing of the business. Activities and transactions could be broken down into different types. Type A activities were those that could have a material detriment to the ability of the scheme to meet its pension liabilities. Type A events included a change in creditor priority and changes in capital arrangements.

The board also considered other powers the Pensions Regulator had, which included the power to issue a contribution notice, how the material detriment test worked, a financial support direction and the situation in which that would arise. This was an area that the Pensions Regulator was currently exploring through its S72 notice. The board would need to consider, with advice, whether permission was required from the trustees and the Pensions Regulator for some of the proposed transactions to ensure the moral hazard was not invoked. This was known as the clearance procedure. The board discussed SPG and Arcadia's position in relation to moral hazard.”

162.

Finally, on 9 April 2015 Mr Smith signed a “Request for Services” form dated 20 March 2015 which had been issued by Vail Williams. The form described those services as the provision of professional advice and the management of the process to reduce real estate costs and maximise capital returns from both freehold and leasehold disposals. It also described Mr Chappell as the primary point of contact but also named Mr Wareham and Mr Sherwood, who confirmed in his evidence that he had taken up his role of BHSGL’s property director by this date.

163.

As I have already stated, Mr Sherwood was a partner in Vail Williams before he became the BHS Group’s property director and an issue arose during his evidence whether he remained a partner and was seconded to BHS or whether he was separately retained or employed. It is unnecessary for me to decide that issue because there is no dispute that Mr Sherwood carried out the functions or duties of the BHS Group’s property director.

164.

On 2 March 2015 Mr Sherwood had also entered into an agreement with a company called Capital Management Ltd (“CML”) on behalf of Vail Williams to share equally all transactional fees paid by the BHS Group or RAL on a joint agency basis for a period of 24 months. The agreement was signed by Mr Colin Sutton on behalf of CML, who was a business associate of Mr Chappell or his father. In a letter to the Insolvency Service dated 1 February 2017 Vail Williams stated that the only sum paid under this agreement was a single payment of £164,200 in respect of the sale and leaseback of the BHS Group’s distribution centre at Atherstone (below) which completed on 26 August 2015 (below).

(11)

£521,976: Payment to Swiss Rock

165.

By letter dated 16 April 2015 Mr Chappell submitted a letter to Arcadia which contained a payment request for £521,976 to be paid to Swiss Rock’s bank account at Barclays. Both he and Mr Henningson had signed the letter and it stated: “Please ensure that this is done on a same day transfer.” Ms Jessica Kitchiner, a finance analyst at Arcadia (which was still providing back office support to the BHS Group), completed a payment request form and submitted it to Ms Morgan for approval. The form stated that the purpose of the payment was: “Acquisition Fees for Grant Thornton - £521,976.”

166.

By email timed at 11.11 Ms Morgan approved the payment. By email timed at 11.41 Ms Hague wrote to Ms Morgan asking to speak to her urgently. She referred to the request for payment to Swiss Rock and then continued as follows:

“You’ve approved it so not my place not to pay it. BUT I just wanted to ensure that you are aware that virtually the same amount was the subject of a transfer request yesterday (somebody went in to a bank branch to ask for the transfer) but the bank thinking it was an unusual request coming through a branch queried it with Treasury on your behalf not being able to get hold of anyone at BHS we queried it with Matt Crane and put it on hold as none of us knew what it was feedback from Rich B later was that it was stamp duty and that in fact has to be paid from BHS so the transfer was declined. Just want to check that you are aware of all of this as the TT request says Grant Thornton Fees but payable to Swiss Rock.”

167.

Ms Morgan then contacted Mr Topp. After some discussion, they approved the payment and Mr Topp endorsed the payment request with his signature and annotated the letter from Mr Chappell and Mr Henningson as follows: “Discussion with DC ref payment, needed in order to claim VAT back on transaction. Monies will return to BHS in approx. 3 weeks’ time.” The payment was made that day out from BHSL’s current account into Swiss Rock’s current account. The funds were never returned. Swiss Rock’s bank statements show that the sum of £521,976 was not used to pay either GT or HMRC. £300,000 was paid to Mrs Ismailjee and £165,000 was withdrawn by Mr Chappell personally. The balance was used to pay a number of debts or to make payments to Mr Chappell’s father, Mr Joe Chappell.

(12)

The 17 April Board Meeting

168.

On 17 April 2015 GT produced a set of five slides entitled “Credit insurance considerations”. On the first slide they stated that as far as they were aware, credit insurers were not writing cover and that there was currently about £25 million of orders on hold. They set out a range of updates and actions and explained the position in relation to the individual insurers. In particular, they stated that they were awaiting responses from Euler Hermes and Atradius.

169.

On 17 April 2015 a BHSGL board meeting took place at which Mr Smith, Mr Chappell, Mr Chandler, Mr Henningson and Mr Topp were all present with Mr Parladorio, Ms Morgan and Ms Reid in attendance. I will refer to this meeting as the “17 April Board Meeting” and for it the board members had GT’s weekly cashflow update dated 15 April 2015 for the week ended 11 April 2015 available. By email dated 29 April 2015 Mr Chandler wrote to Mr Turner and Mr Burgess incorporating the following extract from the draft minutes of the meeting into his email and asking them whether any amendments were required:

“KM referred to the revised headroom forecast as at 11 April that had been circulated to the board and reported:

• as of this week, the closing balance was £19.9m, with a headroom of £20.6m next week;

• the low point for headroom would be in October at £5.1m and factored in the sale of MH by the end of May and Oxford Street in September; and

• the sale of MH would take the headroom low to £8.5m.

DC1 thought it likely that the sale of MH would be better than forecast. The sale of Oxford Street had to take place post September for tax reasons but was critical to cash flow and the ongoing success of the business. DT said that in recent discussions with Compass, the sale of Oxford Street had been raised. However, the benefits of the sale had not been factored in and whilst these would not been in this financial year, they would come through the following year. The board noted the forecast disposal price of Oxford Street was in the region of £50m.

DT raised the trouble caused by the trade credit facility. As at today letters of credit (LoC) totalling £6.5m were required to secure Autumn stock. The board took the opportunity to consider the matter further. The discussion included:

● if LoCs were written then negotiations with trade suppliers to extend their terms beyond 60 days, to 90 or 120 days needed to take place. This would also have a positive impact on cash flow;

● GT wanted to put the change in credit terms into a cash flow model;

● moving rental payments from a quarterly to monthly basis would alter the nature of cash flow and avoid peaks and troughs that was a current feature;

● LoCs were required today so that gift shop stock for Christmas could be ordered;

● LoCs could only be issued on the condition that they would drop away once underwriters were willing to issue trade credit insurance again;

● KM would address credit terms being extended to 120 days;

● whether SPG had been able to provide assistance: SPG did not want to write LoCs and considered this part of a larger discussion and requirement for a greater amount of credit, however, for the business this was critical and the gift shop order needed to covered and resolved immediately;

● the business was already close to its low point and the cash flow did not include issue of LoCs, which once issued, did put cash flow in the red.

[A] Concerned at the solvency of the business and the potential for wrongful trading, in particular in relation to the fact that the intended LoC might take the headroom in October below Zero, the board agreed that they needed to identify factors that would prevent insolvency and had a real likelihood of materialising. The board noted that the following factors needed to borne in mind:

● the sale of Oxford Street for circa £50m;

● the sale of MH for circa £7-8m;

● the Carlisle disposal;

● moving from quarterly to monthly rental payments;

● the HSBC £25m draw down facility;

● talks with Bank of China for a potential £1m overdraft and a £120m draw down facility;

● the overall property portfolio management would relieve pressure on cash flow;

● change in credit terms to 90 or 120 days would benefit cash flow;

● savings as a result of the Compass deal through the transfer of staff;

● guaranteed profits from Compass were not currently in the cash flow;

● the Booker deal would allow logistics for the supply of food to be closed down as Booker would manage logistics themselves. This created a benefit to cash flow which had not yet been added in; and

● announcements relating to Bookers and Compass was expected to demonstrate other significant businesses were willing to invest in BHS and ease trade credit supply issues.

[B] For all of the above reasons, it was considered that the Company was taking all necessary and reasonable steps to ensure that the Company was not trading insolvently. KS commended KM on her fortnightly board report and asked KM also provide a table of information that showed current amounts of stock, cash, borrowings and headroom. Terms of the borrowings and facilities needed to be included so that maturity dates could be considered by the board during discussions if necessary.”

170.

For ease of reference I will refer to the twelve factors referred to in the third set of bullet points (above) as the “Solvency Factors” in the remainder of this judgment. I have also inserted the letters “A” and “B” in bold type in the text immediately above and below the Solvency Factors and I will refer to those two paragraphs as “Passage A” and “Passage B” for reasons which will shortly become apparent. On 1 May 2015 Mr Turner replied to Mr Chandler’s email attaching a revised draft of what he had called “Cash Flow” wording. He had amended Passages A and B so that they read as follows (and I have highlighted the changes in the text):

[A] Concerned at the solvency of the business and the potential for wrongful trading, in particular in relation to the fact that the intended LoC might take the headroom in October below Zero, the directors agreed that they needed to consider if there was a reasonable prospect of the Company avoiding going into insolvent liquidation and identified the following factors, which had a real prospect of materialising, that would impact on this assessment

[B] For all of the above reasons, the directors considered that there was a reasonable prospect that the Company would avoid going into insolvent liquidation. Furthermore, the directors considered that they were acting in the best interests of the Company's creditors. KS commended KM on her fortnightly board report and asked KM also provide a table of information that showed current amounts of stock, cash, borrowings and headroom. Terms of the borrowings and facilities needed to be included so that maturity dates could be considered by the board during discussions if necessary.”

171.

In the covering email Mr Turner described these amendments as “minor changes to reflect what the directors should be considering from a wrongful trading perspective”. He also stated that he had “added an additional sentence to reflect the fact that what the directors are doing they are doing with the interests of creditors in mind.” He did not, however, change any of the Solvency Factors and he repeated the advice which he had given on 9 April 2015:

“As we discussed at the board meeting we attended, should the directors conclude at any time that there is not a reasonable prospect of avoiding insolvent liquidation, then at that point in time the directors should take every step with a view to minimising the potential loss to the company's creditors that they ought to take. We also advised that even if the point had not yet been reached where there was no reasonable prospect of avoiding insolvent liquidation, it may still be prudent, depending on the actual financial circumstances, to ensure that every such step was taken. In such a situation it may be sensible to specifically make a reference to that in the minutes. However, if the board still feel that they are some way from that point, then it may be that that additional wording is not needed at this point in time and that what is included is sufficient.”

172.

The amendments which Mr Turner had made to Passages A and B (above) were incorporated into the minutes and signed by Mr Smith at the BHSGL board meeting which took place on 4 June 2015. This reflected the BHSGL board’s normal and conventional practice of the board approving the minutes of the previous meeting and Mr Smith signing them (or whoever took the chair).

G.

18 April to 26 June 2015

(1)

The LOC Facilities

173.

By a facility agreement dated 15 April 2015 Barclays Bank plc (“Barclays”) agreed to grant BHSL a documentary letter of credit facility for £2 million for the purpose of financing the purchase of stock and commodities (the “First LOC Facility”). The facility was to be secured by a cross-guarantee and debenture to be granted by BHSGL, BHSL, BHSPL and Davenbush. It was also a special condition of the facility that BHSL should provide a guarantee for £2 million from Arcadia in a form and substance which was satisfactory to Barclays by 27 April 2015.

174.

In the event, Arcadia did not provide this guarantee and by a letter of variation dated 30 April 2015 Barclays required BHSL to agree to amended terms under which a new special condition was substituted with effect from that date requiring BHSL to ensure that at all times its credit balance was equal to the facility of £2 million and to grant a charge over that credit balance. By email dated 5 May 2015 Ms Laura Sims of Barclays sent the letter of variation to Ms Bourne and it took effect immediately.

175.

By a second facility agreement also dated 30 April 2015 Barclays agreed to grant BHSL a bonds guarantee or indemnity facility for £6 million for general corporate purposes (the “Second LOC Facility”). This facility was also to be secured by a cross-guarantee and debenture to be granted by BHSGL, BHSL, BHSPL and Davenbush although it was not a term of the facility that BHSL had to maintain a minimum credit balance or grant a charge over it. At a board meeting on 1 May 2015 Mr Topp and Mr Chandler approved the terms of the facility agreement and on 6 May 2015 they both signed it. Under cover of a letter dated 4 May 2015 (which must have been wrongly dated by mistake) Mr Chandler returned the signed facility agreement to Barclays.

176.

By letter dated 5 May 2015 Barclays also required BHSL to agree to amend an earlier bonds guarantee or indemnity facility agreement for £1 million originally dated 25 July 2012 to ensure that at all times its credit balance was equal to the facility of £1 million and to grant a charge over that credit balance. It was common ground that the principal purpose of this facility was to cover deferred duty payable to HMRC on imported goods. I will refer to this as the “Barclays HMRC Facility”.

177.

By a letter of variation dated 22 May 2015 Barclays agreed to increase the Second LOC Facility to £13.1 million. By a further letter of variation dated 12 June 2015 it agreed to increase the Second LOC Facility to £19.92 million and by a further letter dated 21 October 2015 it agreed to increase it to £22.42 million. On 6 May 2015 the total amount of the facilities available to BHSL was £8.6 million (excluding the Barclays HMRC Facility). On 26 May 2015, when BHSL counter-signed the first letter of variation, the total amount of those facilities was £15.1 million and on 16 June 2015, when BHSL counter-signed the second letter of variation, the total amount of those facilities was £21.9 million. These figures are admitted by Mr Chandler in his Points of Defence.

178.

In the cashflow update for the week ended 9 May 2015 GT identified supplier credit insurance and letters of credit as a critical issue in relation to cashflow, funding and headroom. They stated that supplier credit insurance lines remained largely closed and that the estimated supplier cover was £31 million for “AW15” which I take to be a reference to autumn and winter 2015. They also reported that the latest cashflow forecast indicated that there was likely to be insufficient headroom to post £31 million of cash collateral to write all of the necessary letters of credit. Finally, GT also reported that BHSL had agreed to issue letters of credit worth £7 million to four critical suppliers of which £4.6 million was in place and £2.4 million would be actioned during that week.

179.

The revised cashflow forecast for the following week ended 16 May 2015 showed, however, that there would now be a total closing cash balance of £17.2 million and closing headroom of £14.8 million after taking into account the letters of credit worth £2.4 million to be issued the same week. The revised headroom forecast showed a separate line for headroom excluding cash held for letters of credit which still showed substantial headroom. However, GT also made the following comment about the position at the end of the following week (original emphasis):

“Headroom drops to £14.8m in week 37, and includes £7m of L/Cs, and a further £2m duty deferment collateral in week 38 but does not include any further collateral to fund more L/Cs although management has recommended a further £6m of L/Cs be provided over the coming weeks.”

(2)

The Deed of Amendment and Variation

180.

RAL failed to repay the £2 million due within five days under the ACE I Loan Agreement and defaulted on its obligations immediately. By letter dated 14 April 2015 Mr Dellal wrote to RAL and Olswang on behalf of ACE stating that £1 million had been paid to Mishcon on 20 March 2015 but this did not satisfy RAL’s obligations. He stated that an Event of Default had occurred under ACE I and he reserved ACE’s rights. On 16 April 2015 Mr Chappell met Mr Dellal to discuss the position and by email dated 17 April 2015 headed “without prejudice” Mr Bernard Berman, who was a director of ACE, put forward the following proposals:

“I really do need your help on this as a matter of urgency. As a suggestion I believe I might be able to help and try and avert the action if we can do one of the following:-

1)

The Lease on North West House completed as per our intention. I understand this is probably a non-starter for you in a very short timeframe due to third party matters.

2)

Another entity to be either BHS Properties Ltd or BHS Group to enter into the lease.

3)

The unsecured loan note to be added to the Atherstone loan. On this basis we will keep the remaining amount of the escrow account as set off for the loss of the rental income.

I want to try and help the situation as much as I can and really do need you to get David Roberts to present an acceptable proposal to Mishcons by the end of Monday at absolute latest which can be implemented in very short order.”

181.

The first two numbered paragraphs related to a proposal that the existing lease granted by Lowland should be surrendered and that J9 would grant a new lease to BHSGL or BHSPL (and I note that a draft lease was in circulation at the time). On 21 April 2015 Mr Henningson met Mr Dellal as his SMS messages record. By email dated 21 April 2015 headed “without prejudice and subject to contract” Mr Dellal wrote directly to Mr Henningson setting out the following revised proposals:

“Thank you for coming in to see Bernie and myself. We have now given the matter some thought and we believe the way to appease our Trustees is as follows:- We will extend the time period for repayment of the Secured facility until December 2015. In consideration of doing this:

1)

The entire Escrow amount of £750,000 will be released immediately and will cover the repayments up until August 2015, together with accrued interest, legal costs and the insurance. A further payment of £500,000 will be payable in June 2015. The remaining payments under this section of the unsecured loan will then be paid for a further 17 months. This amount totals £2,128,333.35 and for the avoidance of doubt will be paid as follows:-….

…2) The payment of £1,075,000 under the unsecured facility will be paid as per the original agreement in September 2015.

3)

The on-going occupation at Atherstone will have to be regularised in accordance with comments to be made by Mishcon de Reya. This will be on the basis of either an express tenancy at will to the occupier or lease to it which is contracted out of the security of tenure provisions of the Landlord and Tenant Act 1954 containing a rolling break clause exercisable by the landlord on one months notice. In essence we must be able to obtain vacant possession of the property should we need to enforce our security. I trust we can agree this as soon as possible to avert any formal action.”

182.

Beneath the first numbered paragraph and above the second was a table showing monthly payments of £125,196.08. By email dated 30 April 2015 Mr Roberts wrote to Mr Parladorio, Mr Henningson and Mr Chappell (copying in others) setting out the terms finally agreed:

“● The £3.65m loan note from BHS Group is being reduced by £1.075m

● This £1.075m is being switched up to be covered by the original ACE £5m loan and will thus become secured over Atherstone and repayable on 31 Dec like the balance

● The original £5m loan from ACE will be amended and the repayments rescheduled so that:

o the £4m balance will now not be payable until 31 December 2015

o the £1m exit fee (per clause 8 of the loan) will be payable on 31 December 2015

o the £1.075m will also be payable on 31 December 2015

o default interest under the existing breach is capitalized and also repayable on 31 December 2015 (circa £12,600)

o costs and expenses (circa £69,900)

● The £750,000 in MdR s client account is paid to ACE tomorrow when we sign

● The new balance of the loan note is £2.585m which is repayable as per the agreed schedule…

I have spoken to Eddie to inform him of the fact that RAL s indebtedness is increased by this deal but also confirmed that its existing breach is remedied and obligation to pay postponed until the year end. He has reluctantly agreed that this is unavoidable and will discuss with Dominic a potential early sale and lease back of Atherstone to clear the ACE debt.”

183.

By letter dated 1 May 2015 Lowland and J9 terminated the escrow agreement on terms that Olswang released the £750,000 to J9 and paid it into J9’s bank account and by a deed of amendment and variation also dated 1 May 2015 and made between ACE, RAL and BHSPL (the “Deed of Amendment and Variation”) the parties agreed to vary the ACE I Loan Agreement so that a total amount of £5,157,884 became repayable by 31 December 2015 (together with the original exit fee of £1 million). Clause 2.3 explained that the figure of £5,157,884 was made up of the following amounts:

(1)

£4,000,000: This was the amount originally payable under the ACE I Loan Agreement less the £1,000,000 paid on 20 March 2015 out of the proceeds of sale of North West House.

(2)

£1,075,000: This was the first repayment due under ACE Loan Note I and the face value of the first of the loan notes issued by BHSGL on 27 March 2015.

(3)

£12,680.44: consisted of default interest.

(4)

£69,907.80: consisted of legal fees.

184.

By a further agreement dated 1 May 2015 (the “ACE Loan Note II”) BHSGL agreed to issue a new series of loan notes for the principal sum of £2,585,365 which was the balance of the principal sum due under the ACE Loan Note I. Schedule 2 provided that £500,000 was to be repayable on 11 June 2015 and that £122,668.51 would be repayable on eleventh day of each month until 11 December 2016. Finally, on 1 May 2015 BHSGL issued a certificate recording that ACE was the registered holder of £2,585,365 unsecured loan notes.

(3)

The Pensions Regulator

185.

Once the S.72 Notice had been issued by the Pensions Regulator, Mr Parladorio became concerned about the way in which the use of the proceeds of sale of £7 million from North West House might be perceived and he instructed GT to give advice. Mr Keith Hinds was the lead partner at GT in relation to the pensions issues and by email dated 30 April 2015 Ms Lucy Orhnial, an associate director in GT’s tax department, wrote to Mr Parladorio stating as follows:

“Thanks for your time at our meeting earlier this week. As discussed, I have spoken to Keith on the point you raised in relation to RAL, in particular around the £7m loan from Lowland Homes Ltd and the position for RAL in case of a BHS Group insolvency. I have summarised the key points below. Please note that the comments below are high level only and do not factor in any potential legal implications, which should be confirmed with Olswang.

· Part of the proceeds of the disposal of NW House by Lowland Homes Ltd were used to fund £7m costs at the level of RAL (deal fees and the partial repayment of debt to ACE).

· As discussed, the proceeds belong to Lowland Homes and therefore this step created a £7m intercompany debt between Lowland Homes (creditor) and RAL (debtor) in order to get the cash to the right place. It is not possible to distribute the amount up to RAL as there are negative reserves at BHS Ltd

· This leaves RAL exposed in case of a liquidation of the BHS group, as the liquidator would seek repayment of the debt. We discussed simply writing the debt off, which whilst possible from an accounting perspective and should not cause material tax implications it does have other associated risks (see below).

· If the BHS group were to go into liquidation in the near future, it is possible that such a transaction could be challenged by a liquidator as a transaction at a preference with a connected party. In particular, unless there is justifiable commercial rationale for funding the cash to RAL in a scenario where BHS is about to go into liquidation, the liquidator could still seek repayment of the debt.

· Unless RAL is able to refund the £7m to Lowland Homes, there is unlikely to be a simple solution to this issue. As discussed, over time the debt could potentially be released in consideration for payment of management fees and it may be possible for a small portion of the deal fees (relating to the acquisition of NW House) to be recharged to Lowland Homes. However we would need to consider how to structure this correctly, and the unwind is likely to occur over a period of 5-7 years.

· In addition, the £7m loan to RAL may raise moral hazard issues from a pension scheme perspective.”

186.

By email dated 6 May 2015 Mr Hurst of Olswang wrote to Mr Chappell, Mr Chandler, Mr Tasker and Mr Parladorio stating that the Pensions Regulator had requested details of all fees and payments made to RAL directors and shareholders in connection with the acquisition. He stated that they needed to be able to explain the £5.2 million paid to RAL and asked for further instructions. By email dated 7 May 2015 he wrote to them again enclosing a copy of the letter which had been sent to the Pensions Regulator and stating as follows:

“We did not provide the amended schedule with details of payments to the Directors. I spoke to Eddie this afternoon, who provided the details of those payments and attach for your comments an amended version of the schedule with tracked changes to reflect that conversation. In relation to the payments made to DC1, these appear to be more than his contractual entitlement and so they will need to be explained to tPR, in particular the £550K paid to Swiss Rock plc from RAL and the £570K paid to Swiss Rock plc by BHS. I would recommend that you seek advice from GT in relation to these payments as to how they should be treated for accounting purposes. Given that there have been suggestions of insolvency in the build of the sale of BHS, it may also be a good idea for each of the directors to obtain independent legal advice on their fiduciary duties etc. Were there ever to be an insolvency situation, documenting that the directors were taking such precautions tends to prove very helpful.”

187.

On 8 May 2015 Mr Hurst spoke to leading counsel, Mr Paul Newman QC, about the payments made to directors. He relayed the following advice which he had received from Mr Newman:

“I have spoken to Paul Newman QC. He shares my concerns that, viewed collectively, the payments to Directors from the assets of BHS (through BHS itself or through RAL) shortly after completion could potentially trigger the material detriment test for contribution notices. If tPR takes the view that the directors have paid themselves in a way that cannot be justified, and the effect of those payments is to weaken the covenant (which it is), tPR will ask itself whether the size of the overpayments are material to the overall deficit. The more that payments cannot be explained or justified, the more likely it is that tPR will take the view that they are material and seek contributions from the Directors. Documenting the payments to DC1 as loans will of course help the position but the tPR will potentially look behind those loans and assess the likelihood of the money being repaid. Given that no security has been granted for the loans, tPR may take the view that the covenant has been weakened to a material extent.”

(4)

North West House: sale to WELPUT

188.

On 5 May 2015 ACE sold North West House to the West End of London Property Unit Trust (the “WELPUT”) for £38.5 million. By email dated 7 May 2015 Mr Roberts wrote to Mr Shore asking: “Was there any valuation done or evidence to support the £32m purchase price for NW House?” Mr Shore replied stating that Olswang had not seen any valuation advice and Mr Roberts took up the issue with Mr Parladorio. On the same day he replied stating as follows:

“Thanks. I spoke to Mark (Vail Williams) and he said he had no valuation made of NWH and had very little if anything to do with the transaction. So it remains a slight mystery on what basis £32m was regarded as a reasonable price. Hawker was rather hoping we could point to a valuation or some other good reason for the £10m sudden difference in purchase and sale as otherwise the journalists will seek to make a lot of noise over this! I understand we got two years rent free occupation from this sale so was wondering what the market value of that could be said to be? This may help as part of the argument back, if there is leakage.”

189.

Mr Parladorio copied in Mr Sherwood who responded in an email the same day offering a suggestion. His reply indicates that a journalist had already been asking about the transaction:

“So why don't you go back to the journalist and say yes North West House exchanged on the day of the purchase by RAL at a reduced price as part of a funding deal that had been pre agreed with Allied Commercial. BHS and Arcadia both benefit from a significant period of rent free occupation and we are pleased to see Allied Commercial unlocking the upside from this building. I guess the pension guys might have an issue with this? Was it actually BHS that sold it? I thought SPG did it direct?”

190.

The final email in the chain that day was from Mr Roberts who confirmed to Mr Sherwood that North West House had been owned by the BHS Group and not by Arcadia. On 8 May 2015 a BHSGL board meeting took place at which Mr Chappell, Mr Henningson and Mr Chandler were present. The minutes of the meeting record the following in relation to the sale of North West House:

“DC1 referred to the sale of Northwest House. The board agreed careful consideration had gone into the sale and the terms which had formed part of the acquisition of BHS by RAL. The board noted that Northwest House had been sold to Alex Dellal for £32m. In the time since that sale, Mr Dellal had spent considerable time and effort with a team of specialists working on planning so that the sale he had now arranged, for £40m [sic]. This represented the additional time and expertise that his specialist property team had invested into the property. The board agreed that they [sic] it was unlikely they would have been able to achieve the same price and that as part of the agreement a rent free period for occupation of Northwest House had been agreed which represented a saving in excess of £3m. Overall the board considered the price paid by Mr Dellal to have been a fair market price for a buyer willing to take a longer term view of the market.”

191.

Ms Hilliard and Mr Lightman did not adduce any evidence to prove that Mr Dellal had engaged a team of specialists who had been working on either obtaining planning permission or carrying out improvements and I was not taken to any documents in the trial bundle to suggest that he had. Moreover, the statement that the sale involved a rent free period of occupation was untrue. Although Lowland had granted a short lease of North West House for two years at a peppercorn rent shortly before the sale, BHSGL agreed to pay the passing rent of £3.46 million under the ACE Loan Note I and to provide £750,000 as security for that obligation by entering into the Escrow Agreement.

(5)

Bank of China

192.

On or about 13 March 2015 Mr Chappell had told Sir Philip Green that he had £7 million on deposit with the Bank of China and at the 17 April Board Meeting the board identified talks with the Bank of China as a Solvency Factor. In their cashflow update for the week ended 16 May 2015 GT reported that Arcadia had agreed to permit BHSL to draw down a further £17 million of the Noah II facility to fund letters of credit. However, they also stated that Arcadia required a charge over the £7 million cash held at the Bank of China. By email dated 22 May 2015 Ms Caroline Grant of Olswang wrote to Mr Chappell and Mr Chandler stating as follows:

“We understand from the below email from Linklaters that it has been agreed that rather than Arcadia lending BHS £7m as a secured loan, Arcadia are instead going to consent to a further £7m being drawn down under the Noah II working capital facility. However, their consent to the £7m being drawn down is conditional upon the following being provided:

1.

a counter-indemnity agreement between Arcadia and BHS whereby BHS indemnify Arcadia for their liabilities as corporate guarantor of the Noah II liabilities (we assume this will only relate to the new £7m rather than the total borrowings under this facility but it is not clear); and

2.

a charge over the Bank of China account as security for the above counter-indemnity.

Arcadia have also asked for evidence of the amount standing to the credit of the Bank of China account. Could you let us know whether this is agreed and how you would like us to proceed?”

193.

Ms Grant included in the email chain an email from Linklaters attaching drafts of a loan agreement for £7 million and a security agreement and asking for comments on those drafts. Mr Chappell forwarded the chain to Mr Parladorio, who replied on the same day to Mr Chandler:

“The bank of china point (£7m charge over that cash) does not seem to go away. Per our chat yesterday: is this definitely ok with SPG? If so presumably Linklaters have got wrong end of stick and can be told?? As an aside and in any case, I recommend that we pursue a written and enforceable option to borrow £20m from Dellal as this will give some cover and comfort if the cash flow issues in the next few weeks pan out any differently than that discussed on weds. If we leave that potential emergency funding till the last moment then that may cause us problems and the price may also go up. I know some very High Net Worth folk (though of course none of them give the stuff away) and so if Della [sic] doesn’t truly fancy it but the security is there (oxford street as I understand would be used for Dellal), then with a little time still on our side, I could seek such a sum from elsewhere for us.”

194.

I have already set out the evidence which shows what use RAL made of the proceeds of sale of North West House and that it could not have placed £7 million on deposit at the Bank of China. Moreover, in an interview on 18 January 2017 Mr Parladorio told the Insolvency Service that he had never heard or seen anything to suggest that RAL had done so although he could vaguely recall some discussions about the Bank of China between Sir Philip Green and Mr Chappell. Finally, by early June GT had stopped mentioning these funds in their cashflow updates. In the light of this evidence, I find on a balance of probabilities that RAL never placed £7 million on deposit with the Bank of China.

195.

On 21 May 2015 BHSGL submitted a request to Arcadia to drawdown a further £9.2 million of the Noah II facility and Arcadia consented to that request. On 4 June 2015 a meeting of the board of BHSGL took place at which Mr Chappell, Mr Henningson and Mr Chandler were all present. The minutes record that letters of credit worth £9.2 million were to be issued the following week. However, Arcadia did not agree to any further requests to draw on the Noah II Facility and approximately £12.8 million of the facility remained unused.

196.

There was no clear evidence to which I was taken to explain why Sir Philip Green refused to permit BHSGL to draw down the balance of the Noah II facility or, at least, to draw down a further £7.8 million to fund letters of credit (as he had apparently agreed before 16 May 2015). The inference which I draw is that Sir Philip Green refused to permit this once it became clear that RAL would not provide evidence that it had £7 million on deposit at the Bank of China or able to provide security over that deposit. In giving evidence to the Select Committee on 16 June 2016 Sir Philip Green stated that he did not become aware that there was no money on deposit at the Bank of China until the Companies went into administration:

“Yes, we can agree on that. Arcadia were running all the back office, because it was still joined. The £7 million didn’t arrive. When we inquired about the £7 million, we were told the explanation we gave you, and this explanation carried on for several weeks. The £7 million never materialised, nor did the Bank of China. It only transpired, sadly, at the end of this whole process which is about four weeks ago, when an administrator appeared the £7 million remained in the Olswang bank account. Twenty-four or 48 hours after this covenant that I read to you was signed, £7 million of the funds did not arrive in the cash flow that you are looking at; it remained from a statement the administrator showed me in Olswang’s client account. There is no track from there, other than that £1.2 million went to Olswang, £1.2 million went to Grant Thornton, £1.8 million went to Chappell, several hundred thousand pounds went to each of the gentlemen who were sitting here, and then certain loan repayments, or whatever interest payments he arranged with ACE, got paid to ACE. That’s where the £7 million went.”

(6)

The Atherstone Plan

197.

Mr Chandler gave evidence that in early May 2015 a plan emerged to sell Atherstone to Swiss Rock at an undervalue and for Swiss Rock to sell it on at a profit. On 5 June 2015 a meeting of the BHSGL board took place at which Mr Chandler and Mr Topp were present and which Mr Roberts attended. Mr Chandler outlined the plan which involved the sale of Atherstone to Swiss Rock for £10 million and that Swiss Rock would use any excess to repay the inter-company debt of £5.17 million which it owed to BHSGL at that date. The minutes record that Mr Roberts pointed out that the directors would have to have regard to four factors and went through the various considerations with them. Mr Curl suggested to Mr Chandler that his evidence about this plan was misleading and that Mr Smith was the one who opposed it. He also relied on Mr Chandler’s handwritten notes of a meeting in the middle of June 2015.

(7)

The Third and Fourth GT Engagement Letters

198.

By an engagement letter dated 19 May 2015 (the “Third GT Engagement Letter”) GT wrote to BHSGL and BHSL to confirm that they would provide advice and assistance in relation to the separation of the BHS Group from Arcadia. The letter was signed on behalf of both GT and BHSGL and it stated that it was to have effect from 12 March 2015. The scope of work in the body of the letter contained the first three bullet points set out at [153] but not the fourth. The detailed scope of work in Appendix 2 contained the first five bullet points set out in [154].

199.

By a further engagement letter dated 21 May 2015 (the “Fourth GT Engagement Letter”) GT wrote to BHSGL and BHSL to set out the additional services which they would provide in relation to the development of the BHS Group’s three year business plan, the underlying financial model (defined as the “Model”) and the group’s fundraising options. This letter was ultimately signed by both parties (as I explain below). Section 2 of the letter contained the following terms:

“2.6

Our deliverables, which may take the form of verbal advice, presentations, reports, Microsoft Excel models, and email communications, in connection with the Additional Services (the Additional Deliverables) will be presented in the format we consider to be most appropriate. You should be aware that all Additional Deliverables are subject to the terms and conditions set out in the Existing Engagement Letter as if they were Deliverables (as defined therein).”

“2.9

We may require a written representation from the respective directors of the Addressees confirming the factual accuracy of the information contained in our Additional Deliverables.”

200.

Section 3 stated that GT’s assistance was required for the preparation of the Model to underpin the business plan and this was described in the letter as the “Model Purpose”. It then identified two workstreams turnaround planning (stream A) and fundraising options (stream B). In relation to Stream A, GT stated as follows:

“We will assist Management in the preparation (including advice on content and layout) of the Business Plan for the purpose of understanding the potential for engaging in fund raising discussions with third party debt providers. The Business Plan will be presented in Bhs branded format and responsibility for the contents of the Business Plan remains with the Directors and Management.

As part of the planning process, we will work with Management and use both our understanding of the sector and the results of desktop research to identify and to clarify the following:

• Appropriate key performance indicators, based upon indicative benchmarking against other companies in the sector (including both performance measures and recent transaction valuation indicators)

• Analysis of the property portfolio, setting out core stores, potential closures and the impact of various store closure scenarios on contribution, cost base and strategic capability

• The turned-around target operating model for the business (taking account of the benchmarked performance data identified through our work above)

• The transition roadmap to this new operating model (Including setting out key assumptions on brand, sales, produce and promotions)

We will set out the key cash movements anticipated over the three year Plan period and will set out the identified cash requirement of the business under this new operating model. It should be noted that our understanding is that the Business Plan is for internal use by the Directors and Management, we do not at this stage anticipate the Business Plan prepared under this addendum letter of engagement being made available or presented to external parties, including potential financiers of the Bhs business. In the event that you wish to make the Business Plan available to potential financiers, this will be subject to further agreement with us.”

201.

After describing the scope of Stream B, GT stated that they would provide specialist financial modelling for the delivery of both streams and then set out their understanding of the requirements. In particular, they stated that: “The Model is to underpin the Business Plan and support your discussions with potential funding providers.” They then set out the terms and conditions for the Model development which included the following:

“1.2

We will be responsible for the following in relation to the development of the Model:

• suggest alternative approaches for your approval to the extent that your requirements for the Model appear to us to be unachievable or inappropriate for technical, practical or other reasons;

• inform you if the timetable for completion of our work, or our anticipated fees for our work, are likely to exceed those described in this letter;

• development of the Model in accordance with your requirements, in terms of its logical design and the construction and arrangement of its calculations; and

• provide you with interim and unfinished versions of the Model for your review and comment as appropriate.

1.3

You will be responsible for the following in relation to the development of the Model:

• provide the detailed requirements of the Model through discussion with us;

• approve the detailed requirements prior to our commencing work on the construction of the Model;

• provide all input data and assumptions required to populate the Model;

• provision of overall approach and tax and accounting treatments upon which the Model is constructed;

• review the interim versions of the Model during its construction and provide comments or requests for change on a timely basis;

• on-going use and maintenance of the Model, including any future update of the Model on a rolling basis, once our direct involvement with its development has ended; and

• outputs and results of the Model, including any financial statement projections, in terms of the information that the Model creates and its factual accuracy.

1.4

We will not undertake an audit examination, carry out due diligence on any management in formation or any financial accounts provided to us. You may not make any representation to third parties that Grant Thornton has in any way validated the input data, assumptions or output from the Model.

1.5

We will develop the Model in line with the Model Purpose. We do not warrant that the Model will be suitable for use for any other purpose. To the fullest extent permitted by law, we do not accept any responsibility for any loss or damages arising out of the use of the Model, our advice or other communications by the Company for any purpose other than in connection with the Model Purpose.

1.6

We do not accept any responsibility for any formula, programming or other structural changes made to the Model after our direct involvement in its construction has ended, or for any consequences of such changes. Furthermore we do not accept any responsibility for any consequences in the results or use of the Model which arise as a result of any inherent defect in Microsoft Excel or any other software or platform on which the Model relies.”

202.

GT also stated that they would carry out limited testing of the Model but that this would not constitute an audit and would not be conducted independently of the development process and that their testing should not be relied upon to indicate that the Model was free from material error. They then explained what tests they would carry out:

“2.3

We will undertake the following limited procedures in respect of testing the Model or to facilitate separate testing by you;

• perform limited testing of the Model by inputting specimen and test data and comparing the test results to expected results in the course of its development;

• construct the Model, insofar as it is practical to do so, in a way which facilitates independent testing;

• include consistency and structural error checks in the Model where appropriate to do so;

• assist you in responding to queries about the Model that arise from independent testing; and

• rectify any defects in the Model identified by such testing.”

(8)

Farallon

203.

On about 12 May 2015 the BHS Group resumed negotiations with Farallon for a working capital facility. GT’s weekly cashflow update for the week ended 16 May 2015 referred to discussions with Farallon for a £70 million facility. The revised headroom forecast as at 16 May 2015 also assumed that the cash headroom would increase because of the sale of Marylebone House at the end of May and that it would increase again about two weeks later because of the remaining Capital Injection by RAL of £5 million. In cross-examination Mr Chandler accepted that up to this point in time the sale of Marylebone House and the Capital Injection were treated as cumulative sources of funds.

204.

The minutes of the board meeting on 4 June 2015 record that Mr Chappell, Mr Henningson and Mr Chandler were all present and that Mr Parladorio, Mr O’Sullivan and Mr Crane were present. They also record that Mr Crane outlined the cashflow position by reference to the weekly cashflow update for the week ended 31 May 2015 and that Mr Topp outlined the possible outcomes if the BHS Group was unable to re-finance its existing loans:

“DT then put a series of variances on assumptions to MC, which assumed that the refinancing did not take place but proceeds from the sale of MH (£8.5m), Atherstone (£5m) and RAL (£5m) were received prior to the end of June, and the remaining £21.3m HSBC facility was drawn. MC provided explanations that the impact of these would have on the business which could bring cash flow to negative £1.1m on 21 June, after which it would begin to build up again. This was the worse position until September. The board agreed that where possible, LoCs should not be issued. The board also noted that the company held £200m of stock that needed to be sold. MM raised the repayment of the HSBC facility wherein once funds were paid back, the facility could not be drawn down again. In effect selling a property repaid the facility, and it was agreed a waiver should to be put in place to prevent this.”

205.

The minutes also record that once Mr Crane and Mr O’Sullivan had left the meeting the board of BHSGL considered the solvency of the company and the BHS Group as a whole:

“The board reflected on their discussions and concerned at the solvency of the business, the board noted they had considered what the reasonable prospects were of the Company avoiding going into insolvent liquidation in their discussions and had identified factors that had a real prospect of materialising that would impact on that assessment. For all of these reasons the board considered that there was a reasonable prospect that the Company would avoid going into insolvent liquidation. Furthermore, the directors considered that they were acting in the best interests of the Company's creditors.”

206.

Item 6 of the minutes (financing) then record that Mr Morris, to whom the board had now delegated task of arranging finance and who was handling the negotiations with Farallon, reported to the board of BHSGL on their progress:

“MM provided an update on financing. He explained:

• the valuations had come back as he had hoped, albeit Jersey was short £2m and Oxford Street was valued at £50m although it was expected to achieve nearer to £55m;

• Farallon were positive and understood the turnaround plan and the facility requirement, which they believed would not put their own business at risk;

• he had more information to deliver to Farallon today as they were looking at ring fencing security and needed to understand how all aspects of the current arrangements interacted;

• the information provided included details of the Arcadia guarantee on the HSBC facility;

• in respect of the pension, he needed to show their security was ring fenced and that the pension would not be able to reach through the security. He was considering taking up an opinion on this;

• he expected to receive an indicative response tomorrow with an offer and term sheet;

• thereafter once due diligence was complete, the position would become firmer;

• Farallon were aware of the cash flow forecasts and the forthcoming rent payments in June;

• the total financing was for £74m which carried a charge of 5.5% and 2.7% LIBOR, in total this was near to £4m; and

• GT had confirmed this was around market standard for arranging financing at this level.”

207.

Under cover of an email dated 7 June 2015 Mr Mikael Brantberg of Farallon sent Mr Morris a draft term sheet. In the covering email which was copied to Mr Henningson and Mr Chappell he stated as follows:

“Please find revised term sheet and exclusivity letter attached reflecting our latest discussions. I need these signed during Sunday in order to approach the committee in a credible way on Monday morning which is necessary in order to stick to the timeline discussed. As an outcome of our further legal due diligence we have found that we need a qualifying charge over BHS Ltd, which is currently granted for the benefit of the £40m facility to Arcadia, as we could otherwise find ourselves in a situation whereby an administrator is appointed which could block an enforcement over the Oxford street lease. We are available to discuss on Sunday so we can get this agreed and signed in time.”

208.

On 9 June 2015 Farallon provided a revised draft of a term sheet to BHSGL which provided for a total loan facility of £75 million of which the first tranche was £66 million (subject to satisfaction of a loan to value test). The primary purpose of the loan was to enable BGHSL to refinance Noah II, the term of the loan was 26 months and the interest rate was 5.5% above LIBOR together with PIK interest of 7.5% per annum compounded on a quarterly basis to be added to the principal. The term sheet also provided for a facility fee of 6% of the loan amount. The loan was to constitute the senior secured obligations of BHSGL and the loan’s individual guarantors and to be secured by first priority security over a number of properties (which included Oxford Street) and a first priority fixed and floating charge over the assets of BHSL and BHSPL. These terms were acceptable to BHSGL because Mr Chandler signed the term sheet on its behalf.

209.

Under cover of an email dated 12 June 2015 Mr Morris circulated the due diligence documents which he had sent to Farallon over the previous two weeks. In the covering email, which he copied to Mr Henningson and Mr Chappell, he stated that these were the documents upon which Farallon’s credit committee had based “it’s initial green light”. They included a liquidity forecast which showed that a first funding requirement of £29.3 million would arise during June 2015. It also stated that at 18 October 2015 there would be zero cash at the bank after the group had received the proceeds of sale of Oxford Street, Atherstone, Marylebone House and Carlisle and also an equity injection of £10 million by RAL and that a cash buffer of £10 million was required. This email was not copied to Mr Chandler but he gave evidence in his witness statement that he received it.

210.

On 16 June 2015, however, Mr Brantberg wrote to Mr Morris stating that Farallon would be unable to pursue the transaction. He also stated that Farallon had never signed the term sheet (or an exclusivity agreement). Both Mr Chandler and Mr Topp gave evidence in their witness statements that they did not know the reason why Farallon terminated the negotiations.

(9)

The Carlwood Payment

211.

On 28 May 2015 Carlwood, which was a company incorporated in the British Virgin Islands, submitted the Carlwood Invoice for £300,000 to ACE which it described as a consultancy fee for advice given in relation to the purchase of North West House. The address stated on the invoice was 173 Sutherland Avenue London W9 1ET and Carlwood required payment of the invoice to be made to a specified account at a named branch of the Swedish bank, SEB AB, in Stockholm. On 19 June 2015 Mr Dellal gave written instructions to HSBC to make the Carlwood Payment of £300,000 into that account.

(10)

The 17 June cashflow update

212.

On 17 June 2015 GT produced their weekly cashflow update for the week ended 13 June 2015. On the same day they also produced a draft of a turnaround plan. Since the board meeting on 4 June 2015 the weekly update had included a detailed schedule setting out “the latest weekly headroom and assumptions relating to overlays currently included in the cashflow forecast”. That schedule showed that GT forecast a negative cashflow of £23.399 million for the week ended 28 June 2015 and a negative cashflow of £23.350 million for the week ended 27 December 2015. GT also identified a number of key headroom issues on slide 2:

(1)

Letters of credit worth a total £29.8 million were required of which £12.5 million had been issued at the end of the previous week.

(2)

The group’s management were in discussions with a lender and the revised forecast assumed that tranche 1 of £41.6 million of new funding would be received in the week beginning 28 June 2015, that the outstanding balance of £12.2 million of Noah II would remain drawn and that the group would keep the remaining £13 million.

(3)

The current forecast assumed a £5 million Capital Injection by RAL in the week commencing 28 June 2015 and a further £5 million in the week commencing 26 July 2015.

(4)

The group’s management had made the assumption that £8.5 million would be received on the sale of Marylebone House in the week commencing 29 June 2015, £4.92 million on the sale of Carlisle in the week commencing 20 September 2015 and £60 million on the sale of Oxford Street in the week commencing 30 August 2015 (of which £32.5 million would be repaid to the finance lender).

213.

Slide 8 was headed “Key risks and opportunities as at 17 June”. On that slide GT pointed out that there was an external valuation to support the sale price of £60 million for Oxford Street but that Arcadia had expressed the view that the valuation was more like £30 to £35 million. They also stated that the frequency of rent payments was being negotiated with landlords and that the Prudential had moved from a quarterly to a monthly cycle. They confirmed that the impacts of those agreements had been modelled but further discussions were required.

(11)

ACE II

214.

By email dated 17 June 2015 and timed at 4.11 pm Mr Morris sent Mr Bernard Berman of ACE a term sheet which he copied to Mr Henningson. In the covering email he stated: “We’ve been playing phone tennis! Please find attached the term sheet for discussion. Could you call me when you have a moment please?” In a second email that day and timed at 8.45 pm he sent Mr Berman the revised term sheet and in the covering email he stated: “Good seeing you today. Attached you’ll find the revised Term Sheet reflecting our discussions earlier.” He copied the email to Mr Chappell, Mr Parladorio and Mr Henningson.

215.

The terms sheet provided for a loan of £60 million of which a first tranche of £45 million would be committed for drawing by the borrower and a second tranche of £15 million would be at the discretion of the lender. It specified a drawdown date of 24 June 2015 and also that the loan would be repayable in full 18 months after the date of the facility. It also specified an interest rate of 25% IRR (i.e. the internal rate of return), a facility fee of £1 million and that the loan should be secured by a first charge over a number of specified properties (including Oxford Street). The term sheet then provided for the payment of a profit share on the sale of Oxford Street (described as the “Tranche 1 Property”):

“The Lender and Borrower shall co-operate to achieve the sale of the Tranche 1 Property for a target price of £80 million. The Lender shall use reasonable efforts to procure a formal written offer (the “Initial Offer”) from a bona fide prospective buyer (the “Proposed Buyer”) of the Tranche 1 Property, in the amount £80 million, as soon as is practicable following the signature of this Term Sheet.

In the event that (a) an Initial Offer has been provided and the Proposed Buyer in good faith and acting reasonably remains committed to completing the relevant offer and (b) a buyer other than the Proposed Buyer concludes the purchase of the Tranche 1 Property for a price exceeding £60 million but less than £80 million, the Borrower shall pay to the Lender an amount equal to 40% of the net sales proceeds above the sum of i) the Tranche 1 loan amount plus ii) the Interest Payment plus iii) the Facility Fee.

In the event that (a) an Initial Offer has been provided and the Proposed Buyer in good faith and acting reasonably remains committed to completing the relevant offer and (b) a buyer other than the Proposed Buyer concludes the purchase of the Tranche 1 Property for a price exceeding £80 million, the Borrower shall pay to the Lender a further amount equal to 30% of the net sales proceeds above £80 million.

In the event that (i) an Initial Offer has been provided and the Proposed Buyer in good faith and acting reasonably remains committed to completing the relevant offer and (ii) the Tranche 1 Property is sold to a buyer other than the Proposed Buyer, the Borrower and Lender shall pay to the Proposed Buyer all reasonable legal and associated fees in connection with the Initial Offer in proportion to the profit splits above.”

216.

Mr Chandler’s evidence was that he found out in late June 2015 that there were urgent talks with ACE and that on 23 June 2015 he was first told about the proposed loan at a meeting with Mr Chappell and Mr Morris at Marylebone House. His notes of that meeting record that he was told that this was a “big decision”, that Mr Dellal was ready to go and that BHSGL could have the money that day. His notes also record that he was told that about the two tranches of the loan and that it was expensive but that Mr Chappell was in favour of the loan. Mr Chandler explained in Chandler 1 that the situation was urgent because rental payments were due very soon. His notes confirm this to be correct:

“DT – write check today DC1 → Brighton – Bailiffs EP – payment date is tomorrow” and “EP – do bailiffs go in that day? MS – not usually if one day MS – Standard Life sensitive → late on £60k on Brighton KM → 80/100 cheques today → balance today → £27.5m”

217.

Mr Chandler’s notes also record that a discussion about the terms of the proposed loan then took place. It is clear that Mr Morris told the meeting the headline terms including the rate of return proposal, that a first charge should be granted over Oxford Street on the basis that £45 million was 70% of its loan to value and that ACE would be entitled to a profit share. The proposed profit share was 60:40 on a sale below £60 million, 50:50 on a sale between £60 million and £80 million and 30:70 on a sale above £80 million. Mr Morris also stated that BHSGL would have full control over the sale process and that it was unnecessary to sell if it was able to refinance the loan. Finally, Mr Chandler’s notes record that a resolution was taken for “BHS to proceed with ACE”.

218.

Mr Chandler gave evidence that on 24 June 2015 a meeting also took place at Olswang’s offices. He gave evidence in Chandler 1 (which was not challenged) that at the meeting Mr Chappell and he discussed the following with Mr Roberts:

“(a)

The immediate need for the money, which was, as we had also discussed in our previous meeting, the need to pay rent. (b) Mr Topp said that there were certain pinch points for cash flow coming up. The funds would also provide additional working capital for the business. (c) We considered whether to use the Noah II facility instead for these purposes. While the remaining amount under that facility would have allowed us to meet our rent obligations, it would not have been enough to support the plans to turn the business around. Since we were in the middle of that process - which we all believed - it was thought that the agreement with ACE was a better idea. (d) I was told again by Mr Chappell that Sir Philip Green had agreed to help in September 2015 with further financing if that was needed. This gave me confidence that we could get his help in the future if necessary. (e) We had explored all the options, but this was the best solution to the situation we faced. We did not consider whether to put the Companies into administration or liquidation. That did not, at the time, seem like a realistic thing to be contemplating. We were in the middle of the plans to turn the business around (and, for example, Mr Topp was in the middle of negotiating our new deals with Booker and Compass). Detailed work as being done on formalising that plan into a reliable, and costed, document. This facility, whilst expensive, would help us put that plan into action and would buy us time to put in place a more sustainable long term finance package (which we eventually did in September 2015 with Grovepoint).”

219.

By email dated 24 June 2015 Mr Roberts also wrote to Mr Chappell and Mr Henningson with a copy to Mr Parladorio and Mr Chandler reminding them of their ongoing duties as directors of BHSGL:

“Prior to BHS Group Limited and certain of its subsidiaries entering into the refinancing with ACE, we thought it would be helpful to remind you of your ongoing duties as board members, in particular bearing in mind the current challenges faced by the group. These duties are duties which fall on the board members of each group company.

As you are aware from our previous discussions, when entering into any transaction it is imperative that the board of each relevant group company considers the interest of creditors as well as members and forms a view as to whether the transaction to be entered into is in the best interest of the creditors of each company as a whole.

We discussed this issue in detail at the board meeting we attended in April and understand that the [sic] you have been considering the position of the creditors of the various group companies on an ongoing basis. We understand that Grant Thornton have been assisting you in these considerations. As has been discussed previously, you may consider that whether the current transaction with ACE is in the best interests of the creditors relates to whether it is a key step with a view to the implementation of the turnaround plan which the board of each relevant company still believes can be implemented, and that this turnaround plan will ultimately be in the best interests of all creditors. If this is not the case, then you should consider whether it is the best interests of the creditors of each relevant group company to enter into the transaction.

A separate but related issue which we previously discussed with you is the issue of wrongful trading. In brief, individual board members could be liable for wrongful trading if the relevant group company has reached a position where there is no reasonable prospect of avoiding insolvent liquidation and from that point forward, do not take every step with a view to minimising potential loss to company's creditors. Even if that position has not been reached, it's still prudent in the current circumstances to take steps with the interests of creditors in mind.”

220.

By a senior loan agreement dated 26 June and made between ACE and BHSGL (the “ACE II Loan Agreement”), ACE agreed to make two facilities of £25 million (“Facility A”) and £15 million (“Facility B”) available to BHSGL. On the same day the parties also entered into a mezzanine loan agreement for £5 million (the “ACE II Mezzanine Agreement”). The Joint Liquidators set out the principal terms of both facilities in paragraph 203 of the Particulars of Claim:

“203.

On 26 June 2015, BHSGL entered into a short-term loan with ACE, which comprised a senior loan agreement and a mezzanine loan agreement of that date (“ACE II”). The following inter alia were terms of ACE II:

a.

£25 million would be lent by ACE to BHSGL;

b.

the borrowing was due for repayment on 31 December 2015;

c.

BHSL would grant security to ACE over the Oxford Street Property (in addition to other properties owned by the BHS Group);

d.

subject to agreed conditions, ACE would be entitled to a profit share (ranging from 30% to 50%, depending on the level of sale price realised and subject to a minimum sale price of £45 million) on the future sale of the Oxford Street Property (“ACE Profit Share”); and

e.

ACE would have an exclusive and unlimited right to sell the Oxford Street Property after 31 December 2015 or on an earlier event of default.”

221.

Subject to one point, Mr Chandler admitted these paragraphs and Mr Henningson did not plead to them at all. I, therefore, accept that this pleaded summary is correct and for the remainder of this judgment, I will use the term “ACE II” to describe both facilities and the term “ACE Profit Share” which was payable under the ACE II Mezzanine Agreement. Mr Chandler accepted that the total amount advanced by ACE under ACE II was £25 million but he pleaded that the senior loan agreement provided for a facility of £40 million.

222.

It is correct to say that the ACE II Loan Agreement provided for two facilities but Facility B was described in the loan agreement as an “uncommitted facility” and it gave ACE an absolute discretion whether to commit to Facility B at all. Further, in an email dated 25 June 2015 Ms Anne Chitan of Olswang advised Mr Morris that this was cosmetic only. She also reported to Mr Turner later that she had given this advice orally. Her two emails stated as follows:

“There is only one draw for senior facility A and they have told you you cannot draw more that £20,000,000 (even though the facility limit has not changed). This means you have no ability to draw more later unless you do a new deal and we amend the document then. This is consistent with the report that the additional drawing is at their discretion.”

“Had a call with Mike and explained that although A is at 40, this is cosmetic. There is one draw agreed to be 20 and rest A is cancelled after. There is no spring back mechanics and no 2 profit share or IRR. Told him that what they are saying is if we are fine with the extra 20, we will need to amend the doc substantially and cross that bridge when we get there.”

223.

It is common ground that BHSGL never drew on Facility B and ACE II was repaid in full on the maturity date out of the Grovepoint Facility (as defined below). There was no dispute that the agreement provided for BHSGL to pay interest calculated by reference to the “IRR” on the “IRR Calculation Date” in the “IRR Calculation Schedule” which provided that BHSGL was to pay £1,660,958.90 for 97 days on 29 September 2015 and £1,698,266.56 for a further 93 days on repayment on 31 December 2015.

(12)

The Loan Agreement

224.

On 26 June 2015 Arcadia also agreed to pay the sum of £10 million to HSBC pursuant to two separate agreements. The first of those agreements was called the “Loan Agreement” and the second was called the “Framework Agreement”. Mr Chandler’s evidence was that Olswang negotiated the documents with Linklaters without input from him and that other than high level discussions with Mr Parladorio, he had no knowledge of their detailed terms. Mr Curl did not challenge that evidence and I accept it. It is clear from the contemporaneous documents that Mr Chappell negotiated the terms directly with Sir Philip Green on about 21 June 2015 and in order to obtain Arcadia’s consent to ACE II and its assistance in obtaining releases from HSBC.

225.

On the evening of 21 June 2015 Mr Chappell sent an email to Mr Roberts, Mr Parladorio and Mr Morris forwarding on an email which he had received from Mr Budge about 20 minutes before. Mr Budge’s email stated as follows:

“Following your discussions with Sir Philip Green this is [to] confirm the points agreed: Arcadia will:

1)

Enter into an agreement to lend BHS Group Limited £3.5 million, in satisfaction of Taveta's completion obligation to make the BHS Loan under the SPA. Term to be over 5 years, on an interest free basis; and

2)

Agree to pay £6.5m to RAL, to be used by RAL to subscribe for additional shares in BHS Group Limited, in satisfaction of RAL’s completion obligation to make the Capital Injection and to settle the cash flow true ups discussed with Sir Philip.

The £10m referred to above will be used to repay HSBC under the Noah 2 facility. In practice, Arcadia will pay the £10m directly to HSBC and BHS/RAL agree that will satisfy Arcadia's obligations under 1 and 2 above.

Parties to acknowledge above payments are in full and final satisfaction of all completion obligations under the SPA. BHS Group Limited to repay HSBC the remaining amount of the outstanding £12.2m plus interest on Noah 2 (i.e. £2.2m plus interest). BHS Group Limited also to repay HSBC £2.5m to reduce debt under Noah 2 that is secured on Jersey. Olswang to provide undertaking that the £2.2m plus interest and £2.5m referred to above will be paid to HSBC.

Arcadia to arrange for HSBC to release security on all Noah 2 properties (excluding Jersey). Arcadia to arrange for HSBC to release security over Milton Keynes from Noah 1. This may occur subsequently to Noah 2. Arcadia to arrange for HSBC to release the floating charge relating to the Noah 1 and 2 facilities. The floating charge relating to the pension scheme to remain in place.”

226.

The email did not refer in terms to Marylebone House or the collateral agreement between Mr Chappell and Sir Philip made at completion: see [112] and [113]. However, in the covering email Mr Chappell told the recipients: “Below from Paul B re the MH payment This agreement needs to be kept between the three of us for the time being”. By email also dated 21 June 2015 Mr Roberts replied to Mr Chappell setting out his understanding of the arrangements:

“There is a lot to unpack there. I will need to bring in Anne to the loop as I will need her assistance in documenting/advising.

Summary

A.

£3.5m loan and £6.5m payment Paul is essentially saying that in order to finalise SPG's obligations under the SPA, SPG will procure that Arcadia loans BHS £3.5m and also makes a payment to RAL of £6.5m (£10m in total). I presume the £6.5m to RAL is a commission on MBH but we need to confirm this. RAL will use the £6.5m to subscribe for £5m of shares (putting £5m into BHS Group) and presumably to loan the additional £1.5m to BHS Group? This puts BHS Group in funds of £10m which they are proposing will be used to repay HSBC.

B.

Noah II

It is suggested that the Noah II balance is £12.2m and thus BHS will need to pay the difference after taking into account the £10m above (i.e. £2.2m plus interest). BHS Group also must repay HSBC a further £2.5m to reduce debt under Noah II that is secured on Jersey. It is being suggested that we provide Arcadia with an undertaking that we hold the £2.2m plus interest and £2.5m referred in our client account and that it will be paid to HSBC.

C.

Releases

Paul then suggests that Arcadia will arrange for HSBC to release: *security on all Noah II properties (excluding Jersey); *security over Milton Keynes from Noah 1 (this may occur subsequently to Noah II); and * the floating charge relating to the Noah I and II facilities with the floating charge relating to the pension scheme to remain in place.”

227.

By using the phrase “the MH payment” I understood Mr Chappell to be referring to the payment of £8.5 million which Sir Philip had agreed to make out of the proceeds of sale of Marylebone House and Mr Roberts clearly understood it that way. Indeed, he understood the £6.5 million which RAL was supposed to be using to subscribe for shares in BHSGL to be a commission on the sale of the property. I also understood Mr Budge to be referring to the sale of Marylebone House (albeit obliquely) by using the phrase “the cash flow true-ups discussed with Sir Philip”.

(13)

The Loan Agreement

228.

The Loan Agreement was made between BHSGL and Arcadia and although the execution version in the trial bundle is undated and unsigned on behalf of Arcadia, there was no dispute between the parties that it also took effect on 26 June 2015. The recitals recorded that BHSGL had agreed that the facility would satisfy Taveta’s obligation to provide the BHS Loan under clause 4.2.2 of the SPA and to use the proceeds of the loan towards the pre-payment and cancellation of Noah II. Clause 2 provided that Arcadia would make available a facility of £3.5 million and clause 3 imposed an obligation upon BHSGL to apply any amounts borrowed under it to pre-pay Noah II. On 12 February 2016 the Loan Agreement was amended or rectified in the way in which I explain below.

(14)

The Framework Agreement

229.

The Framework Agreement was made between Taveta, RAL, BHSGL and Arcadia. Again, the execution version in the trial bundle is undated and unsigned on behalf of Arcadia but again there was no dispute that it also took effect on 26 June 2015. The recitals recorded that the parties had agreed to implement the terms of the agreement in connection with the re-financing of debt owed by BHSGL and in satisfaction of their completion obligations under the SPA. Clause 2.1 which was headed “Tranche B of the Noah 2 Facility, BHS Loan and Capital Injection” provided as follows:

“2.1.1

In satisfaction of Taveta's completion obligation to make the BHS Loan and RAL's completion obligation to make the Capital Injection, in each case under clause 4 of the SPA: (i) Arcadia shall lend BHS an amount of £3.5 million for a five year term on an interest free basis pursuant to the terms of the BHS Loan Agreement; and (ii) Arcadia shall pay £6.5 million to RAL and RAL shall use such £6.5 million to subscribe for additional fully paid-up shares in BHS and for no other purpose.

2.1.2

BHS shall use the aggregate amount of £10 million referred to in Clause 2.1.1 to prepay £10 million of Tranche B of the Noah 2 Facility ("Tranche B") and for no other purpose.

2.1.3

The payments to be made by Arcadia under Clause 2.1.1 and the prepayment by BHS under Clause 2.1.2 shall be effected by Arcadia making a payment of £10 million directly to HSBC Bank plc subject to and in accordance with Clause 3.

2.1.4

BHS shall prepay the remaining outstanding amount due under Tranche B of the Noah 2 Facility to HSBC Bank plc and cancel Tranche B pursuant to Clause 5 of the Noah 2 Facility.

2.1.5

Any Security granted in favour of HSBC Bank plc over the Properties (excluding any Security granted over the Jersey Property) to secure the Noah 2 Facility shall be released in accordance with the terms of the Deed of Release.

2.1.6

BHS shall not seek any further advances from HSBC Bank plc under the Noah 2 Facility.

2.1.7

The payments and steps referred to in Clause 2.1.1 and the manner of their payment under Clause 2.1 3 shall be in full and final settlement of all of the parties' completion obligations under clause 4 of the SPA and. upon satisfaction of the payments and steps referred to In Clauses 2.1.1 and 2.1.3, the parties shall be irrevocably and unconditionally released from all claims or demands under or in connection with such completion obligations.”

230.

The Jersey Property was 8 to 18 King Street and 2 to 12A Don Street, St Helier, Jersey which were owned by Epoch (above), a subsidiary of BHS Jersey. Under the terms of the Security Agreement BHS Jersey had granted a floating charge over its shares in Epoch and Epoch itself had also granted a number of securities to HSBC under Noah II. The Framework Agreement also provided that BHSGL should use tranche A of ACE II to prepay £2.75 million of Noah II. Mr Budge’s email dated 21 June 2015 suggests that the purpose of this pre-payment was to release the BHS store in Milton Keynes from Noah I to enable BHSL to charge it under ACE II.

231.

It is common ground that the BHS Group received only £17 million of “new money” under ACE II. Olswang acted for BHSGL in relation to the loan and their completion statement for the transaction records that they received £25,000,000 from ACE and that they paid £5,907,474.12 to HSBC’s solicitors, its legal fees of £151,857.60 and a sum of £2,000,000 to RAL which they described as an “arrangement fee”. They also retained £75,000 on account of ACE’s legal fees. Olswang’s completion statement confirmed that in addition to the £5.7 million which they had paid out of ACE II, Arcadia had paid £10 million directly to HSBC:

“Please note that this completion statement does not include transfers that did not come through Olswang's client account, which include: (i) the £3.5m loan that was made by Arcadia to RAL and by RAL to BHS Group Ltd; (ii) the RAL £5m equity injection into BHS Group; and (iii) the £1.5m repayment of intercompany debt by RAL to BHS Group Ltd, which amounts were transferred to HSBC in partial repayment by BHS Group Ltd of the Noah II loan.”

(15)

The arrangement fee

232.

Both Mr Topp and Mr Chandler gave evidence that they challenged Mr Chappell about the £2 million payment. Mr Topp’s evidence was that Mr Chappell first told him that it related to VAT and then told him that it was an arrangement fee. Both gave evidence about a meeting at the Landmark Hotel at which they confronted Mr Chappell. Mr Chandler also gave evidence that Mr Parladorio told him that RAL had already spent about £1,500,000 although Mr Topp and he were later able to recover £500,000.

233.

On 2 July 2015 a meeting of the RAL board took place at which Mr Chappell, Mr Henningson and Mr Parladorio were present. The unsigned minutes of the meeting record that Mr Chappell had proposed that RAL enter into two short term secured loan agreements under which it would advance £575,000 to a company called Wheatleys Bridge Ltd (“Wheatleys Bridge”) and £925,000 to a company called JDM Island Properties Ltd (“JDM Island”) for a term of six months at a rate of interest of 8% above the base rate of the National Westminster Bank plc. These minutes also record that Mr Chappell stated that he was very familiar with the property over which these loans were to be secured. Finally, the minutes record that Mr Chappell and Mr Henningson voted in favour of these loans but that Mr Parladorio voted against them.

234.

On 11 January 2017 Mr Chappell was interviewed by the Insolvency Service and he stated that the balance of the arrangement fee of £1.5 million was used to buy a family property and to discharge a mortgage. Mr Colin Sutton (who may or may not have been a relative of Mr Paul Sutton) incorporated these two companies for him and on 24 January 2017 he also gave an interview to the Insolvency Service. He was asked to describe the circumstances which led to the incorporation of these two companies and he stated as follows:

“Well first of all, tried to set the two companies up on the same date, but for some reason it rejected one, so those dates should be the same but I know they arc not. Erm secondly er Joe was about to lose his house, erm the company that owned the house erm was being sued to repay the mortgage, erm there was a valuation on the property of about 1.8 million, and er it really was to assist the family, Dominic said he could come up with a mortgage, erm so through these companies I made an offer for the house and the bridge and they were set up solely to do that. The offer was subsequently accepted, the old mortgage paid off, er thereafter as far as the house is concerned ... in fact the mortgage has now been wiped out erm in favour of, I think, a company called Otherclear, which I sold my shares to in JDM Island Management, I still hold the one share in Wheatleys 8ridge.”

235.

Mr Sutton also explained that two companies were incorporated to hold the property and some land and the other company was incorporated to hold land which formed an access on the basis that it might be valuable as a separate asset. In an email dated 8 March 2018 Mr Ring wrote to Mr Deane of the Insolvency Service setting out Mr Chappell’s answers to a number of questions about the arrangement fee. I have combined those answers together so that they read as follows:

“The loans to JDM and Wheatleys were discussed and agreed at a board meeting on 2 July 2015. This provided the authorisation from RAL for the loan. It was, of course, subject to there being sufficient funds within RAL to make the loan. I am not aware whether there was a written agreement with BHS. If there was, it will remain with BHS and be in control of the Liquidators of BHS (and probably also with the Liquidator of RAL). I do not recall any RAL board discussion of the purpose of the loan from BHS prior to the meeting on 2 July. Any record of any discussion will be in BHS or RAL emails. I do not have access to these. The loan to JDM and Wheatleys was protected by legal charges and the property was valued far in excess of the loan. Mr Chappell was 90% owner of RAL. There was also the connection to Mr Chappell's parents, so I did not believe there was any realistic possibility of any default.”

(16)

The June quarter rent payments

236.

Mr Perkins took Mr Pilgrem, the accountancy expert for Mr Henningson and Mr Chandler, to the BHS Group’s management accounts dated 1 February 2016 and he accepted that for the year ended 31 August 2015 the group paid rent totalling £95,144,000. The management accounts also record that the group paid rent of approximately £7.5 million each month (although it also received a small amount of rent itself). Mr Curl suggested to Mr Chandler that the Dowry of £23.6 million was equivalent to the rent due on the March quarter day. Mr Chandler’s hand-written notes of the meeting on 23 June 2015 also suggest that on the June quarter day the group was liable to pay £27.5 million and had written about 80 to 100 rent cheques which it was about to present.

237.

An email dated 19 June 2015 which Mr O’Sullivan of GT sent to Mr Chappell, Mr Topp, Mr Morris and Mr Parladorio confirms that this analysis is broadly correct. In that email Mr Morris stated that the total value of the June quarter’s rents was about £25 million, that 33% of them (about £8 million) cleared within two business days with the rest following shortly afterwards, that Arcadia would normally send out rent cheques on 23 June 2015. In summary, he stated that cheques for £8 million were likely to clear that week and cheques for £16 million to £17 million were likely to clear the following week.

H. 27 June 2015 to 7 September 2015

(1)

Mr Hitchcock

238.

On 30 June 2015 Mr Topp met Mr Michael Hitchcock and recruited him to act as the CFO of the BHS Group. Mr Hitchcock was not appointed to the board of directors of any of the Companies and I was not taken by any of the parties to his contract of employment or the minutes of any BHSGL board minute to demonstrate that he was formally appointed as the group’s CFO. Nevertheless, there was no dispute that Mr Hitchcock carried out this role or that he had the relevant experience. Mr Topp exhibited his CV in which he described his recent career as follows:

“I am a Board level commercial leader with fresh thinking and decisiveness, as well as a passion for retail, and expertise in the challenges of business turnarounds. I am committed to the best customer experience aligned with fiscal responsibility, the foundation of all successful businesses.

Having achieved the successful sale of Beales Plc to its largest shareholder, thereby completing the turnaround of Beales and securing its longer term survival, I elected to leave the business by mutual agreement at Easter 2015. What started as an interim CFO assignment in May 2012 to avert administration through refinancing and restructuring the assets of the business, progressed into a permanent CEO role to turn the business around culturally, operationally, and financially and created significant value for all the major stakeholders.

I have previously been a Finance Director with Plc, Private Equity and International experience across retail, leisure and FMCG sectors; I have a track record of buying, selling, starting and turning around companies, fully complimented with extensive commercial experience of production and manufacture through distribution and supply chain to wholesale and retailing.”

(2)

The July 2015 Turnaround Plan

239.

In June 2015 Ms Helen Dale was a director in the Advisory department of GT and an insolvency practitioner. Mr Topp’s evidence was that he worked closely with her and a team from GT on the business plan. Under cover of an email dated 2 June 2015 Ms Dale sent Mr Chappell, Mr Topp, Mr Morris and Ms Morgan a discussion draft. She stated that the content was not suitable for sharing externally and that there were a number of discussion points. On 17 June she sent Mr Topp a revised draft and they met together to discuss the plan. By email dated 10 July 2015 she wrote to him again stating as follows:

“Just to confirm/for your records, following our meeting I have asked the team to run the following only:

1)

Business plan to be updated for the current view on funding, being, NoA loans plus the new ACE funding (at £25m being repaid in December 2015).

2)

Assume that Credit Insurance will be back on from April 2016,

3)

Leave the property disposals in the plan as they are (as indicative of the property disposals that may be required). This includes Ox Str/Carlisle/ Manchester/L’pool/MK. but build in additional comments around options to fund the gap (showing properties available as security).

4)

Add additional wording to show the options available to BHS re loans against unencumbered/otherwise available assets (incl. properties and stock) to plug any funding gap.

I will also:

1)

Call Michael (in part to understand the stock funding and in part, to ensure he is comfortable with Plan content)

2)

Update the plan to demonstrate that the costs of separation have been considered but include only as an overlay (in a table). Not required to be run through the model in detail (given that the costs and potential savings continue to be refined as work progresses)

3)

Recut the main deck to show one journey/one plan and to be to the point, casual in style)

4)

From that, pull out the 6-10 pages of must know points for other stakeholders.”

240.

By email dated 12 July 2015 Ms Dale wrote to Mr Topp again updating him about the business plan and on the morning of 13 July 2015 he forwarded her email to Mr Hitchcock, Mr Chandler, Mr Chappell, Mr Parladorio and Ms Morgan. She stated as follows:

“The team has been working on the docs over the weekend. All updates have now been run through the model and the report tables updated. I’ve also done a very high level sense check of the separation costs and the potential cost savings (the £5.3m) so that these two streams better hang together. We’ve removed all references to a separate Base Case and Target Business Plan in the presentation deck and combined the financials to show a single Plan. I would like someone my end to cold review the decks first thing tomorrow morning and will then send you the detailed deck, shortly followed by the presentation deck. By close of play tomorrow, I’ll also send over a 6-10 pager (casual/succinct stylie!). Michael H and I also plan to catch up at some point this coming week so that I can talk him through the decks. Hopefully this will help with any remaining queries he might have.”

241.

On 13 July 2015 GT produced a slide deck entitled “Three year transition plan to a new BHS by 31 August 2018”. This document appeared in the electronic trial bundle numbered as C/875 and the parties referred to it as the “July 2015 Turnaround Plan”. It consisted of 86 slides and the title on the first page was overlaid on the same picture as the Legacy Turnaround Plan with the legend “BHS Passionate about your lifestyle” in the bottom left-hand corner. The version of the plan to which the parties referred stated that it had been updated on 13 July 2015 but was still marked as a draft. As I explain below, it was not approved by the BHSGL Board until 14 October 2015.

242.

Under cover of an email dated 13 July 2015 Ms Dale sent two documents to Mr Topp under the subject line “Business plan decks”. The first was called “Project Harvey internal presentation.pdf” and the second was called “Project Harvey – Detailed Business Plan”. In the covering email Ms Dale stated that she was sending Mr Topp “Presentation deck and accompanying detail deck attached for your final review”. The trial bundle only contained one attachment to this email which consisted of a 52 slide pack which had clearly been adapted from the July 2015 Turnaround Plan for presentational purposes. I have assumed that this was the first attachment to Ms Dale’s email and that the second attachment was the July Turnaround Plan itself. Both Mr Chandler and Mr Topp gave evidence that they had received it and referred to it in their witness statements by reference to its number in the trial bundle.

243.

On 14 July 2015 Mr Topp forwarded Ms Dale’s email and its attachments to Mr Henningson and Mr Hitchcock. On 14 July 2015 a BHSGL board meeting took place which was attended by all of the directors including Mr Chandler and Mr Henningson. This was the first meeting which Mr Hitchcock attended as acting CFO. Under the heading “Turnaround Plan” the minutes record that Mr Topp provided an update on the plan which was directed at the various trading initiatives. Under the heading “Any other business” the minutes also record: “DT circulated the 3 year plan. MH was asked to consider and agree the plan. Action 5: MH to report back to DCl on the plan.”

244.

The principal objective of the July 2015 Turnaround Plan was stated to be to create a new BHS with an enterprise value of at least £250 million by 31 August 2018, to “de-risk” the transition for all stakeholders and to “delever” the business over the medium term then refinance existing facilities with a true working capital facility. The structure of the plan was stated to be two stages to be executed concurrently:

“Our Base Case (BC): this is our three year forecast ending 25 August 2018 which includes the impact of initiatives under our six key actions opposite.

Our Target Business Plan (TBP): this is the Base Case plus further stretch opportunities and initiatives (under the six key actions opposite). These stretch initiatives are targeted at delivering an enterprise value of £250 million, creating a profitable, refinancable business.”

245.

I will also refer to the two components of the July 2015 Turnaround as the “Base Case” or “BC and the “Target Business Plan” or “TBP”. Six initiatives or actions were intended to deliver both parts of the plan and they were property, trading and supply base, cost base, new growth, the international business and the pension liabilities: see slide 5. The plan then set out the detailed financial forecasts and assumptions upon which the plan was based. These assumed an EBITDA for the year ended 29 August 2015 (“FY15”) of –£55.3 million rising to an EBITDA of +£9.3 million in the year ended 25 August 2018 (“FY18”). This change was driven primarily by property sales of £26.2 million and improvements in trading of £27.3 million.

246.

Slides 9 to 13 set out the key assumptions upon which both the Base Case and the Target Business Plan were based and I will have to consider some of those assumptions in more detail in section V (below). Slide 14 consisted of a headroom forecast graph for the Target Business Plan which was similar to those graphs which GT had produced in their weekly cashflow updates. It showed that even if the BHS Group achieved all of the initiatives in the BC and the additional “stretch” opportunities or initiatives in the TBP, it would still generate insufficient cash at four points in time. These were described as “funding requirements” because the major premise of the plan was that the BHS Group would be able to find external finance to fund those requirements.

247.

The first funding requirement was shown on the headroom forecast as £19.8 million in September or October 2015 and the second funding requirement was shown as £21.6 million in February or March 2016. The third and fourth funding requirements were not specified but stated to be in October 2016 and October 2017. Consistently with the instructions which Ms Dale had received from Mr Topp, the BC and TBP forecasts had been combined and the headroom forecast only included a single line for the Target Business Plan. It was not possible, therefore, to compare the two plans or, equally importantly, the funding requirements which would be necessary if the BHS Group was only able to achieve the Base Case and not the Target Business Plan.

248.

The forecast also assumed that Oxford Street and Carlisle would be sold in September 2015 for £50 million and £4.92 million respectively and that the stores at Liverpool, Milton Keynes and the Arndale Centre, Manchester would be sold for £46.1 million during the year ended 27 August 2016 (“FY16”). Finally, it identified seven other unencumbered properties which could be sold for £13.3 million and stated that these sales had been included in the Target Business Plan. These included the sale of a property in Grimsby for £4 million which did not feature again in the “property collateral pool” which I describe below.

249.

On 17 July 2015 GT also produced a 6 slide pack entitled “BHS Group Limited. Funding proposal information. July 2015” (the “Bridge Funding Slides”). It focussed on the property available as collateral for additional funding and it provided a headroom forecast and two bridge slides to a positive cashflow position under the commentary: “A bridging loan of £68.0 million is required to assist with the property disposal process and working capital requirements.” The inference which I draw is that this was the “6-10 pager (casual/succinct stylie!)” to which Ms Dale referred in her earlier email.

(3)

The new financing round

(i)

Burdale/Wells Fargo

250.

On 13 July 2015 GT produced two similar slide decks entitled “Turnaround Plan Headlines Burdale (Wells Fargo)” and “Turnaround Plan Headlines Brockton Capital”. These documents were prepared for a new financing round to be led by Mr Hitchcock and Mr Morris. Wells Fargo Bank (“Wells Fargo”) was one of the largest US banks, Burdale Financial Ltd (“Burdale”) was a lender specialising in trade finance such as factoring and invoice discounting and wider asset-back lending and Brockton Capital LLP (“Brockton”) was (and is) an investment house with a focus on acquiring, developing and managing large scale buildings.

251.

On 22 July 2015 Mr Crane of GT sent Mr Hitchcock what he described as the “BHS short term cashflow model through to February” and on the same day Mr Hitchcock forwarded it on to Mr Jon Norton of Wells Fargo. On 22 July 2015 Mr Crane also sent Mr Topp two excel spreadsheets and an extract from the July 2015 Turnaround Plan with a copy to Mr Hitchcock. He enclosed copies of the Third and Fourth GT Engagement Letters. The Fourth letter had been signed by GT and counter-signed by BHSGL and dated 6 July 2019. In the covering email Mr Crane stated as follows:

“As discussed, please can your read the below and confirm by responding to this email that you are happy for Michael to send an extract of the business plan cash flow model to Burdale. We’ve attached the financial model underpinning the business plan that we developed in accordance with our engagement letter dated 19 May 2015 and the addendum letter thereto dated 21 May 2015 (attached), along with a pasted values Excel file of the forecast financial statements that you’ve asked us to send you.

The model’s approach and assumptions have been discussed with Kate Parton and Leanne Phipps of the BHS finance team, and the assumptions have been labelled with cell comments in the Excel file to set out how they have been derived from source data provided by you. In accordance with the terms of our engagement, we will in due course require you to sign a letter (the format of which is set out in Appendix 3 of the addendum letter) acknowledging responsibility for the model. However, we recognise that we haven’t yet been able to take you through the content and structure of the model, so you’re not yet in a position to sign this.

Therefore for now please could you, in your capacity as an official of both Bhs Group Limited and Bhs Limited, confirm to us by return email that you take full responsibility for the forecasts and the underlying assumptions, and that you undertake to complete the formal model handover process set out in paragraph 3.4 of the addendum letter as soon as is practicable. We require this confirmation from you before you send any forecasts to a third party. For the avoidance of doubt the Terms and conditions for Model development set out in Appendix 2 to the addendum letter continue to apply.”

252.

On 22 July 2015 Mr Hitchcock sent the Model to Mr Tola Odukomaiya of Wells Fargo who was assisting Mr Norton copying in Ms Morgan. On the same day he sent Mr Odukomaiya the extract from the July 2015 Turnaround Plan which he described as “a Grant Thornton worked forward looking balance sheet and support to at least give you a steer as to shape and size of the stock, receivables and other as appropriate”. He also sent an email to Mr Topp stating that the business was at “heads of terms” with both Burdale and Wells Fargo for an asset backed lending facility and with Brockton for a property backed bridging loan.

253.

By email dated 23 July 2015 Mr Odukomaiya wrote to Mr Hitchcock (with a copy to Ms Morgan) stating that he had looked at the Model and noted that it was based on the Target Business Plan and asked whether it was possible to get a similar model for the Base Case. Ms Morgan forwarded this on to Mr Crane and Ms Dale who responded as follows:

“Having discussed with the business planning team, their understanding is that there is no base case, and if you wanted to share something to reflect that you and Darren would need to help them define that. The suggested response to Burdale would be that as the business has separated from Arcadia, it has needed to change and hence the Target Business Plan is the only plan and that there is no other scenario that has been considered. Let me know your thoughts on this, but may be worth discussing with Helen or Chris if you want a different scenario to send.”

“As per Matt s note, happy to discuss if needed. From my discussion with Darren, he was keen that both internally and externally the business plan was viewed as a single plan rather than a base case and a stretch case. Tagging something as a base case could be interpreted to implicitly suggest that the base is actually what management expects the business to achieve. Whilst the model has a base, those figures was reflective of management s base at that point in time. From later conversations, I suspect that it is no longer considered your base (by Darren at least) and releasing it as such could be detrimental if the intended messaging is not clarified. We are happy to help where we can but would just suggest that you have the conversation internally (with both Darren and with Michael H) to ensure a shared understanding of what Management considers its base position to be, prior to releasing this information. It may be that, clarifying that it is not a two-stage plan to the interested party, is sufficient.”

254.

Ms Morgan discussed this with Mr Hitchcock and by email dated 10 August 2015 she wrote back to Ms Dale stating that Burdale wanted a copy of the Base Case “so that we are being monitored against a more prudent view”. It is apparent that GT had not run the Model for the Base Case at all because on 12 August 2015 Ms Dale replied:

“In fairly short order we could agree and run a base case. We should just discuss what that needs to include as the base per the business plan is unlikely to be reflective of your current view on a base scenario. No huge effort required.”

(ii)

Tufton Oceanic

255.

On 22 July 2015 Mr Morris also sent Mr Henningson a draft non-disclosure agreement for another lender, Tufton Oceanic Ltd (“Tufton Oceanic”), and on 23 July 2015 Mr Henningson exchanged emails with Mr Ted Kalborg of Tufton arranging to meet him the following Wednesday, 29 July 2015. Mr Henningson asked Mr Kalborg to sign the NDA giving the following reason: “The material we will send to you is quite detailed and since we are in a restructuring phase with Grant Thornton as advisor, it is essential that this material remains intact.”

256.

On 7 August 2015 Mr Morris wrote to Mr Kalborg thanking him for the meeting and enclosing the Bridge Funding Slides, valuation summaries provided by C&W and the same extract from the July 2015 Turnaround Plan which Mr Hitchcock had sent to Wells Fargo. By email dated 10 August 2015 Mr Morris wrote to Mr Henningson bringing him up to date: “Here's the info that went to Ted late last week. I can discuss it with you/him at any time. Hope you are well mate. Lots of due diligence with lenders at the moment. Had Ernst & Young going all through GT's cash flows today. Was ugly!!”

(iii)

Alteri

257.

On 10 August 2015 Ms Jane Hughes of Alteri Partners LLC (“Alteri”) sent Mr Morris an information request and a proposed term sheet for property bridging finance. On 25 August 2015 Mr Fraser Pearce of Alteri chased Mr Hitchcock for information and on the same day Mr Morris sent him GT’s latest weekly cashflow update. He also sent Mr Pearce a slide containing a table of the “property collateral pool” of nine properties. The commentary on the slide stated that the group’s valuations of the potential collateral pool available was £88.25 million. The table also stated that Liverpool was forecast to be sold for £17.14 million, Atherstone had now exchanged for £10 million and Carlisle had now exchanged for £4.92 million producing a total of £32.06 million (with transaction costs of £2.2 million).

258.

On 25 August 2015 Mr Pearce wrote back to Mr Morris stating that a trust structure under which the BHS Group held the properties on trust for Alteri might be possible but that a loan structure would not work for the following reasons:

“A loan structure I don t think works for us with or without a qualifying floating charge (QFC) simply unlike in the case of a trust, the properties would remain owned by BHS/BHSPL. If an administrator was appointed to one or both companies then a moratorium would prevent any exercise of security rights. If the Administrator was minded to stay in possession Alteri would obtain no benefit whilst they do so. That would defeat our economic objectives on any transaction and the risks of this are too great based upon LTV and holding costs and other considerations.”

(iv)

The DTZ Valuation Report

259.

Under cover of an email dated 31 August 2015 Mr Morris wrote to Olswang enclosing a draft valuation report of the nine properties in the collateral pool prepared by DTZ Debenham Tie Leung Ltd (“DTZ”) and dated 28 August 2015 to which I will refer as the “DTZ Valuation Report”. They valued the nine properties at £89.195 million in total and they gave the following individual valuations for each property (and I set out in brackets for comparison purposes the valuations in the table sent to Alteri on 25 August 2015):

(1)

Blackpool: £0.8 million (£1.5 million).

(2)

Exeter: £0.625 million (£1 million).

(3)

Carmarthen: £1.16 million (£1.5 million).

(4)

Oxford Street: £60 million (£50 million).

(5)

The Arndale Centre, Manchester: £10.265 million (£14 million).

(6)

Milton Keynes: £11.94 million (£15 million).

(7)

Scunthorpe: £1.325 million (£1.5 million).

(8)

Sunderland: £1.73 million (£1.75 million).

(9)

Taunton: £1.35 million (£2 million).

Total: £89.195 million (£88.25 million)

(v)

Other Lenders

260.

Mr Hitchcock and Mr Morris were unable to persuade Wells Fargo and Burdale or Brockton Capital or Alteri to provide further finance. During the same period they also attempted to attract finance from M&G Investments Ltd and Park Street Advisers in each case without success. Indeed, in their opening submissions Mr Curl and Mr Perkins stated that between February 2015 and April 2016 the BHS Group was unable to secure finance from a total of 14 lenders (including Farallon).

(4)

Atherstone

261.

On 26 August 2015 BHSPL sold Atherstone to Aequitas Estates (Midland) Ltd, a company ultimately owned by Mr Ismailjee, for £17.9 million (which equated to £14.94 million plus VAT). The Joint Liquidators did not allege that this was a sale at an undervalue and Mr Ismailjee gave evidence to the Insolvency Service that he had negotiated the sale with Mr Sherwood and denied that he received any favourable terms.

262.

£6,157,588.24 of the proceeds of sale was used by BHSGL to repay ACE I which was secured on the distribution centre. £5,157,884 was the sum payable under the ACE I Loan Agreement (as amended by the Deed of Amendment and Variation) and £1,000,000 was the “exit fee” payable under the original terms. That exit fee was payable in full whether or not RAL repaid the debt earlier than the extended repayment date of 31 December 2015. I was not taken to any conveyancing documents or Olswang’s ledger but normal practice would have been for Olswang to give an undertaking to use the proceeds of sale to discharge the ACE I Charge.

263.

In their weekly cashflow update dated 22 August 2015 GT reported that £11.9 million was due to be received that week from the sale of Atherstone net of £60,000 fees and the £1 million exit fee but that the £11.9 million was inclusive of a payment of £3 million VAT which was due to be paid the following week. They also stated that they assumed that Atherstone had been leased back to the BHS Group from August 2015 at a rent of £770,000 per annum. By email dated 25 August 2015 Mr Shore of Olswang reported to Mr Morris that they were expecting to receive £11,342,337.30 that day and in their weekly cashflow dated 29 August 2015 GT reported that proceeds of £14.9 million had been received less the repayment of ACE I of £6.2 million and agency fees of £0.4 million. The inference which I draw from these documents is that Olswang paid Mishcon directly and then transferred the balance to BHSPL.

264.

Mr Chandler’s evidence in Chandler 1 was that the BHSGL board always understood that when Atherstone was sold and ACE I repaid, RAL would owe the same amount to the BHS Group and that this would increase the inter-company debt between them. He also said that he understood that this debt would be paid down in time from the fees due to RAL under the MSA. From early September 2015 onwards discussions took place to document this arrangement but RAL did not formally acknowledge the debt until 3 March 2016 when Mr Treacy signed the AOI Letter (as I have defined it below).

I. 8 September 2015 to 23 December 2015

(1)

The Grovepoint Facility

265.

On 1 September 2015 a meeting of the Board took place at which Mr Chappell, Mr Chandler, Mr Topp and Mr Henningson were present. They also record that Mr Crane was present for item 5 which was headed “Business Update”. The minutes record that Ms Morgan reported that the cumulative EBITDA was –£63 million. They also record as follows under the sub-heading “cashflow”:

“MC reported:

• cash flow for the previous week had closed at £8.6m;

• cash flow would close at £6.9m this week which included LoCs;

• whilst funds from the sale of Atherstone had been received they had not come in when expected and a significant amount of time had therefore been spent on cash flow management; and

• the Board needed to ensure they were comfortable with the timing and quantum around assumptions.

MH added that the business needed reliable assumptions and timelines. Until the business was comfortable with the assumption, it would need to assume the property transactions were not taking place so that there would be no reliance on the funds from a cash flow perspective. The Board discussed and recognised the additional work and anxiety for Directors and senior management that missing assumptions around timelines had. DCl added that for Atherstone, the sale had raised £3m more than other bids, despite the timeline.

The Board noted that:

• net proceeds from Atherstone, £11.3m, had now been received;

• ACE had been re-paid, the majority of professional fees had been paid with only VAT outstanding. MH had a query over the fees for the agent which he needed to resolve before payment would be made;

• MH and DC1 had reviewed the product categories and were agreed on which LoCs were required;

• by 20 September, the cash balance would be -£2.9m, the peak funding requirement was forecast to be £31.5m;

• SPG and Arcadia had confirmed they would provide financial support for the funding gap. DT had held similar discussions. The amount and their agreement to assist needed to be documented;

• after discussion, it was agreed that Arcadia would be advised that £35m would be required;

• in the event that this was not required it was further agreed it would be prudent to request a lower amount of £10m to provide a buffer from SPG; and

• in the short term, the focus needed to be on releasing the LoCs, the sale of the targeted properties and repayment of ACE in December, restoring credit insurance facilities for which KS would provide a Lloyd's contact and securing stock and lease financing.

266.

The minutes then record that Ms Morgan, Mr Crane and Mr Carver left the meeting and that Mr Sherwood joined it to provide an update on property negotiations before leaving the meeting. They then record that Mr Morris provided an update on the new financing round before the Board authorised a sub-committee to execute the relevant documents:

“MM then provided an update on the current financing round which included the current position on each of the potential firms. MM outlined advantages with particular firms, along with disadvantages on some of the other potential firms and the security they were seeking. The Board considered these in detail and noted that MM expected to have clarity by Friday as to the final firm.

MM then left the meeting.

The Board then considered the process for agreeing the final documentation for the financing. KS proposed that a sub-committee of the Board be formed to provide final sign off, but that the whole Board should receive and consider the documentation. The Board agreed with this proposal and it was resolved THAT DCl and DC2 be approved to execute the final paperwork with the successful firm, subject to the whole board's consideration of the documentation. The Board also agreed that a PR needed to be lined up for release following the conclusion of this financing round to mitigate and address the issues faced with credit insurance and to counter negative media coverage.

Action 4: OT and EP to arrange for Jonathan Hawker to draft press release

The Board reflected on their discussions and information provided on the current trading update, cash flow, property and finance updates. The Board noted they had considered what the reasonable prospects were of the Company avoiding going into insolvent liquidation in their discussions and had identified factors that had a real prospect of materialising that would impact on that assessment. For all of these reasons the Board considered that there was a reasonable prospect that the Company would avoid going into insolvent liquidation. Furthermore, the directors considered that they were acting in the best interests of the Company's creditors.”

267.

On 3 September 2015 Mr Morris circulated the final draft of the Grovepoint Facility (as I define it below) to all of the members of the Board including Mr Henningson. In the covering email he stated that it was in agreed commercial form subject to minor drafting and typographical amendments. On 8 September 2015 three meetings of BHSL, BHSGL and Davenbush took place at 12.45 pm, 12.50 pm and 1 pm which Mr Chappell and Mr Chandler attended and at which they authorised the repayment of ACE II and entry into the Grovepoint Facility. Each set of minutes records as follows:

“[I]n in considering whether the Company should enter into the Documents, each director needed to comply with his general duties to the Company. These included (without limitation) the duty to exercise reasonable care, skill and diligence and the duty to act in accordance with the Company's constitution and for each director to exercise his powers for the purposes for which they are conferred. Each director also had a duty to act in the way he considered, in good faith, would be most likely to promote the success of the Company for the benefit of its members as a whole and In doing so have regard (amongst other matters) to:

5.4.1

the likely consequences of any decision in the long term;

5.4.2

the interests of the Company's employees (if any);

5.4.3

the need to foster the Company's business relationships. with suppliers, customers and others;

5.4.4

the Impact of the Company's operations on the community and the environment;

5.4.5

the desirability of the Company maintaining a reputation for high standards of business conduct; and

5.4.6

the need to act fairly as between the members of the Company.

It was noted that the list of factors was not exhaustive and, in having regard to these and any other relevant factors, the duty to exercise reasonable care, skill and diligence applied. It was also noted that:

5.4.7

the terms of the transaction and each of the Documents were fair and reasonable; and

5.4.8

In entering into the Documents and undertaking the other obligations contained in the Documents as part of the overall arrangements described above, the directors would be acting in the way they considered would be most likely to promote the success of the Company for the benefit of its members as a whole, as set out in section 172 of the Act.

After careful consideration IT WAS RESOLVED that, in entering into the Documents and undertaking the other obligations contained In the Documents as part of the overall arrangements described above, the directors would be acting In the way they considered would be most likely to promote the success of the Company for the benefit of its members as a whole, as set out above;

5.5

IT WAS RESOLVED that the execution and delivery by the Company of each of the Documents, the performance by the Company of its obligations under each of the Documents and the terms and conditions of each of the Documents so far as they concern the Company be approved.”

268.

By a facility agreement dated 11 September 2015 (the “Grovepoint Facility Agreement”) and made between BHSGL together with BHSL, BHSPL and Davenbush (defined as the “Borrowers”) and Grovepoint Credit Funding 2 Ltd (“Grovepoint”) as lender, agent and security agent, Grovepoint agreed to make available a total facility of £62,436,500 (the “Grovepoint Facility”). The Grovepoint Facility Agreement provided as follows:

(1)

The term "Borrower's Allocated Loan Amount" was defined with respect to BHSL as £52,097,500, with respect to Davenbush as £437,500 and with respect to BHSPL as £9,901,500 (section 1.1).

(2)

The term “Make Whole Amount” meant (in relation to a pre-payment) the amount equal to the interest which a Lender should have received on the Termination Date from the date of the prepayment (section 1.1).

(3)

The term “Margin” was defined as 15% (section 1.1).

(4)

The “Termination Date” was stated to be 16 September 2016 (section 1.1).

(5)

The purpose of the facility was to finance working capital requirements, refinance ACE I, ACE II and the ACE Loan Notes and to fund the payment of fees and costs (section 3.1).

(6)

The Borrowers undertook to repay the loans on the Termination Date (section 6.1).

(7)

Any prepayment under the facility was to be paid together with the Make Whole Amount relating to that pre-payment (section 7.9(h)).

(8)

Interest was payable at the percentage rate which was the aggregate of the Margin and LIBOR (section 8.1).

(9)

BHSGL agreed to pay to Grovepoint (as agent) a structuring fee of £1,248,730 (section 11.1).

(10)

Each Obligor (as defined) entered into a negative pledge not to sell, transfer or otherwise dispose of its assets on terms whereby they could be leased to or re-acquired by an Obligor or enter into any arrangement under which money or the benefit of a bank or other account could be applied, set off or made subject to a combination of accounts (section 22.3)

269.

The Grovepoint Facility was secured by a security agreement also dated 11 September 2015 (the “Grovepoint Security Agreement”) under which, BHSL, BHSPL and Davenbush granted first legal charges over 10 properties, namely, Oxford Street and its stores at the Arndale Centre, Manchester, Milton Keynes, Carmathen, Sunderland, Taunton, Blackpool, Exeter and Scunthorpe. Shortly before completion of the loan, C&W produced a residual valuation of Oxford Street at £60 million.

270.

Olswang’s completion statement for the Grovepoint Facility records that it received £62,436,500 on behalf of the BHS Group of which Grovepoint retained the structuring fee of £1,248,730, that £27,400,000 was transferred directly to Mishcon to repay ACE II, that Olswang paid £2,722,668.51 to Mishcon to repay the ACE I Loan Note and the first instalment of the ACE Loan Note III (below) and that Olswang paid £30,790,818 to BHSGL. This left £2,996,952 remaining in Olswang’s client account which was ultimately paid to ACE. By email dated 16 September 2015 Mr Hitchcock sent Mr Budge a summary cashflow update which confirmed that the Grovepoint Facility had generated about £31 million of new money.

271.

On 25 August 2015 Mr Turner of Olswang produced a memo headed “Trading advice to the Boards of BGL, BPL and BL”. Olswang stated that the BHSGL was currently considering bridging finance for £65 million to repay ACE II and to provide working capital. Olswang also reminded the members of their duties and then raised a number of questions. These included the following:

“There are a number of factors which each Board should consider when deciding whether it is in the best interests of creditors for this transaction to be entered into (and this is whether BGL, BPL and BL is borrower, guarantor, vendor and/or chargor). The primary consideration in the Board’s deliberations is no doubt whether the financing allows the turnaround plan to be implemented (and that belief is reasonable), such that the position of the companies in the Group and their creditors becomes more secure and the companies return to a more stable footing. The position of the pension fund liability is a significant factor in any consideration of the unsecured creditor position. In addition, what other factors should be considered? Ultimately if is for each Board to ensure all relevant considerations have been taken into account but they may include the following:

4.1

The funding allows the ACE II facility to be repaid and replaced by a facility on more favourable terms.

4.2

It is contemplated that the facility will be repaid by the sale of the properties over which the funder will take security over the next 6 -12 months. Is that likely? In addition, bearing in mind that a number of these properties are currently unsecured (not subject to either fixed or floating charge security) and therefore any proceeds of sale would be available for unsecured creditors, to what extent are the relevant Boards comfortable that were the relevant companies in the Group to go into administration at any time after the financing is put in place, as opposed to today, the position of unsecured creditors would not have been prejudiced. Part of that assessment would be that the three most valuable properties, Oxford Street, Manchester and Milton Keynes are currently secured (to ACE and HSBC), so presently what value is there in those properties for unsecured creditors, and do the other proper ties to be charged have any material value?”

“5.

Inevitably the Board may feel it is necessary to balance a number of factors. The issue may centre around the reduced assets available for unsecured creditors due to the debt/sale terms and due to the security being granted over certain pieces of real estate which are currently unencumbered and therefore the prejudice (if any) that unsecured creditors may suffer in due course if the companies fail. This is to be balanced against the fact that the relevant Boards may feel that this financing will take the Group through to a position where its turnaround plan is implemented. Is it reasonable for the Boards to believe that that will be achieved, and therefore no unsecured creditors will suffer, whereas if the Group went into a formal process to day, there would be a shortfall for unsecured creditors. In assessing the position of unsecured creditors the position of the pension fund must, as mentioned, be considered.”

272.

By email dated 11 September 2015 and timed at 4.05 pm Mr Chandler wrote to Mr Roberts asking for a copy of the note which Olswang had prepared for the presentation on 9 April 2015. By email timed at 6.31 pm Mr Roberts replied enclosing three attachments. In his covering email he stated as follows:

“Please find attached:

1)

Original paper presented by Olswang

2)

Recent memo prepared for boards for ACE II transaction

3)

Memo from Ron prepared on pensions / directors duties issues which I have held back pending the meeting yesterday but now include”

273.

The second attachment was Mr Turner’s memo dated 25 August 2015. I am not certain why Mr Roberts described it as prepared for the “ACE II transaction” because there was no evidence before me that it was prepared any earlier than 25 August 2015 or that it was sent to the BHSGL board before 26 June 2015. It may be that Mr Roberts was confused or it may be that he referred to the ACE II transaction because ACE was to be repaid out of the funds drawn down under the Grovepoint Facility.

(2)

The ACE Loan Note III

274.

In order to enter into the Grovepoint Facility, BHSGL had to reach agreement with ACE to release its security over Oxford Street and the Arndale Centre in Manchester. By email dated 2 September 2015 and headed “subject to contract” Mr Dellal wrote to Mr Chappell stating that for ACE to exit its position in its entirety including the securities which it held over Oxford Street and Manchester, it would require BHSGL to pay £33 million by the end of September 2015 and £122,668.51 per month until December 2015. Over the next few days, however, he must have agreed to accept £30 million to discharge ACE II and £3 million payable in December 2015 with monthly instalments of £122,668.51.

275.

On 10 September 2015 a BHSGL board meeting took place at which Mr Chandler and Mr Topp were present. The minutes of the meeting record that as part of the overall financing of the BHS Group ACE had agreed to surrender the ACE Loan Note II in exchange for a new loan for £3,490,674.04. In broad terms, this sum represented the balance due under the ACE Loan Note II and a sum required to buy out the ACE Profit Share payable under the ACE II Mezzanine Agreement, fees, interest and four months’ rent for North West House. The minutes also record that the board resolved to issue a new series of notes to ACE upon it surrendering the ACE Loan Note II.

276.

By letter dated 11 September 2015 and headed “Pay Off Letter” ACE wrote to BHSGL, BHSL and BHSPL stating that upon the payment of £30,122,668.51 and the issue of new loan notes to the value of £3,490,674.04, ACE agreed and acknowledged that all sums due under ACE Loan Note II would be paid and discharged and agreed to release the three Companies from their obligations under ACE II. By a deed dated 11 September 2015 (the “ACE Loan Note III”) BHSGL agreed to issue a new series of loan notes for the principal sum of £3,490,674.04. Clause 5 provided that it was to be repaid in four equal instalments of £122,668.51 on 11 September 2015, 28 October 2015, 28 November 2015 and 28 December 2015 with a final payment of £3,000,000 also payable on 28 December 2015. On 11 September 2015 BHSGL issued a certificate recording that ACE was the registered holder of £3,490,674.04 unsecured loan notes.

277.

Finally, by a deed of release dated 11 September 2015 ACE acknowledged that ACE Loan Note II had been released in full and it released BHSGL, BHSL and BHSPL from their obligations under ACE II and the legal charges over Oxford Street and Manchester. The first instalment of ACE Loan Note III which fell due immediately was paid out of the proceeds of sale of Atherstone. There was no dispute that BHSGL redeemed the ACE III Loan Note and paid the sum due in full.

(3)

The Hudson Facility

278.

On 16 September 2015 a BHSGL board meeting took place at which Mr Chappell, Mr Chandler and Mr Henningson were all present. Mr Hitchcock reported that despite the Grovepoint Facility there remained a shortfall in cashflow and that Sir Philip Green had agreed to fund the shortfall so that an additional £10 million of cash would be in place by 20 September 2015. The minutes record that the board also discussed the following measures:

“• the pre-funding requirement from HMRC and the subsequent impact on cash flow. MH intended to appeal but in the meantime the costs still had to be met;

• alternative options to ease cash flow by delaying rental payments with the agreement of landlords;

• the cash flow summary presented to the Board had been prepared by BHS and by the end of the month,

• GT s involvement would have come to an end;

• the cash flow summary provided both a short and long term view;

• the pension levy had been significantly increased as a result of the Company’s risk profile, to £2.9m for this year and double that the following year although there was potential to reduce the levy; and

• VAT was due on 27 September; DC1 intended to explore whether the due date could be varied.”

279.

The minutes also record that Ms Morgan presented the business plan (which was a reference to the July 2015 Turnaround Plan). She stated that the planning process had started some months previously with the assistance of GT who had taken “a top down approach” whilst internally a “bottom up approach” had been used. She reported that the two plans “had not met in the middle” and that there was a challenge to meet the target EBITDA £20 million. Finally, she stated that each profit or loss driver had then been analysed and categorised into “pillars” with building blocks added to give incremental gains. Finally, the minutes show that no decision was taken to approve the July 2015 Turnaround Plan and the board agreed to consider it at a later meeting.

280.

The BHS weekly cashflow update dated 17 September 2015 recorded that the Grovepoint Facility had generated a net receipt of approximately £31 million, that HMRC had declined to agree to a deferral of import VAT and that the BHS Group was required to pay it on an ongoing basis from the following week. It also recorded that “Mitigating cash flow levers of c.£5 million will be used if required” and that the PPF Levy of £2.9 million was to be appealed in the hope of agreeing a deferral. Finally, they recorded that discussions were ongoing to obtain an asset backed lending or “ABL” facility of up to £40 million. The headroom graph forecasted that the BHS Group would have negative cashflow of between £4 million and £12 million between 27 September 2015 and 22 November 2015.

281.

By a letter dated 27 September 2015 Barclays agreed to grant an overdraft facility of £11 million to a company called Hudson Accounting (No 1) Ltd (“Hudson”) at a rate of 1.75% above its base rate until 5 December 2015 (the “Hudson Facility”) on condition that Arcadia provided a guarantee in form and substance acceptable to the bank. On 25 September 2015 Arcadia entered into a deed of guarantee for the Hudson Facility and by email dated 29 September 2015 Mr Carver wrote to Mr Hitchcock and Ms Morgan stating that the Hudson Facility was in place and available for drawdown. None of the loan documents to which I was referred suggest that any of the Companies was a party to the Hudson Facility.

282.

On 14 October 2015 a BHSGL board meeting took place at which Mr Chappell, Mr Chandler and Mr Henningson were all present. Mr Morris reported that the Hudson Facility had not yet been drawn and Ms Morgan reported that the trading EBITDA was now –£67.8 million. Item 9 on the agenda was headed “i. Business Plan and Budget: for approval ii. Pillar Goals hierarchy” and the minutes recorded as follows:

“MH circulated a paper which outlined the Pillar Goals hierarchy. The Pillar Goals hierarchy formed part of the Business Plan and provided granularity and laid out which member of the Operations Board was responsible for each Pillar. DT explained that on Wednesday 25 November, this Board along with the Operations Board were meeting offsite. The agenda for that meeting would include the turnaround plan in more detail, and in particular, how each Pillar would be achieved. MH explained that for all Pillars, a plan was in place to achieve savings or create new growth. Pensions had been left deliberately blank at this stage however, following a meeting with Grant Thornton, MH outlined a possible pension solution road map. MH circulated a summary. The Board meeting was then adjourned. The Board meeting was reconvened. MH left the meeting. The Board approved the Business Plan & Budget.”

283.

The BHS weekly cashflow update as at 30 October 2015 recorded that £9 million of the Hudson Facility had already been drawn to cover “end of month” payments. The headroom graph forecast that the BHS Group would still have negative cashflow until 22 November 2015 when it was forecast that there would be a significant sales receipt increase of £16 million for trading over the Black Friday weekend.

(4)

Grovepoint brokerage fees

284.

Under cover of an email dated 4 September 2015 Mr Roberts sent a copy of the MSA to Mr Chandler and Mr Morris. It is clear that he had been instructed that a fee was to be paid to RAL because he identified the following “Problem” and the following “analysis”:

Problem

Under the proposed loan, there is a restriction on the quantum of funds that BHS Group can pay up to RAL. At the last minute, BHS considered the payments under the MSA and have asked whether it would make sense to assign the agreement to one of the non-obligor companies in the group as the restriction on payments does not apply to such parties.

Analysis

I see that clause 8 permits BHS to assign its rights or obligations to another member of its group. On that basis, I see no reason why BHS Group could not assign the agreement to one of the non-obligor companies (for instance BHS Services Limited) who would continue to benefit from RAL’s services (as all group companies benefit) and would then be obliged to pay RAL under the agreement – presumably by taking an intercompany loan from its parent BHS Group Limited.

This would not affect the services that RAL provides, as they are provided to the entire group and it would not affect the employees who amended their employment contracts to be employed by RAL on or post completion, as I understand the deeds of variation they signed contained a separate guarantee from BHS to pay their salaries in any event.”

285.

On 8 September 2015 Mr Roberts sent Mr Chandler an email attaching draft minutes of a BHSGL board meeting to be held to approve the payment of a 4% “brokerage fee” to RAL for arranging the Grovepoint Facility. On the same day he sent a first draft of an amended and restated MSA. It was Mr Chandler’s evidence (which the Joint Liquidators did not challenge) that before he had read this email Mr Roberts had called him and told him that Olswang had been asked to transfer £2.7 million of the sum held on their client account to RAL on the instructions of Mr Chappell. Finally, it was also Mr Chandler’s evidence that he then instructed Mr Roberts that the transfer should not be made until the BHSGL board had considered it and he confirmed this by email.

286.

Under cover of an email dated 15 September 2015 and headed “Traffic Lights” Ms Georgina Roscoe, Mr Turner’s PA, sent Mr Chappell and Mr Parladorio a memo on “Trading Advice to the Board of BHS Group Limited” the purpose of which was to identify the risks associated with paying a brokerage fee to RAL. Mr Turner identified the potential risks as follows:

“Should the relevant BHS entity enter into administration or liquidation within two years of the date of the Transaction, the Transaction could be attacked by the administrator/liquidator as a transaction at an undervalue. The basis for any such application would be that pursuant to the Transaction RAL had provided significantly less consideration than that received. The administrator/liquidator would also have to show that the relevant BHS entity was unable to pay its debts at the time of the Transaction or became unable to do so as a result, although this will be presumed where the parties are connected, as in the present case. Furthermore, any Payment may be attacked as a preference by an administrator/liquidator if it could be shown that the Payment put RAL in a better position than it otherwise would have been on insolvent liquidation, and that when the Payment was made the relevant BHS entity was influenced by a desire to prefer RAL as opposed to arms-length commercial considerations (and a desire to prefer will be presumed where the parties are connected, as here).

In addition, the directors themselves could find themselves liable for breach of duty if it could be shown that at the relevant time, due to the position of BHS, the directors owed duties to act in the best interests of creditors and that the Transaction and/or any Payment were not in the interests of creditors. Finally, allowing the BHS entity to enter into a Transaction/make a Payment which is subsequently set aside could be a ground for a misfeasance claim.”

287.

Mr Turner stated that two proposals had been put forward: first, deferring payment until 30 January 2016 and, secondly, deferring payment until the business was capable of affording it. He identified the first option as red or amber and the second as closer to green on the amber scale. He then stated as follows under the heading “Summary”:

“The potential challenges to the Transaction and any subsequent Payment mentioned above will only arise if the relevant BHS entity enters an administration or liquidation process within two years of the date of the Transaction or Payment, as the case may be. However, if the company does enter such a process, the Transaction is vulnerable to being found to be a transaction at an undervalue and/the Payment a preference, whether option one or two is followed. The difference in risk is predominantly that if option two is taken, it is less likely that the relevant BHS entity will enter administration or liquidation after the Payment is made, if the payment will only occur once the relevant BHS company has achieved a position of sufficient financial robustness such that the payment of the fee to RAL will not materially detrimentally affect the cash flow of the relevant BHS entity. Making the Payment in those circumstances is also likely to leave the directors less open to criticism and liability.”

288.

By email dated 24 September 2015 Ms Caroline Dodman of Olswang wrote to Mr Morris stating that she understood that there was a plan for BHSL to put £748,800 (i.e. £624,000 plus 20% VAT) into Lowland by way of share subscription and on 28 September 2015 Mr Joshua Swerner of Olswang sent a suite of documents designed to give effect to this plan. In the event, a decision was taken for BHSL to make a loan to Lowland instead of subscribing for shares.

289.

On 25 September 2015 a RAL board meeting took place at which Mr Parladorio and Mr Chappell were present in person and Mr Henningson by telephone. The minutes record that Mr Parladorio explained that changes were necessary to the MSA and that it would be reviewed and tabled for final approval. Under the heading “Fees on re-financing (Michael Morris)" the minutes also record that the board agreed to pay a 1% fee to Mr Morris which was described as “low and therefore a good deal”. By email dated 12 October 2015 Mr Topp also wrote to Mr Paul Martin of GT asking about introducer fees:

“We are currently debating the fees which maybe payable to both Michael Morris and RAL for completing the transaction with grovepoint. So not inc the legals, property etc. I understand that Seaun [sic] introduced grovepoint to Michael and didn't charge an introducer fee? Could you provide some indicative costs of what appropriate fees could/would look like......”

290.

On 9 October 2015 RAL raised an invoice to Lowland for £115,000 (ex VAT) or £138,000 (inc VAT). The narrative stated: "Management Service Fee on account (in relation to services in relation to Grovepoint deal)”. On the same day Mr Parladorio sent the invoice to Mr Topp (copying in Mr Chappell, Mr Chandler and Mr Morris). There is no evidence that this email or the invoice were copied to Mr Henningson.

291.

On 14 October 2015 Mr Topp reported back to Mr Parladorio on Mr Martin’s advice that introduction fees were about 75 to 100 basis points. On 27 October 2015 a RAL board meeting took place at the Landmark Hotel at which Mr Parladorio, Mr Chappell and Mr Henningson were all present. The minutes record that they resolved to offer the post of CFO to Mr Aidan Treacy. They also record that Mr Parladorio provided an update on the MSA and that it was agreed that Mr Treacy and he would proceed with a benchmarking exercise.

292.

By email dated 4 November 2015 Ms Dodman wrote to Mr Morris advising that it was possible for BHSL to make a loan to Lowland and for Lowland to pay RAL. Mr Chandler described this device in Chandler 1 as using Lowland as an “invoicing hub” for other group companies. By email also dated 4 November 2015 Mr Topp wrote to Mr Hitchcock stating that he wanted further advice from Olswang before the revised MSA was put in place. On 5 November 2015 Mr Topp and Mr Chandler spoke to Mr Roberts by telephone and Mr Chandler took detailed notes of the call.

293.

On 5 November 2015 board meetings of Lowland and BHSL took place. No signed minutes of the meetings were in evidence but draft minutes of both meetings record that Mr Chappell, Mr Chandler and Mr Henningson were all present. Both sets of draft minutes also record that Mr Chappell and Mr Henningson declared that they had an interest in the proposed transaction which they were required to declare under section 177 of the CA 2006. Both sets of draft minutes then record:

“It was noted that pursuant to article 7.6 of the Company's articles of association, a director may vote and form part of the quorum in relation to any proposed transaction or arrangement in which they were interested, subject to being so authorised by the other directors of the Company. Accordingly, DC2, acting alone, resolved THAT DC1 and LH be authorised to continue in their duties and each director remained entitled to vote and count towards the quorum on all business to be discussed at the meeting.”

294.

The draft minutes of the Lowland board meeting go on to record that the board had received an invoice for services provided by RAL for £138,000 but that it did not have funds to pay it but could raise the funds by requesting a loan from BHSL. The minutes then continue:

“The Board considered the proposal to request a loan and noted that with income due of at least £3.5m, it had the means to re-pay a loan. The Board agreed to request a loan from BHS Limited in order that it could pay the invoice from RAL.”

295.

The draft minutes of the BHSL meeting record the same information, namely, that Lowland had received the invoice which could not meet its obligation to repay the loan. They then continue: “The Board resolved that it would provide a loan to Lowland for £138,000.” It is common ground that on 9 November 2015 £88,300 was transferred by BHSL to Lowland and that £138,000 was transferred by Lowland to RAL.

296.

On 4 December 2015 RAL raised a second invoice addressed to Lowland for the sum of £509,363 (ex VAT) or £611,238 (inc VAT). Again, the narrative stated: "Management Service Fee (interim second payment on account in relation to services re: Grovepoint deal)”. RAL’s reserve account bank statement records that on 9 October 2015 RAL received £138,000 from Lowland and on 7 December 2015 it received the balance of £611,238. It also records that on 10 November 2015 it paid £100,000 to Prime Capital Services and £45,000 to Mr Chappell and that on 10 December 2015 it paid £509,000 to an unidentified capital management account.

297.

Mr Chandler accepted that there were no minutes of either Lowland or BHSL authorising the payment of the second invoice. His evidence was that he was not involved in the bank transfers and that he could not recall why there were two payments (although he suggested that there might have been some urgency about the first one). However, it was also his evidence that he was sure that the total payment of £624,000 (plus VAT) was approved at the board meetings on 5 November 2015.

(5)

Project Vera

298.

Project Vera” was the code name which the new BHS management gave to their own solution to the pensions deficit and the successor to Project Thor. On 13 July 2015 Mr Chappell, Mr Topp and Mr Hitchcock met the Trustees and in advance of that meeting Mr Martin sent Mr Topp preliminary indications of the outcome of the Triennial Valuation. The accompanying slide indicated the basis of valuation and the deficit of each scheme. The text included the following bullet point:

“Looking over a 20 year period and making some reasonable allowances for future administration expenses, we estimated that total annual deficit contributions of £25m would be required to make good a combined deficit on the gilts basis of £345m, broadly and the addition of £15m a year to the £10m pa currently being paid. This does not include PPF levies, which the Company pays in addition.”

299.

By email dated 14 July 2015 Mr Topp wrote to Mr Martin summarising the outcome of their discussions and a number of individual workstreams. In relation to the restructuring of the Schemes, Mr Topp stated as follows:

“Grant Thornton and Olswang will draft a high level proposal for a possible consensual restructuring of the Schemes (‘Project Vera’), outlining a possible structure and key process steps. This will be provided to the Trustees for consideration and comment prior to the end of July 2015.”

300.

By email dated 17 July 2015 Mr Martin replied thanking Mr Topp for his summary and stating that he looked forward “to receiving the straw man from GT in due course”. In cross-examination Mr Martin confirmed that this was a reference to the high level proposal (above) and on 31 July 2015 Mr Topp sent this document to Mr Martin. It consisted of 10 slides and proposed that new schemes would be set up, an RAA would be agreed with the Pensions Regulator and that BHSL’s obligations would be transferred to a new company.

301.

Mr Martin’s evidence in Martin 1 was that the period following July 2015 was relatively quiet and that he did not meet with members of the BHSGL board again to discuss Project Vera until December 2015. Mr Chandler’s evidence was that he attended a meeting with the Trustees, their lawyers and accountants and the Pensions Regulator on 15 September 2015. After he had considered this evidence, Mr Martin made a second witness statement dated 3 March 2023 (“Martin 2”) stating that he had no recollection of such a meeting and no record of doing so. I return to this issue below.

302.

On 1 October 2015 Eversheds provided an Advice Note to the Trustees setting out their considered advice following the acquisition. In the Executive Summary they drew attention to the fact that Arcadia had a fixed charge over Cribbs Causeway and a floating charge over the BHS Group’s non-real estate assets and that this “Debt Security Package” had a number of legal deficiencies. They also stated that they had engaged with the advisers for RAL and Arcadia with a view to obtaining their agreement to remedy these deficiencies but without success. They also expressed the view that the BHS Group’s long term survival appeared to be dependent upon the implementation of Project Vera.

303.

On 7 October 2015 Mr Martin spoke to Sir Philip Green and the minutes of the meeting of the Trustees on the same day record that Sir Philip told him that “the proposed security support package will be held back until the position with the Regulator has been resolved”. The minutes also record as follows:

“The Trustees unanimously agreed that the best outcome for members of the Schemes at present is to continue to collect the Company's deficit contribution payments – which continue to be paid on time and in accordance with the Schedules of Contributions agreed at the outcome of the 2012 triennial valuations - and to pay members' benefits in accordance with the Schemes’ Rules. The Trustees saw no merit or advantage to members in “forcing the pace" so far as the ongoing (March 2015) triennial valuations are concerned – particularly as the Scheme Actuary had confirmed (subject to continuing to monitor the position), that there wat no PPF "drift".”

304.

On 15 October 2015 the Trustees met again. The minutes record that the Trustees had answered all of GT’s information requests in relation to Project Vera during the first half of September 2015. They also record that there was some discussion about the increase in the PPF Levy and that the Trustees acknowledged that making a financial demand for reimbursement to BHSL would contravene “their recently-agreed stance of not precipitating BHS’s insolvency or forcing a similar outcome, as this would not benefit members or be in the interests of the PPF”.

305.

On 4 November 2015 Mr Martin sent Mr Hitchcock the initial results of the Triennial Valuation exercise. He attached a slide deck called “Actuarial valuations as at 31 March 2015” and it showed a deficit of £231.4 million for both Schemes (an increase of about £20 million on the 2012 Triennial Valuation): see slide 6. It also stated that DRCs continuing at the current level would take more than 40 years to remove the deficit. The slides set out the following illustrative recovery plans (on slide 27):

“Based on the deficits of £231m in the Bhs Pension Scheme and £20m in the SMS under the Technical Provisions bases shown on slide 4, we have carried out some calculations on deficit contributions. The current contribution levels would not be expected to remove the deficit within 40 years. Deficit contributions of £ 14.4m/£1.2m with effect from 31 March 2015 would be expected to eliminate the deficit by 31 March 2035 for Bhs Pension Scheme/SMS respectively. If the Trustees choose the gilts basis, deficit contributions of £18.0m/£1.9m with effect from 31 March 2015 would be expected to eliminate the deficit by 31 March 2035 for Bhs Pension Scheme/SMS respectively, assuming no asset outperformance.

PPF levies are payable in addition. The 2015/16 levies are £2.8m/£0.12m for the Bhs Pension Scheme/SMS respectively. It is not possible to determine future levies, but, as an indication, it is likely that the 2016/17 PPF levy will be approximately £4.5m for the Bhs Pension Scheme if Bhs Limited remains in Experian Band 10, and there would be an increase in the SMS levy”

306.

Mr Hitchcock prepared a pensions roadmap for Project Vera which he sent to Mr Chandler on 4 November 2015. It stated that the current funding gap would require a minimum future funding requirement of more than £25 million per annum plus £5 million for the PPF Levy. However, there was no discussion of the roadmap at the BHSGL board meeting that day. Indeed, they record only that Mr Chandler was continuing his research on pension investments and returns and would provide further information. By email dated 5 November 2015 Mr Hitchcock expressed his frustration to Mr Martin:

“Chris, my main aim is to get to know you and share with you my unfettered, uncomplicated and completely independent view of life at BHS! Privately, I don't agree with the guarded and hidden messaging that appears to have taken place preceding my arrival, as I am very proactive and transparent and like to collaboratively work with the key stakeholders in any business to move it forward. I have built up my own, ie, not contaminated by emotionally driven owners and advisers, view of a way forward and would like to discuss it with you. Hope this helps.”

307.

On 9 November 2015 Mr Martin met with Mr Hitchcock and Mr Topp. His notes record that Mr Topp said that the revised DRCs were unaffordable and that “save for a successful refinancing the company would run out of cash in March and become insolvent”. They also record that Mr Hitchcock told him that the current proposal was to enter into an ABL with Gordon Brothers backed by Well Fargo but in order to do so BHSGL had to demonstrate that there was a credible pensions solution. Finally, his notes record that he confirmed that the solution was Project Vera, that GT were preparing a proposal and that they suggested that the cost could be in the region of £100 million to £200 million.

308.

On 1 December 2015 a meeting took place between Mr Martin, Mr Hitchcock, Mr Topp, Mr Parladorio, Mr Hinds and Mr Kevin Hollister of GT. For the meeting GT had prepared a slide deck called “Project Vera: High level initial proposal for the consideration of the Trustee”. This document was so recent that it was still being printed when the meeting began. Mr Martin’s notes of the meeting record that Mr Hollister ran through it and that Mr Martin noted that it excluded the PPF Levy which would have to be paid. Mr Martin also noted the following bullet points:

“• Critically CM noted that there was no provision for equity to PPF and asked whether this had been considered by the shareholders. CM did not receive a clear response. CM went on to point out that if the alternative to giving up equity was insolvency when all of the equity would be worthless, presumably the shareholders could be persuaded that it was necessary to do so. KH took the point.

• As the equity issue is so fundamental it was agreed that this would be the key action point for the BHS Team and GT to pursue directly with PPF.

• CM agreed to discuss the proposal with his Board and advisors and to revert with a high level view.

• Funding for Vera was discussed. Again, it was accepted that this could realistically only come from one source. No detailed discussions have been commenced in this respect.

• There was a brief discussion around the nature of any funding support. KH and CM agreed that if this was by way of a loan to the company it was unlikely to satisfy any moral hazard objectives of tPR.”

309.

The slide deck consisted of 12 slides in total and acknowledged that without reaching agreement with the Trustee BHSL faced the prospect of insolvency. GT proposed that the Schemes should be wound up and new schemes established which would provide an uplift of 1% on the current benefits. They also estimated that the residual estimated deficit would be £113 million. Finally, they stated that this would be 100% funded and that BHSL would be “assisted by a one off third party contribution”. This was obviously a reference to Sir Philip Green or Arcadia.

310.

On 12 January 2016 Mr Martin met Mr Topp and Mr Hitchcock. His notes record that they told him that they remained confident that an ABL (Footnote: 1) could be put in place but that the lenders required some degree of confidence about the pensions situation and that there was a need for urgency if a third party was to fund Project Vera. On the same day he met with Mr Chappell and Mr Parladorio as well as Mr Topp and Mr Hitchcock. His notes of the second meeting record as follows:

“• CM recapped on the update provided by OT and MH and looked for an open discussion on a possible way forward for both the business and the Scheme.

• DC responded vigorously that the business could stand alone and needed no support from its previous owner.

• CM noted that wherever funding is to come from, if the business is going to propose a Vera type solution to the Trustees then it has to be credible, with a credible funder.

• DC indicated that he could raise £120m and if necessary would sell off the businesses "crown jewels”.”

311.

Mr Martin’s notes then record that he expressed surprise that the business would be able to fund this level of contribution towards Project Vera and his evidence in Martin 1 was that Mr Hitchcock and Mr Topp turned to Mr Chappell to point out the obvious that there were no “crown jewels” left to sell because everything had either been charged or sold.

(6)

Darlington

312.

On 8 October 2015 Knight Frank LLP (“Knight Frank”) offered the freehold for sale of the BHS Group’s Darlington Store at 60 to 64 Northgate Darlington DL1 1PR (“Darlington”) on behalf of Landmaster Properties Ltd (“Landmaster”) which had gone into administrative receivership. Knight Frank stated in their brochure that they had been instructed to seek offers in excess of £2,850,000. At the BHSGL board meeting on 4 November 2015 Mr Chappell proposed the purchase of Darlington because it made sense from a financial perspective to purchase the freehold. The minutes record that the board was in favour of the transaction.

313.

Following the meeting Mr Sherwood was able to negotiate a price of £2.55 million. However, by email dated 10 November 2015 Ms Morgan set out a calculation to show that the annual financing cost would be £312,000 and expressed the view that the transaction did not make sense. Mr Sherwood responded to this email by asking Mr Hitchcock to confirm that the BHS Group could fund a purchase price of £2.55 million and he replied stating that he could not guarantee it. He also stated that “there is not a CFO in the land who would sanction this” and “We are a retailer, not a property trading/investment company.” Mr Topp became involved and later that day Mr Sherwood wrote to him as follows (copying in Mr Hitchcock):

“DC does have a potential purchaser whom based upon a reduced rent and a 20 year lease would buy the freehold off us. The proposal would give us a circa £500k capital gain and an annual rental saving of circa £90k. We would still be acting like a property company and when I floated this concept in the property meeting there appeared to be little enthusiasm for it?”

314.

Later that day Mr Hitchcock came back with a more positive response stating that the group would have the funds to purchase Darlington in six weeks’ time. In a report dated 27 November 2015 Mr Toby Yates of Vail Williams gave advice in relation to the purchase. He advised that a building survey (which had been assigned to the BHS Group) suggested that repairs to Darlington were required in the medium to short term for a budgeted cost of £312,000. He also advised that a mechanical and engineering report (which had also been assigned to the BHS Group) referred to a number of items which were operating beyond their normal life expectancy and were scheduled for replacement at a cost of £1,096,870. However, based on a number of comparable transactions Mr Yates advised that £2,550,000 reflected the fair market value of Darlington for investment.

315.

By email dated 26 November 2015 Mr Sherwood wrote to Mr Topp stating that exchange of contracts was imminent. On 30 November 2015 Mr Topp replied stating that the purchase of Darlington required board approval and that a full financial evaluation of the purchaser was required. It is clear that Mr Chappell and Mr Sherwood anticipated the onward sale of Darlington because Mr Sherwood responded by telling Mr Topp that: “The SPV is being set up now so the onward sale would be on the basis of selling the SPV which saves any double stamp duty. I will ask DC to confirm the purchaser details.”

316.

On 30 November 2015 a BHSGL board meeting took place at which Mr Chappell and Mr Chandler were present (but not Mr Henningson). The unsigned minutes of the meeting record that Mr Topp told the meeting that the ability to sell on the property at a profit before the end of March 2016 was critical to approving the proposal and that Mr Chappell and Mr Sherwood both said that it would be possible to achieve such a re-sale. The unsigned minutes then record that the purchase was approved.

317.

Mr Chandler took handwritten notes of the meeting to which he referred in Chandler 1. His notes record that there was some discussion about a “proper document” and that Ms Morgan said that she had produced one. They also record that there was discussion about the figures. They do not record, however, that a formal resolution was passed to purchase Darlington although Mr Chandler’s evidence was that the board approved the purchase at that meeting.

318.

By email dated 1 December 2015 Mr Sherwood wrote to Mr Topp stating: “As agreed on the conference call we need to move £255,000 into the lawyers account today.” Mr Topp replied stating that the money would be available. He also stated: “Thought it would be useful to lay out the key parts of the deal as I understood them and clearly agreed the transaction on that basis.” He then set out the detailed terms as he understood them. Shortly afterwards Mr Sherwood replied correcting some of the details.

319.

On 2 December 2015 a further BHSGL board meeting took place and this time Mr Chappell, Mr Chandler and Mr Henningson were all present. The board pack contained a one page note on the purchase of Darlington which Mr Chandler annotated: “DT – is good deal if we get it away. KS – issue is cash flow if we cannot flip it on. DC1 – we could get mtge on it if not selling it.” Under the heading “Darlington” the signed minutes of the meeting record as follows:

“DC1 reported that the offer had been accepted although MS continued to negotiate to reduce the sale price. KS noted the Board were to have had a paper prepared on this and upon enquiry a paper had been prepared. The Board required a greater level of detail than had been provided. MH was asked to follow this up with MS and KM.

Action 6: MH to ensure MS and KM prepare a paper, including a Capital Expenditure Request, and a P&L for Darlington, for circulation to the Board.

DC1 explained that Darlington was a good proposal which included potential office space that could be let. It may also be possible to take out a mortgage on the property. The Board agreed that subject to receipt of a written proposal and a reduction in price, they would hold a meeting by conference call to consider the purchase.

Action 7: Board conference call to be held to consider Darlington as necessary.”

320.

Between 3 and 9 December 2015 all of the directors signed a written resolution to incorporate a subsidiary, Darlington SHB Ltd (“DSHBL”), and to appoint Mr Chandler as the initial (and sole) director. On 9 December 2015 Mr Sherwood reported by email to Mr Chappell (copying in both Mr Topp and Ms Morgan) that the purchaser had agreed to reduce the price to £2.45 million and that Gordon Dadds LLP (“Gordon Dadds”), who were acting for DSHBL, needed to be put in funds by 21 December 2015.

321.

Mr Chandler signed the contract for the purchase of Darlington on behalf of DSHBL and on 11 December 2015 DSHBL exchanged contracts with Landmaster to purchase the property for a purchase price of £2.45 million. The contract provided for payment of a deposit and completion on 21 December 2015. By email dated 22 December 2015 Mr Mino Themistocli of Gordon Dadds wrote to Mr Sherwood and Mr Carver confirming that completion had taken place that day and enclosing a completion statement, which confirmed that DSHBL had paid the purchase price in full (including £241.36 interest for completing a day late) together with legal fees and SDLT totalling £107,922.46.

322.

The trial bundle contained an extract from BHSL’s ledger confirming that on 3 December 2015 the sum of £255,000 was transferred from its Barclays account to Gordon Dadds’ client account and that on 21 December 2015 the sum of £2,300,333.42 was also transferred from its Barclays account to Gordon Dadds’ client account. In their Points of Defence Mr Chandler admitted that BHSL funded the purchase of Darlington but Mr Henningson did not admit this allegation. It is necessary, therefore, for me to determine whether BHSL funded the purchase and on the basis of the ledger I make that finding of fact.

323.

By email dated 23 December 2015 Mr Topp chased Mr Sherwood for an update about the resale of Darlington and on the same day Mr Sherwood replied to Mr Topp (who copied the email to Mr Chandler). He stated as follows:

“We are talking to a couple of different parties about the sale one of whom tells me they are working up an offer. Given the cash flow position I have been concentrating more on finding a buyer than holding out for a top price. Nothing more will happen now until next year as the market pretty much shut down yesterday.”

324.

On 30 December 2015 Mr Sherwood produced a very short board paper in which he summarised the transaction and asked for the BHSGL board’s “retrospective support” for the purchase and also for a strategy of buying in the BHS Group’s freeholds to reduce the rents and seek an onward sale in order to release capital back into the business. He did not identify a potential purchaser but he described the opportunity as follows:

“We have succeeded in agreeing terms to purchase the freehold for £2,450,000. Our intention is to extend the lease to a 30 year term; reduce the rent to circa £220,000 and then re market the property seeking to achieve a price in excess of £2,700,000. This improved price will reflect the enhanced lease term and the reduced rent that will be perceived as providing the opportunity for rental growth. An alternative to a sale of the asset may be to refinance (This depends upon the terms that are available).”

325.

At the BHSGL board meeting on 27 January 2016 (below) Mr Chappell reported that a sale of Darlington had been agreed for £2.2 million (i.e. at a loss of £250,000) and that he expected the sale to be a 14 day process. But a sale did not materialise even at that price. It is common ground that on 2 October 2017 Darlington was sold for £975,000 and that on 22 January 2018 DHSBL went into creditors’ voluntary liquidation. Finally, I was not taken to any documents to prove that the board ever gave its retrospective support to the transaction.

J. 14 January 2016 to 25 April 2016

326.

On 14 January 2016 a BHSGL board meeting took place at which Mr Chappell, Mr Chandler and Mr Henningson were all present. The BHS weekly cashflow update in the board pack for that meeting showed that the BHS Group would have negative cashflow for the foreseeable future. The text noted that in the week commencing 9 January 2016 the group would have to pay the January payroll of £9.2 million (including PAYE) producing negative cashflow of £19.8 million. The minutes of the meeting record that Mr Carver told the meeting that Christmas trading had been disappointing and that certain merchandising payments had been misunderstood. They also record that “the Board noted the gravity of the situation”.

(1)

Project Pipe

327.

By January 2016 Mr Hitchcock had been contemplating a CVA for some time. In early December 2015 he contacted Mr Will Wright of KPMG, who was an insolvency practitioner and restructuring expert and by email dated 4 December 2015 Mr Wright wrote to him enclosing a proposal document. In the covering email he stressed KPMG’s experience:

“As you know we would bring a wealth and breadth of experience to bear with a blended team of property, retail and restructuring expertise. We have led numerous landlord focussed restructurings so have unrivalled experience of such situations and deep understanding of the [sic] both the attitude of the various landlords and range of potentially achievable outcomes having been there before on many different occasions.”

328.

On 18 January 2016 RAL instructed KPMG to act for it in relation to a possible CVA. Their engagement was known as “Project Pipe” and its scope was set out in Appendix 1 to their engagement letter dated 26 January 2016. This stated that the business had experienced challenging trading conditions, that a turnaround plan had been developed to address key issues one of which was to reduce its fixed costs base. Phase 1 of their work included the following:

“■ Review the group and legal structure, store performance, lease and creditor position and advise on (alongside the Group legal advisors) the nature and scale of opportunities to renegotiate leases (with particular regard to the stores with marginal or negative store EBITDA) with emphasis on the feasibility of a company voluntary arrangement (“CVA”);

■ Consider the feasibility. cost-benefit analysis. associated risks and benefits of a CVA and where relevant. advise on the potential level of support from relevant stakeholders;

■ If appropriate. outline the various potential CVA structures for consideration by Management. incorporating the legal structures and challenges thereof.”

329.

KPMG’s engagement letter also included cash monitoring work within the scope of their engagement. In particular, they agreed to review and challenge the BHS Group’s “cash generation initiatives” and assist it in the implementation of “agreed cash generation and preservation initiatives”. However, it also stated that the directors of the Companies would be responsible for the preparation of forecasts and for determining which assumptions to use. Mr Curl also placed reliance on paragraph 12 of KPMG’s standard terms which accompanied the engagement letter:

“Where there is more than one of you this clause applies to each of you separately and collectively. Notwithstanding our duties and responsibilities in relation to the Services, you shall retain responsibility and accountability for managing your affairs, deciding on what to do after receiving any product of the Services, implementing any advice or recommendations provided by us, and realising any benefits requiring activity by you.”

330.

On 22 January 2016 RAL also instructed Weil to act for RAL in relation to Project Pipe. In their engagement letter of that date Mr Plainer recorded that Weil had been instructed to give general restructuring advice in relation to Project Pipe including (a) advising the boards of the Companies on their duties, (b) assisting the Companies and KPMG to implement one or more CVAs and (c) if required to advise in relation to the restructuring of the pension liabilities. Mr Wright’s evidence was that Mr Fleming had recommended Mr Plainer and that he was very highly regarded in the market.

331.

On 26 January 2016 a meeting took place at Weil’s offices between the Trustees (and their advisers), RAL and BHSGL (and their advisers). Mr Mike Birch of the Pensions Regulator and Mr Kevin Dolan and Mr Malcolm Weir of the PPF also attended the meeting. Mr Hitchcock had produced an information pack which showed that there was an immediate funding requirement of £11.6 million in the week commencing 24 January 2016 (to meet the payroll costs of £10.2 million) and that it increased to £58.5 million in the week commencing 27 March 2016. It also recorded that an ABL Facility was dependent upon Arcadia giving up its priority as a QFC holder. Finally, it stated that it was critical for the BHS Group to find a solution to all pension issues. The information pack also disclosed that the group was contemplating a CVA.

332.

Mr Martin’s notes of the meeting record that the Trustees and the Pensions Regulator were told that the CVA proposal had to be announced in the first week of March 2016. They also record that RAL and BHSGL repeated the proposal for Project Vera but also stated that £110 million to £120 million of additional funding was required and set out a series of next steps which included the agreement of the Trustees and the Pensions Regulator to Project Vera. Mr Martin’s notes then record that Mr Birch expressed the view that “it did not appear that the business was “broke, it had just had a bad Christmas” and that “the position looked better in Sept 2015, when the Grovepoint financing was secured”. Finally, Mr Martin noted that after a breakout session the parties reconvened to sum up the key actions to be taken after the meeting:

“a.

TPR response to an RAA - MB said TPR needs to see a formal proposal and full information and to assess this in the context of other creditors; it does not have sufficient detail at this stage and cannot give an indication of its view in advance. From what has been said so far, it does not appear critical that TPR give a view this week - but when the information does come through, TPR will work through it with the CVA timeline in mind.

b.

SPG release of security on Cribbs - SGP/Arcadia hold this security; MB said TPR is not clear on who is being asked to give what? What assurances are being sought? It is in SGP's gift to release this security - subject to conditionality - TPR and the Trustees need to see full details in writing before opining-and will revert with a decision ASAP thereafter.

c.

Vera financing- if SPG were to fund the c£120m cost - what would be his/Arcadia's terms/conditions for doing so?

d.

TPR needs answers/further detail In relation to all the foregoing.”

333.

On 27 January 2016 Mr Martin wrote to Mr Hitchcock stating that the Trustees and the PPF operations team saw it as essential that a contingency plan was put in place with a third party administrator briefed and lined up at short notice. Mr Chandler also wrote to Mr Birch confirming that there were no “pensions-related” conditions attached to the release of Arcadia’s first charge over Cribbs Causeway. On the same day a BHSGL board meeting took place at which Mr Chappell, Mr Chandler and Mr Henningson were all present. Mr Plainer and Mr Linton Bloomberg of Weil and Mr Wright and Mr Peter Crompton of KPMG also attended the meeting. The minutes of the meeting record discussion about Darlington (above) and an ABL Facility (below). They also record that Mr Hitchcock reported as follows:

“MH reported on the cashflow and stated that the position was moving constantly and had changed since the cashflow update was produced. MH stated that the negative balance forecasted for Friday 29 January (£3.004m) would now be positive. MH stated that he was now stretching payments to suppliers by 3 weeks which, whilst not unusual amongst competitors, was not something which he believed should be pushed much further.”

334.

The minutes also record that under the heading “Present Financial Condition” Mr Plainer and Mr Wright both gave preliminary advice and that the board confirmed that no winding up petitions had been served or any formal action taken by creditors against the BHS Group:

“6.1

AP advised the Directors that it was important that they all had the opportunity to consider the latest financial information available and ask any questions. AP noted that a note in relation to the duties owed by the Directors had been circulated and advised that, given the financial position of the Company, the Directors owed their duties to creditors.

6.2

The Directors confirmed that no winding up petitions had been served on the Company and, whilst there had been some noise from creditors, no creditors has taken any formal action or put any threat of formal action in writing. WW advised the Directors that they should put a formal internal process in place so that threats of action can be adequately monitored and flagged when necessary. WW stated that it was especially important to ensure that a winding up petition was not filed and served upon the Company. DT confirmed that a process was already in place as the issue was both legal and commercial.

6.3

The Directors confirmed that they were not intending to enter into any material new commitments and that any new commitments entered into were in the normal course of trade.

6.4

AP advised the Directors that they needed to consider whether there was a reasonable prospect of avoiding insolvency. He commented that:

(a)

from the financial information provided to the meeting it appeared that there was liquidity in the business and further that there was an opportunity to raise monies via the New Loan given the recent indications given by Arcadia;

(b)

that, following a presentation to the Pension Trustees, the PPF and the Pension Regulator (the " Pension Stakeholders") on 26 January 2016, the Pension Stakeholders had not stated that they were not prepared to support a restructuring of the Company;

(c)

Arcadia had not threatened to take their own enforcement action pursuant to their security but had, instead, indicated their willingness to release Bristol from their charge so that the New loan could be obtained; and

(d)

KPMG had been engaged to explore medium to long term solutions to right size the business.

6.5

WW updated the Directors on KPMG's workstream and stated that, whilst the workstream had only just commenced, he had not encountered any issues so far which would suggest that a medium to long term restructuring solution was not possible.

6.6

AP advised the Directors that, taking all matters into account, he saw no reason from a wrongful trading perspective why they should not continue to trade but this was a decision for the Directors and AP requested that should any Director have any different view that he should make this known to the meeting. No Director expressed a different view.

(2)

Gordon Brothers

335.

By the end of January 2016 the financial position of the BHS Group had, if anything, become even more severe. The BHS weekly cashflow update as at 29 January 2016 (which formed part of the board pack for the BHSGL board meeting on 4 February 2016) showed that there was a funding gap of £15 million at the end of that week rising to £55 million by the beginning of April. The text also stated that the BHS Group was currently deferring £9.8 million of trade payments and £1.8 million of other costs.

336.

Mr Chandler’s evidence was that from the beginning of 2016 Mr Morris had been in negotiations with Gordon Brothers, a US investment and finance firm, for an ABL Facility of £60 million for which the BHS Group would principally use its stock as security. However, at the beginning of February 2016 Gordon Brothers also agreed to provide a bridging loan of up to £9.418,437.50 to be secured on Cribbs Causeway (the “GB Bridging Facility”).

337.

On 4 February 2016 a BHSL board meeting took place at which Mr Chappell, Mr Chandler and Mr Henningson approved the GB Bridging Facility. By a facility agreement also dated 4 February 2016 (the “GB Bridging Facility Agreement”) and made between GB Europe Management Services Ltd (“GB Europe”) and BHSL, GB Europe agreed to make available a term loan facility of £9,418,437.50 in aggregate for the purpose of general corporate and working capital purposes at an interest rate of 15% over the base rate of the Bank of England for a period of 60 days. BHSL was also required to pay an arrangement fee of £211,914.84. On 1 April 2016 GB Europe agreed to extend the loan for a further 60 days until 3 June 2016 in return for a further commitment fee of £105,957.42.

338.

Clause 14.2 of the GB Bridging Facility Agreement provided that if BHSL did not enter into a “Refinancing Facility Agreement” on or before the termination date of the bridging facility, BHSL was to pay GB Europe a “break fee” of £1 million. The term “Refinancing Facility Agreement” was defined as an agreement on terms which were mutually consistent with those set out in a term sheet dated 16 January 2016. I understood this to be a reference to a term sheet signed on behalf of GB Europe and sent on 12 January 2016 by Mr Heinz Webber of GB Europe to Mr Hitchcock. On 15 January 2016 Mr Hitchcock replied stating that BHSL was happy to move forward subject to agreeing a commitment fee of 3% and the possible reduction in the amount of the third tranche of £20 million (below). I draw the inference that on 16 January 2016 Mr Webber agreed those terms and sent a final version of the term sheet to Mr Hitchcock (even though it had not made its way into the trial bundle).

339.

The key terms set out in the term sheet which Mr Webber sent to Mr Hitchcock provided for a senior secured first loan of £60 million in three tranches of £30 million, £10 million and £20 million to finance working capital and for other general corporate purposes. The required security was a first secured interest in and liens or charges over all present and future assets of BHSL and its subsidiaries including all contract rights and intangibles, deposit and current accounts, receivables and all unencumbered property. It also provided for blocked receipt and income accounts to be controlled by GB Europe “with cash swept back to the company on a weekly basis subject to covenant compliance and borrowing base compliance”.

340.

The term sheet also provided for the interest rate on each tranche to increase from LIBOR plus 9.2% to LIBOR plus 12.0% to LIBOR plus 14%, a commitment fee of 3.25%, a LIBOR floor of 0.75% and an annual fee of £48,000 and a range of early termination fees. In relation to financial covenants, the term sheet stated as follows:

“The Lender is considering the following covenants: minimum EBITDA and cashflow levels, minimum inventory levels, minimum liquidity levels and maximum capex. Covenant levels and equity cure mechanics will be finalized based on further review of business plan and review of the collateral profile. The Lender anticipates financial covenants to be based on a discount to an acceptable business plan.”

341.

Finally, the term sheet provided for a number of conditions precedent which included “Updated inventory approvals and field exam” and “receivables appraisal”. Mr Curl and Mr Perkins calculated that the APR of the GB Bridging Facility was 94% (after taking into account the break fee of £1 million) and in answer to a question from me Mr Topp accepted that the terms of this ABL Facility were very onerous and he described it as a “loan to own” scheme. By this he meant that the financial covenants would be so onerous that a default would be triggered almost immediately and that the lender would be able to take control of the BHS Group’s assets.

342.

On 4 February 2016 Arcadia released Cribbs Causeway from the Arcadia Security Agreement and on the same day BHSL granted a first legal charge over the property to GB Europe. However, by letter dated 27 January 2016 Mr Budge wrote to the board of BHSGL on behalf of Arcadia stating as follows:

“For the avoidance of doubt, the only reason we are prepared to release the security over the Property (the fixed charge) is because our floating charge under the Security Agreement will remain in full force and effect for the whole amount of the £40 million debt owed to Arcadia Group Limited by BHS Group Limited and the value of the assets covered by the floating charge is well in excess of the amount owed to Arcadia Group Limited under the Acknowledgement of Debt.”

343.

On 4 February 2016 two further board meetings of BHSGL and BHSL took place at which Mr Chappell, Mr Chandler and Mr Henningson were all present and Mr Plainer and Mr Fleming were in attendance. The purpose of these meetings was to consider contingency planning and discuss an upcoming meeting with the Pensions Regulator and the PPF. The minutes record that Mr Richard Fleming, who was KPMG’s senior engagement partner, explained the benefits of contingency planning and Mr Plainer explained the directors’ duties to creditors:

“4.1

RF explained the benefits of contingency planning to the Board and why it was necessary to have a plan in the event that the worst outcome came to realisation. He explained that the vast majority of sales in an insolvency process were effected via a pre-pack administration and that, if this was to occur, it was necessary for any office holder to be able to demonstrate that they have complied with SIP16 requirements including those relating to marketing and that this was necessary In order to demonstrate that value to creditors has been maximised.

4.2

AP explained that the directors have a duty to act in the best interests of creditors including secured creditors such as Arcadia. Arcadia has indicated that they were expecting the directors to have undertaken contingency planning. In the event that the CVA was not proposed, or was not approved, AP explained how the mechanics of any sale would ultimately be determined by the requirements of the purchaser. As a result therefore the Board should authorise KPMG to commence the contingency planning

4.3

DC1 said that it may be preferable for the Company to be the party that obtains valuations and undertakes discrete marketing however AP explained that in order to demonstrate that they have complied with their SIP16 obligations, KPMG would need to be involved.

4.4

The Board resolved that KPMG be instructed to commence contingency planning.”

344.

On 5 February 2016 a further BHSGL board meeting took place at which Mr Chappell, Mr Chandler and Mr Henningson were again present and Mr Plainer and Mr Wright were in attendance. One of the purposes of the meeting was to review the latest trading and cashflow position, receive updates on property and restructuring and consider the correspondence with the Pensions Regulator and PPF. The minutes of the meeting record that Mr Carver reported that the £9 million from Gordon Brothers had now been received allowing critical payments to be made. The minutes also record that Mr Wright asked about Oxford Street, Mr Plainer gave advice which was very similar to the advice which he had given at the first meeting on 27 January 2016 and Mr Wright also confirmed his view that the CVA could go ahead:

“5.5

WW asked for an update on progress with Oxford Street. DC1 explained that he had spoken to Lancer the previous day and received confirmation that they were ready to proceed. A meeting with lawyers had been scheduled for next week. DC1 estimated that completion could take place in 5 days. DC1 explained that the terms involved surrender of the lease, to be replaced by the issue of a new 10 year lease at the same rate. The Company would receive £75m for surrender of the lease. WW asked for confirmation which DT provided that the business would be able to operate until the end of February but at the current time, to continue to the end of March would be challenging.”

“6.1

AP advised the Directors that it was important that they all had the opportunity to consider the latest financial information available and ask any questions. AP asked whether Directors were aware of any legal action taken against the Company or winding up petition served on the Company.

6.2

The Directors confirmed that no winding up petitions had been served on the Company and no creditors has taken any formal action or put any threat of formal action in writing. MH advised that he held regular meetings to review payments due to suppliers.

6.3

AP advised that discussions had been held with the floating charge holder who was supportive of a restructuring. There were meetings due to be held the following week with TPR, the PPF and pension trustees who, to date, had not said that they opposed a restructuring.

6.4

AP advised the Directors that that they needed to consider the cash flow and whether there was a reasonable prospect of avoiding insolvency. DC1 explained that there potential lines of funding being pursued and he believed he could secure the cash required for the business. DT believed the business could safely trade to the end of February without onerous withholding of supplier payments. DC1 asked whether the business could commit to orders. AP explained that providing the orders were in the ordinary course of business, then the orders could be placed. Commitments outside the ordinary course of business needed however to come to the attention of the Board for further consideration and advice.

6.5

The Directors confirmed that they were not intending to enter into any material new commitments and that any new commitments entered into were in the normal course of trade.

6.6

AP advised the Directors that, taking all matters into account, he saw no reason from a wrongful trading perspective why they should not continue to trade but this was a decision for the Directors and AP requested that should any Director have any different view that he should make this known to the meeting. No Director expressed a different view.”

“7.1

WW advised that work continued with pace and, at present that there appeared to be no “showstoppers” as to why a CVA could not be proposed. Finding a solution to the pension issue was obviously important as was considering the viability of the Company post CVA.”

345.

On 9 February 2016 KPMG produced a draft CVA feasibility review for discussion purposes which consisted of 50 slides. Its “headlines” were that CVAs of both BHSL and Davenbush appeared to be feasible and would generate savings of between £49.6 million and £70.7 million over three years depending on whether certain stores were re-let. On a slide headed “Key Issues” they identified a number of concerns: see slide 9. In particular, they stated that they did not consider that a CVA of BHSPL was feasible and they raised the following concerns about feasibility more generally:

“— We understand a business plan is currently being prepared that will include central costs savings and other initiatives that, in conjunction with the CVA savings, could return the business to profitability. We received a first draft of the profit and loss forecast on 4 February and understand the forecast cash flow, balance sheet and funding requirements are currently being progressed. Further work is required to conclude on post-CVA viability.

— Funding for the business plan is an important consideration as CVA creditors will expect the Group to demonstrate that it has sufficient resources to carry out its business plan post-compromise.

— In addition to the business plan, the Group must find a solution to the Group’s underfunded defined benefit pension schemes if the business is to be viable in the long term. This will be a key corner-stone of messaging to landlords and other creditors to support any proposed CVA.”

346.

KPMG repeated this text on slide 25 and stated that key issues remained outstanding in respect of future profitability, funding and the pension scheme deficit and that they had yet to complete their work in this area. Finally, on slide 33 KPMG stated as an assumption that Arcadia was a floating charge creditor: “Floating charge creditor following the release of its fixed charge security over Cribbs Causeway (see note 1 above), Arcadia’s loan of £35.8m is now secured solely by its floating charge.”

347.

Under cover of an email dated 16 February 2016 Mr Wright also sent Mr Hitchcock a summary of key issues and a workplan which contemplated the implementation of the CVA by the end of March 2016. These included a division of responsibility under which the BHS Group was to prepare an initial cash flow and balance sheet, prepare sensitivities and update the profit and loss account and then KPMG were to “review base case and management’s stress tests/sensitivities to take a view on viability”.

348.

On 16 February 2016 Mr Wright sent a letter headed “Variation Letter – Project Pipe” in which he set out a variation to KPMG’s engagement letter to add an additional workstream headed “Contingency Options”. It required KPMG to advise on methods, tactics and timetable to explore the sale options available and the most appropriate approach for RAL to adopt to financial investors, potential trade investors and alternative lenders. On 17 February 2016 a BHSGL board meeting took place at which Mr Chappell, Mr Chandler and Mr Henningson were present and Mr Plainer and Mr Wright in attendance. The minutes record that Mr Plainer advised the board that CVA planning was progressing in the right direction and Mr Wright advised that he had not encountered any issue that would prevent a CVA. They also record as follows:

“6.1

DC2 requested an amendment be made to the funding and pension section of the CVA proposal, which WW agreed to. DC2 asked whether the pension negotiations needed to be fully settled if the Board decided to proceed with the CVA. AP advised that the future funding of the business needed to be evidenced, even if the pension discussions were not finalised.

6.2

MM asked whether he should request a revised term sheet from Gordon Brothers for the facility agreement. AP advised yes and that if a CVA were to proceed the Directors needed to have comfort over the future funding as they would need to be confident this was available.

6.3

WW said that this was an element required of KPMG too as there needed to be a reasonable chance of the CVA being successful.”

“9.1

DC1 advised the Board that he had spoken to lancer in respect of Oxford Street earlier that day and would provide a written update tomorrow. 9.2 DC1 was considering other options for Darlington as a result of some complications with leasing to Matalan. DT noted that the board would need to approve the transaction. 9.3 DC1 reported that Manchester was progressing and being managed by MS.”

349.

By email dated 29 February 2016 Mr Wright also wrote to Mr Eli Appelbaum of GB Europe asking him to confirm that it was in "detailed discussions” with BHSL to provide a £60 million working capital facility secured against its stock. He also stated that he understood that the facility was not formally agreed but that subject to final negotiation there was a desire to conclude arrangements either just before or immediately after the creditors’ meeting. By email also dated 29 February 2016 Mr Appelbaum replied stating that he was happy to confirm that this was the case.

350.

On 1 March 2016 Mr Morris sent Mr Mike Pink, a partner of KPMG who later became one of the nominees, the current mark-up of the facility agreement. By email dated 2 March 2016 Mr Pink wrote to Mr Morris asking him whether there was any uncertainty about the aggregate facility of £60 million. He also asked: “Also, as you highlight, at least £10m would be only utilised to repay the existing GB facility, so the "net" new money would be £50m. Has that been factored in to your cash forecasts?” By email dated 2 March 2016 Mr Morris replied to Mr Pink copying in Mr Chandler. He stated as follows:

“Copying DC2 as he’s holding the pen on the proposal draft. The wording states up to £100 million of funding from the various sources and should continue to state that. DC2 I would suggest adding in 25.8b the facility of approximately £60 million"

Mike, re. Tranche C, we (BHS) have the third tranche square bracketed currently because we will not be sure what the total stock levels will be in years 2 & 3 of the facility until the position of the Red/Amber stores becomes clear. Our borrowing base (stock levels) will be reduced when the relevant stores close - and the tranches are based on borrowing base availability. We will almost certainly have sufficient stock to draw the full Tranche C (£20m) in Year 1. however, we did not want to commit to paying the interest on the full Tranche C for years 2 & 3 before we can determine what the stock levels / borrowing base availability will be at that point. Gordon Brothers are on board with this approach and are committing £60 million subject to what portion of Tranche 3 we have the stock levels to draw on in Years 2 & 3.

The current intention is for the Bristol loan to be rolled in to the Gordon Brothers facility from the outset (raising Tranche A to £39m).”

(3)

The Pensions Deficit Offer

351.

On 2 February 2016 Mr Paul Newman QC was instructed by Weil to give advice in consultation to RAL and BHSL and on 8 February 2016 he settled a note of his advice. His instructions were that there were three possible pension solutions: first, BHSL could enter into a CVA with a prior RAA and the implementation of the restructuring plan contemplated in Project Vera; secondly, BHSL could enter into a CVA and implement Project Vera; or, thirdly, BHSL could enter into a CVA and the Schemes would enter into the PPF by agreement. Mr Newman expressed the view that the first option was “close to impossible” and that the second option involved a series of legal limitations which the Pensions Regulator and the PPF could not do much to overcome. In relation to the third option, Mr Newman explained that in January 2016 the PPF had published guidance for insolvency practitioners and that any deal would involve two elements which I set out below together with his summary of the position:

“First, the PPF will request an up-front lump sum payment to the Schemes. Leading Counsel was not aware of any cases where the PPF has done otherwise. as the PPF's aim is to maximise its potential return if the alternative is insolvency (this condition would apply in the case of either a consensual deal on a CVA involving PPF entry or a Project Vera). Leading Counsel emphasised that this condition would therefore require something significantly better than if BHS as sponsoring employer went into insolvency and the Schemes were treated as an unsecured creditor (albeit this would still be less than the full buy-out cost) and this payment will probably be required to be made as a lump sum up-front payment. so that the assets made available to the Schemes did not diminish due to the competing claims of other creditors.

Second, the PPF will seek an "anti-embarrassment" stake in the new business going forward - this would be a 10% stake if the business is owned by new investors, (i.e. investors completely unconnected to the current shareholders and management team) and 33% if the business continued to be owned by the existing shareholders. Leading Counsel was not aware of any circumstances where the PPF had departed from these principles. The PPF would also need to be satisfied that any settlement reached was a better outcome for the Schemes than if tPR exercised its anti-avoidance powers to secure additional financial support.”

“In summary, Leading Counsel was of the view that a deal with the PPF involving consensual PPF entry was the neatest solution. as this would avoid the timing and difficulties associated with a RAA and allowed tPR to pursue Arcadia/Taveta with its moral hazard powers separately. The key issue would however be to first source and then agreeing the appropriate level of funding for the Schemes to enable PPF entry as part of a CVA. In that scenario, Leading Counsel made the point that it would simplify matters if the BHS management team had complete control over the source of funding. Leading Counsel also advised that we may of course still wish to seek clearance and it may be that an equity investor would insist on clearance in any event.”

352.

On 5 February 2016 Mr Hinds called Mr Martin who recorded his notes of the call in an email dated 7 February 2016. He recorded that Mr Hinds had also called the PPF and the Pensions Regulator and was trying to manage expectations ahead of a meeting which was to take place later that week. His notes continue:

“The company will propose a CVA at the meeting and if it isn't possible to execute this in the first week in March then BHS will go into administration (same timescale). KH confirmed that planning for the administration is underway.

One of the determining factors for a CVA will be Arcadia agreeing to release/subordinate its floating charge so that post CVA ABL can be put in place.

Others [sic] factors will include PPF agreeing to vote in favour and 33% of Bhs equity plus cash mitigation will be offered (no mention of the source or quantum of the cash).

In order to release its floating charge Arcadia/SPG, will want tPR to drop its investigation. CM expressed his doubt that this was going to happen and questioned whether a meeting was even worthwhile.

Regardless of whether it is a CVA or an Administration there will [be] no Vera proposal and so the Schemes will enter PPF in early March.

CM expressed his frustration at the approach of KH's client in terms of the trustees' contingency planning, KH understood the point and said he would raise it with his client.”

353.

On 9 February 2016 the meeting between BHSL, the Pensions Regulator and the PPF took place. Mr Chandler did not deal with it in evidence and I could find no record of the meeting in the trial bundle or the offer which was subsequently made. However, a draft letter which Mr Bloomberg circulated on 23 February 2016 shows that BHSL made an offer to the PPF to make a cash payment of £18 million to the Schemes, to issue a £10 million loan note repayable over 10 years with a 24 month holiday and a 33% equity stake in the BHS Group after the CVA. Mr Bloomberg described this as the "Pensions Deficit Offer”.

354.

On 10 February Mr Chandler reported to a meeting of the BHSGL board, at which both Mr Chappell and Mr Henningson were also present, that the Pensions Deficit Offer had been made to the Pensions Regulator and the PPF on the day before:

“The Pension Offer that was made at the Meeting was as follows:

1.

£18m cash payment up front to the Pension Schemes;

2.

£10m unsecured loan note repayable over 10 years with a 24 month payment holiday commencing on the date the CVA becomes effective; and

3.

33% equity stake in all relevant BHS companies post-CVA.

The directors of the Company will have to provide an update in the CVA proposal in relation to its attempts to compromise the Pension Schemes deficit. We appreciate that part of your decision with regard to the Pension Deficit Offer may be linked to separate and independent discussions that The Pension Regulator may be having with Arcadia, the holder of a qualifying floating charge over the Company’s business and assets. We have no visibility over the progress of those discussions however, as you know, the long term re-finance that has been offered for the Company post-CVA is conditional upon Arcadia’s floating charge being subordinated. In view of the above, we look forward to hearing from you as soon as possible.”

355.

The minutes of the meeting also record that KPMG’s feasibility study was put before the board and that the BHSGL board resolved to instruct Weil and KPMG to begin drafting a CVA proposal. Finally, the minutes record under the heading “Present Financial Condition”:

“7.1

AP advised the Directors that they needed to consider the wrongful trading test and whether there was a reasonable prospect of avoiding insolvency. He commented that:

(a)

the Company had received the presentation from KPMG which showed that there was every chance of a successful restructuring through a CVA;

(b)

negotiations with Pension Stakeholders to resolve the pension deficit were ongoing;

(c)

the Company had the support of the floating charge holder order to propose a CVA;

(d)

the Company was making good progress with its restructuring; and

(e)

the Company nor its subsidiaries were in default on any loan payments.

7.2

AP advised the Directors that, taking all matters into account, he saw no reason from a wrongful trading perspective why they should not continue to trade but this was a decision for the Directors and AP requested that should any Director have any different view that he should make this known to the meeting. No Director expressed a different view.

7.3

AP advised that in respect of suppliers, there was no suggestion of compromising them in the CVA proposal as they would receive full payment of their invoices. Stretching creditor payments so that full payment could be made, albeit later, was providing them with a better position than they would otherwise be in if the business were to go into liquidation. A script would be a useful tool for a handful of senior managers so that a consistent message was passed on to suppliers.”

356.

There was no immediate response to the Pensions Deficit Offer. However, on 16 February 2016 Mr Neville Kahn, who was a Deloitte partner, called Mr Martin who made a note of that call in an email the following day. He recorded as follows:

“We spoke late yesterday. SPG asked Neville to call. Not too many surprises. A structure of settlement has been proposed to tPR. TPR has written back with what Arcadia considers to be a very unhelpful letter. Arcadia hadn’t put forward [a] number but has suggested releasing its security plus the balance of the £15m. Neville [sic] personal view but not tested with SPG is that they might go up to the Thor number. There is no way they will go beyond and would not support the level of payment required for a Vera. It seems Arcadia sees the CVA as the next outcome now it protects more of the jobs. I explained that the trustees are out of the loop in terms of negotiations with tPR given the company’s position that the schemes will enter the PPF either way.

357.

On Wednesday 24 February 2016 a BHSGL board meeting took place at which Mr Chappell, Mr Chandler and Mr Henningson were present. Mr Wright, Mr Brian Green and Mr Pink, who were to be appointed the Joint Nominees, were present too. The minutes record that Mr Chappell said that he had spoken to Lancer the previous evening, that they were aware of the CVA and that the parties were expecting to agree on a figure of £75 million as the sale price for Oxford Street. He also said that Lancer needed to consult their client and assess the tax implications but that he expected them to confirm by the Friday how long this process would take.

358.

I should explain the reference to Lancer. The Lancer Group were asset managers who managed the freehold of Oxford Street on behalf of the landlord, Oxford & City Holdings Ltd (“O&C”), which was ultimately owned by a Middle Eastern group of companies. As Mr Sherwood explained in evidence, the BHS Group’s leasehold interest in Oxford Street was unusual. It was a long lease of 61 years with 46 years of the term unexpired. It also had onerous terms and a sitting tenant which made it less attractive to a third party purchaser. O&C had an obvious interest in buying out the group because of the marriage value of the two interests and BHSGL had been negotiating with Lancer on and off since Day One.

359.

The minutes of the meeting also record that Mr Plainer summarised the current position on the pensions negotiations. He reported that the PPF were considering the offer and it was proposed that a letter be sent to the PPF (and copied to the Pensions Regulator) later that week repeating the offer. He also reported that discussions between the Pensions Regulator and Arcadia were ongoing. Under the headings “CVA Update” and “Present Financial Condition” the minutes then record:

“7.1

WW advised that planning for the CVA was now in an advanced state and, assuming that the Board were comfortable that there would be some form of pension solution, WW saw no reason as to why a CVA could not be launched for BHS Limited.

7.2

WW advised that a decision was yet to be made for BHS Properties Limited ("Properties"). AP said the business needed to focus on whether a CVA was appropriate for Properties. DT reminded the Board that excluding Properties left a £3m hole in the P&L so it was preferable for it to be included. There was a consensus amongst directors to exclude Davenbush Limited.

7.3

WW said that KPMG had now been formally engaged by the Board and commenced the Contingency Planning workstream. The distressed M&A preparatory work was also being advanced and there was a meeting scheduled later in the day to discuss further.

7.4

DT asked when the CVA would be ready. AP explained that a draft could be sent to major creditors this week, with a final version ready by 4pm on 1 March when it would be filed at court. Copies had to be sent to all creditors on 1 March.

7.5

WW sought confirmation which was provided, that MM would lead on communications with financial stakeholders, whilst MH would lead on discussions with Worldpay. DT and DC1 would speak to Arcadia.”

8.1

AP advised the Directors that they needed to consider their directors' duties, the best interests of creditors and the wrongful trading test as to whether there was a reasonable prospect of avoiding insolvent liquidation. He commented that: (a) it appeared the cash flow position was sufficient; (b) negotiations with the pension parties continued; (c) discussions with the floating charge holder continued; (d) KH intended to discuss the position with the PPF; and (e) there were no winding up petitions against the Company or other litigation received.

8.2

AP advised the Directors, that taking all matters into account, he saw no reason from a wrongful trading perspective why they should not presently continue to trade but this was a decision for the Directors and AP requested that should any Director have any different view that he should make this known to the meeting. No Director expressed a different view.

8.3

KS asked all Directors to confirm whether they were confident that the business could continue trading along the lines set out by AP. All Directors confirmed they were confident of this.

8.4

KS also asked the RAL Directors to confirm the same. AT, EP and DC1 confirmed they were confident the business could continue to trade.”

360.

By letter dated 29 February 2016 Ms Claire Boorman of the Pensions Regulator wrote to Mr Chandler responding to the Pensions Deficit Offer. She recorded that on 29 February 2016 the parties had met again and that Mr Chandler had confirmed the Pensions Deficit Offer in writing and set out its terms (as above). She stated: “The Regulator has no comment to make on the Offer, as these are matters for consideration by the PPF.” She then continued:

“2.

Meeting with Arcadia

As you are aware we have already had meetings with Arcadia or representatives of Arcadia and a further meeting took place with, amongst others, members of the Arcadia board after we met with you on 29 February 2016. At that meeting the Regulator was presented with an offer from Arcadia ("the Arcadia Offer"), which included release or subordination of the floating charge security, but was subject to certain conditions, including the Regulator closing its moral hazard investigation and providing clearance to various Arcadia/Taveta group companies and individuals ('the Conditions'). The Regulator has at all times made clear its view that the release or subordination of the floating charge is a matter for Arcadia and not the Regulator, however we have also been open in considering any potential solution to this matter. Having given the Arcadia Offer careful consideration, and in light of the Conditions, the Regulator is of the view that the Arcadia Offer is an insufficient settlement and does not provide a reasonable outcome for the Schemes so that the Regulator could consider it appropriate to cease its moral hazard investigation. The Regulator's view is that, in the current circumstances, an appropriate outcome would be an offer which enabled the Schemes to reach self-sufficiency, as this would enable the Schemes to pay members' benefits as they fall due without reliance on ongoing covenant support. The Regulator has already confirmed our position to Arcadia.

3.

Implications for the CVA

The outcome of our meeting with Taveta and Arcadia representatives has implications for the CVA being proposed by the directors of BHS. This is particularly the case given the stated importance of agreeing a resolution of the pensions' liabilities for the success of the financial restructuring as a whole. As such, we consider that you may wish to reconsider the viability of the CVA proposal. In the event that you consider that the proposal remains viable then, while we remain open to further discussions regarding pensions, you may wish to redraft certain aspects of the CVA proposal to more accurately reflect the current position in relation to pensions, for example paragraph 3.15 which states that the Directors believe that there is a reasonable prospect of the pension settlement discussions being successful.

4.

Clearance

We also note that you indicated at our meeting that BHS and Retail Acquisitions Limited ("RAL") now intend to seek clearance from the Regulator; however, you have not specified if this will form part of your Offer or whether this will be a separate matter. The Regulator would consider any application for clearance based on the information presented and available at that time. Your advisers will be able to explain the clearance process and how applications can be made in accordance with the Regulator's clearance guidance. We would however remind any parties seeking clearance that if further information or evidence came to light which altered our view then any clearance may fall away and the Regulator may consider that it is appropriate to take steps to exercise its moral hazard powers. It would have to be reasonable for the Regulator to take such a view but to suggest otherwise goes beyond the scope of the clearance function.”

361.

Mr Martin summarised the position at it stood by the end of February 2016 in Martin 1. His evidence was that in January 2016 Mr Chandler wanted an indication from the Trustees, the Pensions Regulator and the PPF that Project Vera was viable and worth pursuing but that no such indication was forthcoming because it had not been developed to a level at which they were able to comment. It was also his evidence that the various conversations and meetings which took place in February 2016 did not go anywhere very quickly and that Mr Hinds had told him on 5 February 2016 that whether BHSL entered into a CVA or administration, there would no longer be a restructuring of the Schemes and that the intention was for them to transfer to the PPF. None of this evidence was challenged.

(4)

The Amended MSA

362.

By email dated 27 August 2015 Mr Hitchcock had written to Mr Topp stating that the inter-company balance between RAL and the BHS Group was £15.7 million and that RAL owed the group £15.8 million. He stated: “I cannot see how this will ever get repaid and technically RAL could therefore be seen as bust interesting!” Under cover of an email dated 26 November 2015 Mr Carver revisited the inter-company balance and sent Mr Treacy a summary together with a number of supporting documents.

363.

The summary showed that RAL owed the group in total £8,466,564. The summary stated that RAL owed Lowland £7,000,000 in respect of North West House and contained the following narrative against the payment of £521,976: “RAL Grant Thornton Fees paid by BHS”. It also recorded the balance of the arrangement fee paid on 26 June 2015 as: “Repayment as part of ACE II transaction”. Finally, it also suggested that RAL might be entitled to set off £1,075,000 payable under the ACE Loan Note 1 (although Mr Carver was waiting for a reconciliation).

364.

By email dated 29 November 2015 Mr Treacy replied stating that he was “on the case with the RAL VAT return”. He also stated that he would sort out the £2 million arrangement fee and that it was likely that RAL would issue BHSGL an invoice and that it would be asked to pay the VAT. Finally, he stated that he understood that no invoices had been raised by RAL to ease pressure on cashflow and because a long term MSA was to be agreed by the BHSGL board.

365.

By email dated 4 December 2015 Mr Treacy wrote to Mr Carver again stating that this time he had accounted for the £2 million arrangement fee paid to RAL as a loan. On 19 October 2016 Mr Treacy was interviewed by the Insolvency Service and he gave the following explanation for this treatment:

“And my job was to account for it. So it came from Olswang, it was on one of the transactions, the property transactions. I believe that the reason we haven't got absolute clarity is there wasn't a finance person overseeing this transaction. Uhm, the accounting treatment I've adopted is that it was an additional loan by BHS. Uhm, and that's essentially where it ends up. So, uhrn, yeah I mean I probably won't even recall all of the different versions I was told on that transaction. But essentially it's money owed by RAL to BHS.”

366.

On 18 December 2015 Mr Parladorio sent Mr Hitchcock a briefing paper prepared by Mr Treacy in relation to the inter-company loan. The minutes of the BHSGL board meeting on 2 December 2015 record that the inter-company position was discussed in the context of approving the minutes of the meeting on 29 July 2015. They record as follows:

“DT’s view had been that on 29 July he had only agreed to the original management services agreement on the basis that RAL would invoice for the cost of labour plus a 30% fee of the labour fee, with a guaranteed 75% of that charge being used by RAL to repay loans due from it to BHS. EP's view, as the shareholder's representative, was that that charge would be made, with 75% of that charge used to repay loans from BHS, save that if there were good reasons to depart from that principle in any given month, then RAL would explain the reasons why and reasonably consult with the Company in that regard, with the intention that both RAL and the Company should act reasonably and in good faith on any such occasion. Also with the proviso that RAL should first be allowed to build up a sensible reserve for future contingencies.”

367.

Over the next month Mr Treacy revised his paper and on 13 January 2016 Mr Parladorio sent the revised version to all of the BHSGL board members. Mr Treacy stated that the inter-company loan was £8,354,564 as at 31 October 2015. He also stated that RAL’s intention was to enter into a formal loan agreement with the BHS Group for £6 million which would be repayable over five years leaving a balance of £2.35 million which would be repaid in part out of the anticipated proceeds of the MSA. Mr Treacy then turned to the MSA. He stated that it had been signed on 13 March 2015, that a revised version was drafted in October 2015 which had extended the parties to include group subsidiaries and he set out the agreed fees in a schedule. He also enclosed a revised draft together with a draft budget.

368.

In his paper Mr Treacy proposed that the BHS Group should pay a fixed management charge of 30% of RAL’s salary costs (and he indicated that this had been applied on an interim basis between May and August). He also proposed that RAL should charge 2% for raising finance, that an interim invoice of 1% (£0.63 million) had been raised for Grovepoint and that an additional invoice for £0.63 million and £0.5 million plus VAT would be raised in respect of both the Grovepoint Facility and ACE II. Mr Treacy also stated that RAL intended to charge for property services and, in particular, £0.6 million on the sale of Oxford Street plus 10% of any increase above £60 million. Finally, Mr Treacy stated that RAL intended to charge for “transformative” and “ad hoc” services.

369.

During January 2016 the MSA was the subject of emails between Mr Parladorio and Mr Topp. In summary, they continued to disagree about the amounts which RAL would be entitled to retain and whether RAL should be entitled to a fee of 2% for arranging the ABL Facility when it was completed. For example, in emails dated 24 and 27 January 2016 Mr Parladorio argued that substantial sums should be paid to RAL rather than set off against its existing debt.

370.

On 28 January 2016 Mr Chandler instructed Edwin Coe to advise on the terms of the MSA and by email dated 29 January 2016 Mr David Kinch of Edwin Coe gave detailed advice to Mr Chandler. Most of the points which he made were sensible drafting points although he stated that it was important to make it clear whether fees should be payable only by the group company and not by the BHS Group as a whole. On 15 February 2016 Mr Chandler circulated a revised draft reflecting this advice and raising some of Mr Kinch’s points for discussion.

371.

By email dated 22 February 2016 Mr Smith wrote to Mr Chandler saying that he wanted to take advice about the MSA and by email dated 23 February 2016 Mr Bloomberg of Weil gave advice to BHSGL on the question whether it was appropriate at this time to enter into the MSA (as amended) together with a number of ancillary documents. He stated that he had not seen any previous documents evidencing its terms but pointed out that there was no impediment to memorialising existing arrangements provided that the drafts accurately reflected the terms previously agreed. He continued:

“As we have previously advised, at the time when the Companies are in the zone of insolvency the duty of the directors is to act in the best interests of all creditors and to minimise loss to creditors as a whole. English law requires that creditors are looked at on a company by company basis.

In determining whether the Draft Documents should be entered into, the relevant directors need to consider their duties and whether the terms of the Draft Documents accurately reflect the previously agreed position. As the directors are aware, any subsequently appointed office holder (whether administrator or liquidator) has a duty to review any transactions entered into within a relevant time (being 2 years ending with the onset of insolvency). In addition, the directors of BHS Limited and BHS Properties Limited have a statutory obligation to disclose any transactions which may be deemed to be, inter alia, either a preference or a transaction at an undervalue in the CVA proposals.

The board should also consider whether the provision of services under the Draft Documents are actually required at this time, and whether various payments required under the Draft Documents are commercially acceptable to the board. The important consideration for the board relates to section 239 of the Insolvency Act 1986 (Preferences)…”

372.

On 27 February 2016 RAL submitted an invoice for £600,000 plus VAT to Lowland. The narrative stated: “Management Charges re ACE refinancing as agreed”. At meetings of the BHSGL board and BHSL board on 2 March 2016 at which Mr Chappell, Mr Chandler and Mr Henningson were present, both companies were authorised to enter into the restated and amended MSA and also to enter into what was described as the “Acknowledgment of Indebtedness” letter (the “AOI Letter”). The execution copy of the MSA (as amended) stated that it was originally made on 11 May 2015 and that the parties to it were not just RAL and BHSGL but RAL, the Companies, BHSPL, Carmen and BHSJL (who were defined as the “Target Companies”). The minutes of the meeting also record that Mr Chandler and Mr Topp had now become employees of RAL. It appears that their contracts of employment had been novated with effect from 1 July 2015 in order to support the level of management fees paid to RAL.

373.

The MSA (as amended) provided that the Target Companies had requested that RAL should provide additional services in three categories: fundraising services, real estate services and material benefit services (see clause 3) for the agreed fees set out in Schedule 3 and the additional fees (see clause 4). Schedule 3 provided that from the date of the MSA until 29 February 2016 the agreed fees to which RAL would be entitled were the actual costs of providing the relevant services plus an uplift of 30% and that from 1 March 2016 the agreed fees would be calculated by reference to a budget.

374.

Attachment 1 to the MSA was headed “Additional services record – financing” and it recorded (or purported to record) that from 1 June 2015 it had been agreed that the BHS Group had agreed to pay RAL 2% of the total funds available under ACE II, the Grovepoint Facility, the GB Bridging Facility and the ABL Facility. Attachment 2 was headed “Additional services record – Real Estate Services” and it purported to record fees which had been agreed for property sales. In particular, in the second paragraph it recorded a fee of £160,000 for Atherstone and the following fee for Oxford Street:

“ii)

In relation to the sale of Oxford Street – (as this is critical to fund the cash flow of the business in 2016 and has a high level of complexity) agreed fee as follows:

• 1 % of £60m (being the estimated value as advised by DTZ/Cushman) where £60m represents the net sale proceeds after Transaction Costs (where Transaction Costs shall mean any marketing or professional costs directly associated with the relevant sale).

• 10% of any realisation (after transaction costs) above £60m”

375.

On 3 March 2016 Mr Treacy signed the AOI Letter on behalf of RAL and Mr Smith and Mr Chandler signed it on behalf of BHSGL. It bore the date “December 2015” but Mr Chandler accepted in cross-examination that he executed it on 3 March 2016 and on the day before the CVA Proposal (below) was circulated to creditors. In the AOI Letter RAL acknowledged that it had received a loan of £6,177,000 from BHSGL and the parties agreed that £1 million would be repayable in 20 equal quarterly instalments and the balance of £5,177,000 on 31 December 2020. It expressly stated that the loan would not bear interest although it provided that default interest of 4% above the base rate of Barclays would be payable if RAL failed to make any payment.

376.

Finally, on 3 March 2016 all of the Directors including Mr Chappell, Mr Chandler and Mr Henningson signed a memorandum prepared by Mr Parladorio in which they acknowledged or agreed to pay management fees of costs plus 30% of which 75% would be set off against the existing debt (apart from the first £300,000). They also agreed to a number of other arrangement fees:

“1.

Uplift at 30% agreed. This system to continue to end Feb 2016 then new system takes over. A 75% so called 'flow back' (for RAL to pay off loans from BHS) to operate. In this regard subject to the same not applying to the first £300,000 earned by RAL from the MSA Schedule 3 Agreed Fees (to 29/02/20l6). For the avoidance of any doubt it was also discussed and agreed that from 1/3/16 the 75% “flow back” would then cease to have effect.”

5.

Oxford Street lease ("MSA Att 2 fee- due if and when sale executed). It has been previously discussed and agreed that on the sale of the Oxford Street lease (given its inherent complexity and the potential upside to BHS of achieving a sale in excess of the estimated pre-RAL-acquisition value (circa £30m approx) the following shall apply in place of the "MSA Attachment 2" agreed formula:

1% commission on any net sale proceeds up to and including £60m (where net sale proceeds shall for these purposes mean the contracted sale price less any professional costs associated with the sale);

• An additional 10% commission on net sale proceeds above the combination of (i) net sale proceeds of £60m plus (ii) the costs paid by BHS to buy out the interest of ACE in the property as part of the ACE loan entered into mid 2015.”

377.

In preparation for the Creditors Meeting (below) KPMG pulled together information to explain the inter-company balance. On 17 March 2016 Ms Rachel Bryan sent the KPMG a breakdown of the balance of £8,354,564. The explanation which KPMG recorded for the payment to Swiss Rock of £521,976 on 16 April 2015 (Footnote: 2) was “RAL Grant Thornton Fees paid by BHS” and the explanation for the balance of the arrangement fee of £1.5 million which had not been repaid was: “Repayment as part of ACE II transaction”.

(5)

The Deed of Rectification

378.

Mr Chandler gave evidence that he had identified some inconsistencies in the BHS Loan Agreement and the Framework Agreement. On 1 July 2015 a BHSGL board meeting took place at which Mr Chappell, Mr Henningson and he were all present. The minutes of the meeting record:

“DC2 explained that under the re-financing arrangements last week, RAL had injected £8.5m to BHS Group and the cash flow would need to be amended to reflect that. There were some inconsistencies with the agreements signed last week when compared to the SPA. DC2 expanded on these but the board noted the relevant parties had agreed amendments should be made to reflect the SPA. DC2 also highlighted that under those loan arrangements, RAL had made a short term loan to BHS Group in the sum of £1.5m. That £1.5m loan had been repaid by BHS to RAL immediately on draw down of the facility. DC1 confirmed that it was RAL's intention to re-invest that £1.5m into BHS within the next six months.”

379.

Mr Chandler’s evidence was that the BHS Loan (or the “Tina Green Loan” as it was known) should have been made to RAL and not BHS and that BHSGL owed RAL £1.5 million because it had paid £6.5 million to subscribe for shares but there were only £5 million of BHSGL shares unissued and no new share issue had taken place. It was also his evidence that this analysis was unconnected with the £2 million payment which Olswang made to RAL on Mr Chappell’s instructions and he was not attempting to justify RAL’s retention of £1.5 million which it was unable to repay.

380.

On 1 July 2015 Mr Roberts, Mr Chappell and Mr Chandler exchanged emails about these issues. Nothing further was done at that stage. However, by email dated 6 September 2015 Mr Roberts wrote to Mr Chandler suggesting that it might be necessary to rectify the Loan Agreement but that it was unnecessary to rectify the Framework Agreement:

“I have been through my files this evening and attach the correspondence on this issue - where I proposed a Steps Note which was to cover the relevant accounting steps that occurred around the time the Noah II Tranche B was refinanced. The key step was to ensure that the Tina Green loan was to RAL and not to BHS. That appears to have been agreed by Linklaters. The other point related to the £1.5m which we were informed post completion was being retained by RAL. The correspondence below sets out some accounting steps (between RAL and BHS) which the BHS and RAL boards agreed would best characterize how the accounting entries would be. In the end, these are all internal accounting steps and I would argue, the Framework Agreement provisions do not need to be amended to nuance these steps. In order for the refinance to have occurred, Arcadia sent the £10m it owed to HSBC directly and BHS sent £5.9m (which it received from the ACE II refinance loan of £25m). Given that the steps below that the BHS and RAL board agreed upon are internal, I think that the FA can remain as it currently provides.”

381.

On 7 September 2015 Mr Turner confirmed that Linklaters had no objection to adding some suggested wording but no steps were taken to rectify the relevant agreements until the following year. By a deed of rectification dated 12 February 2016 and made between BHSGL, RAL, Arcadia and Taveta (the “Deed of Rectification”) the parties agreed to rectify the SPA, the Framework Agreement and the BHS Loan Agreement. They agreed to rectify the SPA by substituting a new definition of the term “BHS Loan” and to impose an obligation on RAL to make the proceeds available to BHSGL. They also agreed to rectify the BHS Loan Agreement by substituting a new agreement entirely this time made between RAL and Arcadia. Finally, they agreed to rectify the Framework Agreement by replacing the references to the BHS Loan and BHS Loan Agreement with references to the “RAL Loan” and the “RAL Loan Agreement”.

(6)

Management Information

382.

Mr Wright’s evidence was that for the purposes of Project Pipe Mr Treacy provided his team with three year forecasts which the BHS Group revised and updated regularly and that on 3 March 2016 when the CVA Proposal was filed with the Court his team received a cashflow forecast dated 25 February 2016. He referred to this forecast as the “Management Forecast” and I adopt this term. The trial bundle contained a native version of the Management Forecast and I have checked Mr Wright’s evidence against it for accuracy. I am satisfied that it was accurate but it is easier for me to quote the relevant paragraphs in his witness statement dated 24 January 2023 (footnotes omitted):

“16.2

The Management Forecast showed that the BHS Group could achieve a projected EBITDAE (Footnote: 3) loss of £14 million in the 12-month period ending 26 February 2017 and positive EBITDAE of £6.5 million and £13.3 million in the 12-month periods ending 25 February 2018 and 24 February 2019 respectively. We understood that the Management Forecast was prepared on the basis that the CVAs were approved, and the Operational Restructuring, defined in the CVA proposals, was fully implemented.

16.3

The Management Forecast showed a peak (post capex) funding requirement, before new finance, of £56.6 million in October 2016. My team was informed by Michael Hitchcock and Dominic Chandler on 2 March 2016 that additional finance of up to £100 million from various sources was to be made available. I also received confirmation from Gordon Brothers by email confirming they were in advanced negotiations with BHS Group in relation to a new facility of up to £60 million.

16.4

The Management Forecast reflected the expectation that the Gordon Brothers facility would be available in three tranches, the first in March 2016 (£30 million), the second in July 2016 (£10 million) and the third in September 2016 (£20 million). According to the Management Forecast, even if the Gordon Brothers loan was received in full at the relevant points, an additional funding requirement of £7.8 million would still arise in May 2016.

16.5

However, the Management Forecast also included an additional source of funding of £23.8 million to be achieved by May 2016 through the refinancing of certain properties. I was aware that these properties were subject to a legal charge in support of a £62.4 million loan facility that BHSL, BHS Properties and Davenbush Limited had entered into with Grovepoint Credit Funding 2 Limited, an investment management firm (the "Grovepoint Facility"). The Management Forecast showed the Grovepoint Facility being repaid, together with accrued interest of £9.7 million, from the sale of BHSL's property at 252/258 Oxford Street, London (the "Oxford Street Property") which was shown as being completed by the end of March 2016 at a price of £75 million (i.e. more than the £72.1 million required to discharge the Grovepoint Facility at the amount then outstanding). The Management Forecast showed that once the Grovepoint Facility having been repaid in full (including interest) it would have resulted in the release of the charge over the other properties, allowing the additional £23.8 million finance to be included in the Management Forecast in May 2016. I therefore understood at the time that, based on the Management Forecast, the sale of the Oxford Street Property within a few months of the CVA was an important component of any restructuring plan and the viability of the business.”

383.

Ms Hilliard took Mr Wright to the Management Forecast in cross-examination and he confirmed that £75 million was forecast to be raised from property transactions. Mr Shaw, the Joint Liquidators’ accountancy expert, also gave evidence that management provided KPMG with two sets of management accounts which showed an EBITDA loss for the 12 month period to August 2015 and a positive EBITDA of £5.1 million for the four months to December 2015 but did not, however, provide KPMG with management accounts for the five months to January 2016 and the six months to February 2016 which showed a very different picture. Those management accounts showed an EBITDA loss of £27.2 million for the half year. Mr Curl put it to Mr Chandler that those management accounts became available on 15 March 2016 although he was unable to confirm whether this was correct.

(7)

The CVA Proposal

384.

By an engagement letter dated 2 March 2016 Mr Wright wrote to the board of BHSL setting out the basis on which Mr Green, Mr Pink and he agreed to act as Joint Nominees (the “Nominees”) for the purpose of the CVA. He drew attention to the fact that a misstatement of BHSL’s assets and liabilities could constitute a “material irregularity” for the purposes of section 6 of the IA 1986 and that it was a criminal offence for directors to make false representations for the purpose of obtaining the approval of creditors. He continued as follows:

“Once the proposal document is prepared and reviewed by Weil, we will forward it to you for your comments, alterations etc. It is important that the board go through this in detail and understand it in its entirety. My staff will explain any matters on which you or the board require further clarification. I strongly advise that the directors seek legal opinion from Weil on the contents of the proposal as appropriate. I would stress that the document is the directors' proposal and the directors alone are responsible for its accuracy.”

385.

There was an issue about the date on which Mr Wright and his partners were appointed and whether it was 3 March 2016 or 4 March 2016 but nothing turned on this. Mr Wright pointed out in his witness statement that it was his role as one of the Nominees to consider whether the CVAs had a reasonable prospect of being approved and implemented and that his team reviewed the funding requirements set out in the Management Forecast and sought evidence from management that initiatives were in place to cover the forecast funding requirements. It was also his evidence that the Nominees concluded that it was not certain whether the funding initiatives which the BHS Group was pursuing would be concluded by the date on which the CVA Proposal (below) was circulated and it was agreed that the wording would reflect the fact that efforts to secure the required funding were on going.

386.

By email dated 3 March 2016 and timed at 6.12 am Mr Plainer circulated Ms Boorman’s letter dated 29 February 2016 to Mr Chappell and Mr Chandler and the teams at Weil and KPMG. He suggested a conference call at 11.45 am that day. Under cover of an email timed at 4.34 pm that day Mr Mark Lawford of KPMG circulated copies of the final proposal for the CVA of BHSL (the “CVA Proposal”), the Nominees’ report (the “Nominees Report”) and the Statement of Affairs.

387.

The CVA Proposal was signed by Mr Chappell and dated 4 March 2016 in anticipation of its issue the following day. Page ii contained a notice from the Nominees, which identified them and then continued:

“In accordance with section 2 of the Insolvency Act 1986, the Nominees have reviewed the Proposal and reported to the Court that, in their opinion: (a) the CVA Proposal has a reasonable prospect of being approved and implemented; (b) meetings of BHS Limited and of its CVA Creditors should be summoned to consider the CVA Proposal; (c) the meeting of the CVA Creditors of BHS Limited to consider the CVA Proposal should be held at Novotel London West, One Shortlands, London W6 8DR at 10:30 on 23 March 2016; and (d) the meeting of the Shareholder of BHS Limited to consider the CVA Proposal should be held at Novotel London West, One Shortlands, London W6 8DR at 12:30 on 23 March 2016.

The Nominees are unable to warrant or represent the accuracy or completeness of any information contained within this document, or any information provided by any third party. The Nominees have not authorised any person to make any representations concerning the CVA Proposal, and if such representations are made, they may not be relied upon as having been so authorised.”

388.

Pages iv to ix contained a summary and began by setting out the background to the BHS Group (which I have largely adopted in introducing the business). It then stated that management had devised a turnaround plan which included the following key components:

“i.

Compromise of pension liabilities. BHS Limited sponsors two occupational defined benefit pension plans, the BHS Pension Scheme and the BHS Senior Management Scheme, which are closed to new entrants and future accrual. The Directors are currently engaged in discussions with the Pension Protection Fund, the Pensions Regulator and the Trustees of the schemes in respect of a deficit in the pension schemes. The Directors believe that there is a reasonable prospect of those settlement discussions being successful, and therefore anticipate an agreement being reached. The effect of the compromise would be that the schemes would enter the Pension Protection Fund and BHS Limited, post-CVA, would have no further liability in relation to either the deficit or ongoing funding requirements of the schemes. While the CVA facilitates the entry of the schemes into the Pension Protection Fund, the compromise will be effected by a separate agreement.

ii.

Funding. In order to address BHS Limited’s cash flow deficit in the short term and repay existing borrowings, BHS Limited also obtained a short term £62.4 million secured facility with Grovepoint Credit Funding 2 Limited (“Grovepoint”) in September 2015 and a £9.4 million secured facility from GB Europe Management Services Limited (“Gordon Brothers”) in February 2016. However, additional funding is required to enable BHS Limited to continue to trade beyond 25 March 2016.

The Directors are therefore also engaged in efforts to raise funding of up to £100 million from three primary sources: (i) up to £60 million funding from an asset based lending facility secured against the stock and debtors within the business with a term of 3 years, after which point if the facility is not renewed it is intended it will be refinanced by an alternative asset based facility, (ii) up to £30 million from property funding and disposals, and (iii) up to £10 million of funding from the release of funds tied up in letters of credit and/or security deposits held with suppliers of goods not for resale.”

389.

The proposal then stated in bold type that the turnaround plan and short term funding to date were not in isolation sufficient to restore the future viability of BHSL unless its retail arm underwent a significant restructuring. It stated that the objective was to rationalise BHSL’s leasehold obligations and that the proposal compromised its liabilities in respect of two categories of leases and other property liabilities and inter-company debts to BHSPL, Davenbush and Lowland. The remainder of the summary identified a number of categories of leases and other property debtors and the way in which those debts were to be compromised. Finally, it stated that proposal would become effective if it was approved at the meetings of creditors and shareholders on 23 March 2015.

390.

It is unnecessary for me to set out the material terms of the detailed proposal and enough for me to identify those passages to which Ms Hilliard put to Mr Wright. He was taken to page 8 on which it was stated that the CVA would continue until the proposed supervisors had supervised its implementation, that it was not possible to state with any certainty its proposed duration but that the anticipated date of completion is 24 June 2016. He was also taken to page 54 which stated that the total fees which were estimated to be paid to KPMG amounted to approximately £1 million and that the total fees to be paid to the Nominees amounted to £450,000. Finally, he was taken to the list of CVA creditors which included the pension scheme deficit at £571 million. Ms Hilliard pointed out to Mr Wright that if the PPF had voted against the CVA, this would have been sufficient to prevent it taking effect.

391.

The Nominees’ Report was also signed by each of the Nominees and dated 3 March 2016. It stated that on 26 January 2016 KPMG had been instructed by RAL to consider the feasibility of the CVA and disclosed the fees which KPMG would be paid both for the engagement and also for the three individuals to act as Nominees. It also stated that an estimate of fees for acting as supervisors was £200,000. It then continued:

“5.

The Nominees have satisfied themselves: a) that the Company's true position as to assets and liabilities is not materially different from that which is represented to the creditors; b) that the Proposal has a reasonable prospect of being approved and implemented in the manner represented in the Proposal; and c) that there is no unavoidable prospective which is already manifest.”

“7.

The Nominees make the following comments in respect of the Proposal: a) The Nominees have carried out limited investigations into the Company's circumstances to enable them to assist the Directors in their preparation of the Proposal and report to the Court under section 2(2) of the Insolvency Act 1986. b) The business and assets of the Company as a whole have not been professionally valued. The realisable asset values contained in the statement of affairs have been estimated by the Directors based on book values adjusted for available current market information. The Nominees have reviewed the asset values for reasonableness, although no detailed audit has been carried out. c) The Nominees are not aware of any reason to believe that the information provided by the Directors in relation to the estimate of the liabilities of the Company cannot be relied on by the creditors and shareholders of the Company. On that basis, the Nominees consider that reliance can be placed on such estimate. d) The Directors have been totally co-operative and has provided the Nominees with all necessary information… k) The Nominees are not aware of any claims which might be capable of being pursued by a liquidator or administrator of the Company if one were appointed.”

392.

Finally, the Statement of Affairs was signed by Mr Chappell and Mr Chandler and also dated 3 March 2016. It stated that the Directors had prepared it as at 23 January 2016 and that the shortfall due to unsecured creditors based on book value was £500.4 million and in liquidation was £1,322.6 million. On 3 March 2016 a BHSL board meeting took place at which Mr Chappell, Mr Chandler and Mr Henningson were present. Mr Plainer and Mr Bloomberg and all three Joint Nominees attended the meeting. The minutes record that the CVA Proposal, the Nominees Report and the Statement of Affairs were tabled and that the board resolved to approve them. They also record that Mr Plainer gave the following advice:

“4.2

AP advised that: (a) the CVA proposal is a proposal by the Directors; and (b) that the contents should be true to the best of the Director's knowledge and belief.

4.3

AP advised that should any Director have any further queries on the terms of the CVA or should they not believe that the contents are true to the best of their knowledge and belief then they should make their views known.

4.4

AP advised that in view of the update provided in relation to the recent communications with the Pension Stakeholders, Arcadia and landlords, he saw no reason why the Directors could not take a view that the CVA has a reasonable prospect of being approved and implemented however requested that should any Director have any different view that he should make this known to the meeting. No Director expressed a different view.”

393.

On 10 March 2016 BHSGL and BHSL board meetings took place at which Mr Chappell, Mr Chandler and Mr Henningson were present as were Mr Plainer and the Nominees. The minutes of both meetings record that Mr Hitchcock reported on the cashflow position as follows:

“4.1

A cash flow forecast for the period from week 27 to the end of week 31 was distributed to the Board.

4.2

MH reported on cash flow and explained that the forecast assumed all outstanding payments had been caught up with to the value of £8m, however to get a sense of cash flow, £8m needed to be added back in for other payments that would become due.

4.3

MH highlighted key items that needed to be paid between now and 24 March, which included payroll, a payment to DHL and VAT to HMRC. Whilst paying HMRC late was regrettable, MH intended to make payment immediately after the Easter weekend.

4.4

MH said that the ABL funding of £30m was required by 24 March as payments for rent and rates, the suppliers mentioned above and merchandise payments became due on that date.

4.5

KS asked for a progress update on securing ABL financing which MM confirmed was in advanced stages.

4.6

There was a brief discussion as to the possibility that Arcadia could make up the shortfall currently being sought from Gordon Brothers. Arcadia were fully briefed on the current cash flow position of the business.

4.7

MH said that he would need to make some payments to suppliers identified as critical and intended to use £8m held back thus far.”

394.

Both sets of minutes also record that a meeting was to be held the following day with the PPF to consider the CVA Proposal but that Mr Pink and Mr Chandler were not prepared to hold discussions beyond the CVA at the meeting. They also recorded that Mr Plainer reported on the negotiations as follows:

“6.1

A meeting was due to be held the following day with the PPF to consider the CVA proposal. MP and DC2 were not prepared to hold discussions beyond the CVA at the meeting. MP reported that the PPF had so far indicated some concern at the removal of a termination date. 6.2 The Board discussed the position on the issue of a scheme failure notice. It was noted that a QC had been engaged and that his advice would provide the clarity required to allow the Board to better understand the Impact of Issuing a scheme failure notice. 6.3 AP stated that since the last Board meeting, the PPF had now rejected the Company's offer. The TPR had also stated that discussions with Arcadia had not yet come to a resolution. Both letters from the PPF and TPR had suggested that they remained open to further discussions with the Company.”

(8)

The Oxford Street sale

395.

On or shortly before 21 March 2016 BHSL agreed to sell its long leasehold interest in Oxford Street to the freeholder, O&C, for £50 million. Mr Curl took Mr Chandler to a long email chain passing between Edwin Coe (who were acting for BHSL) and Eversheds (who were acting for the freeholder) to which Mr Sherwood, Mr Parladorio and he were copied. This email chain showed that over the course of the next three days the parties agreed a completion date of 24 March 2016, that VAT was payable, that the terms of the relevant documents had almost been agreed and that Edwin Coe were pressing Eversheds for confirmation that they were in funds to complete.

396.

On 22 March 2016 a meeting of the BHSL board took place at which Mr Chappell, Mr Chandler and Mr Henningson were all present and at which the board concluded that the sale was in the interests of creditors and that it should proceed. Mr Plainer attended the meeting by telephone. The minutes record that the meeting had been convened to consider the sale of Oxford Street and then continue as follows:

“DC1 explained that following many months of protracted negotiations with the Landlord of the Property, a price had been agreed for the surrender of the lease. That price was £52.5m +VAT. The Company would continue to occupy the Property, paying normal rent, until 31 January 2016. As was known by the Board, the Property has been loss making for many years, and it has always been the intention of the business to exit the Property once a suitable deal had been agreed. The Board reminded itself that a sub-lease had been signed with LPP, and that it was a part of the proposed deal under consideration that LPP would agree the deal. The deal is neutral for the Company in relation to LPP. LPP have confirmed that they agree the deal.

The Board reminded itself that it had received formal valuations of the Property which ranged from £25m (from Savills) to £60m (from DTZ). The £60m valuation was on the basis of a fully sub- let Property at a value of £7.7m per year, and on the basis of a sale of that income stream. The Board recognised that it had attempted to reach agreements with tenants which would provide the £7.7m per year rental value but this had not been achievable. Whilst the valuations were approximately 5 and 6 months old, the Directors were of the view that retail valuations had only deteriorated and the proposed deal with the Landlord was a very good deal.”

397.

The minutes also record that Grovepoint was keen for the transaction to proceed and that Mr Chappell confirmed that the deal would be concluded and that the VAT element would be in BHSL’s account that day. They then state: “As a result of the transaction, £50m would be repaid to Grovepoint which would enable other properties to be released from the Grovepoint security which would, in turn, provide the Company with an opportunity to raise finance as envisaged in the CVA proposal.” Finally, they record that Mr Plainer advised the BHSL board to consider whether this was a sale at an undervalue and whether it was in the interests of creditors:

“1.

The Board should consider, in the circumstances in which the Company presently found itself, whether the transaction could be said to be at an undervalue. Given the valuations obtained, the history of the negotiations, the position of Grovepoint, and the experience of the Board, it may be that the Directors could conclude that the transaction was at a fair price and was not an undervalue;

2.

The Board should also consider the best interests of its creditors. AP noted that the CVA document made reference to the need for the Company to raise finance through Property transactions and disposals, and that there was also a need to bring liquidity into the business. In all the circumstances it may be that the Directors could conclude that the transaction, as presented to the Board, was in the best Interests of creditors. AP pointed out that it was for the Directors to form their own views based on the above.”

398.

Mr Bloomberg made a manuscript note of the meeting (or the discussions immediately preceding it) and his notes record that Mr Chappell gave the following update which was not reflected in the minutes (or not fully reflected in them):

Oxford St – in legals £52,500,000 + VAT → Stephen Brawer email confirming acting cd be tonight. DC2 – more likely tomorrow. Completion poss tonight/cd be tomorrow – LPP to sign 2 clauses.

MK – in legals £18m + VAT. Lawrence Stephens email confirmed acting for BHS. CP- CVA Hermes exchange planned Thursday.

TOTAL £70,500,000 Hoping GP accept that instead of £72m

ALL NET

Trying to do (Caernavon [sic] £1.6m (1.16)

All by Thursday (Manchester £10m → + £2m VAT

(Scunthorpe £1.3m

All to (Sunderland £2.35m

Sports Direct (Taunton £1.35m //£16.185m

(UNDER OFFER

S.D. (Darlington £2m

(Bristol £10.5m → Pay £10m to GB

( £12.5m”

(9)

The Creditors Meeting

399.

By letter dated 17 March 2016 the PPF had written to the Joint Nominees objecting that the CVA was unfairly prejudicial to the Schemes in the event that no agreement could be reached in relation to the pensions deficit. They explained that the reason for this was that the CVA would prevent the Schemes from continuing to receive the Annual Contributions under the Recovery Plans. The PPF proposed that it would be prepared to agree not to vote against the CVA or to challenge it if BHSL continued to make its recovery plan contributions and to pay the PPF Levy.

400.

By letter dated 18 March 2016 Mr Chandler wrote back to the PPF directly and between 18 and 22 March 2016 the parties were able to negotiate the terms of an agreement. On 23 March 2016 they entered into a binding agreement and by its terms the PPF agreed not to vote against the CVA or to challenge it on any basis whatsoever and to refrain from exercising its powers under section 124 of the PA 2004 until 30 September 2016 or such later date as might be agreed in writing. In return BHSL agreed to make payments of £600,000 per month to the PPF. At the meeting later that day, therefore, the PPF did not vote.

401.

On 23 March 2016 the creditors meeting took place to approve the CVA (the “Creditors Meeting”). The minutes record that Mr Green chaired the meeting and that Mr Topp and then Mr Chandler made presentations. Mr Chandler informed the meeting that the PPF had agreed not to vote at the meeting and that: “The ongoing discussions are complex and sensitive and he is not able to comment any further on this issue.” He then made some comments about letters of credit before addressing funding:

“As set out in the CVA proposal, the directors are actively engaged in obtaining up to £100 million of funding from three sources:

Up to £60 million from a new Asset Based Lending facility. This agreement has passed final credit approval with the lender. There are some conditions to be met namely in respect of intercompany lending and the existing charge-holder subordinating its security.

Up to £30 million from property sales. Good progress is being made on the various property sales. These are needed to, and indeed are anticipated to, exchange and complete in the coming days, and whilst the directors are confident it is not without risk.

Up to £10 million from release of funds tied up in Letters of Credit and security deposits held with suppliers. It not intended that any new Letters of Credit will be provided when the existing ones fall away.

Intercompany position

There has been some press about the intercompany loan between BHS and Retail Acquisitions Limited “RAL”. To clarify the position, there is a loan from BHS Limited to RAL in the sum of around £500,000 but it’s understood that there is interest in the wider inter-company position between RAL and the BHS group.

RAL spent a very considerable amount of time and money in its acquisition of BHS. As part of that process it engaged professional advisers who needed to be paid. In addition, each of the Directors of RAL invested significant amounts of time and effort in preparing for and concluding the acquisition, in circumstances in which they were not certain of the transaction being successful.

It is commonplace in such circumstances for the Company which is the subject of the acquisition to assume the costs of that acquisition. It would not have been unusual for the acquired Company to have assumed the costs and for no intercompany loan to have been created. The Directors of RAL have taken on that liability and put in place an intercompany loan. That loan covered costs associated with the acquisition of the business.

As has also been reported in the press, that loan has been partially repaid, and has reduced to a current level of around £6.9 million. However, to reiterate, there is a debt of £500,000 which is relevant to the Company in respect of which we are meeting today.”

402.

The version of the minutes of the Creditors Meeting which Ms Hilliard put to Mr Wright recorded that Mr Green invited questions but that none were raised. They then continued by stating that Mr Green announced that there had been no modifications to the CVA proposed and that creditors totalling £200,611,000 had voted for the CVA, £3,439,000 had voted against it and £5,156,000 had abstained. Finally, they recorded that he then announced that the CVA and the appointment of the Nominees as supervisors had been approved.

403.

In their closing submissions, however, Ms Hilliard and Ms Earle relied on a different version of the minutes which recorded that Mr Green had also received a number of questions from creditors, that the following questions were asked and that the following answers were given:

“Q There are no forecasts attached to the proposals. Have the nominees seen the forecasts? Will the company be viable going forward? A Yes, we have seen some forecasts and they show that the company will be viable. We have looked at 3 years to fund the business and ensure sufficient cashflow. Assumptions put in forecasts are no sales growth in year 1, 1% in year 2 and 1% in year 3. We believe the forecasts are prudent.”

“Q There are 4 secured creditors, have they made any comment with regards support for the proposals? A Yes, Arcadia are fully supportive of the CVA. Others have not made any objections and have had waivers where requested. The monies due to the secured creditors are not compromised in the CVA, they are unaffected.”

“Q Of the £30m property transactions, how many stores are involved? What turnover will that lose? What will be the impact on P & L? A Not going into detail about the amount of properties that will raise that money. Buying power will not be affected as we are reducing lines but will be buying better quality. If sales growth at same rate will be broadly neutral in Year 1, minimum change in Year 2 and in Year 3 will be £2.5m profit.”

(10)

The proceeds of the Oxford Street sale

404.

By a transfer dated 31 March 2016 BHSL transferred Oxford Street to O&C for £50 million plus VAT. On 1 April 2016 RAL issued an invoice to Lowland for £500,000 plus VAT of £100,000. The narrative described the fee as “additional Management Services Fee reference Oxford Street sale” and on the same day Mr Chappell gave instructions to Edwin Coe to pay £9,400,000 to BHSL’s account and £600,000 to RAL’s account. Mr Topp gave evidence that Mr Morris had issued a winding up petition for unpaid consultancy fees and he accepted that perhaps part of the £600,000 might have been required to pay the debt.

405.

However, when he became aware of the instructions which Mr Chappell had given to Edwin Coe, Mr Topp objected strongly. By email dated 1 April 2016 he wrote to Mr Parladorio and Mr Chappell threatening to resign if the money was not repaid by the following Monday, which was 4 April 2016. On 5 April 2016 a BHSGL board meeting took place at which Mr Chappell and Mr Henningson were present but which Mr Chandler did not attend because he was on leave. The minutes record that Mr Topp told the meeting that there were inappropriate and unapproved allocations of VAT in relation to the sales of Sunderland and Oxford Street. He also objected to the Sunderland transaction itself. Under the heading “Oxford Street” the minutes record:

“• The sale of the Oxford Street store concluded on 1/4/16 for a fee of £50m + VAT. DT had approved this transaction.

• DT was aware that £50m would be paid straight to Grovepoint and BHS would receive the £10m VAT monies, minus some legal fees of around £90k which was as per an email he had received the previous evening.

• When the VAT monies. arrived they totalled £9.3m. DT had asked HC (Head of Treasury) to follow up with the solicitor who said £600k had been paid to “another party” on DC1's instruction.

• DT immediately phoned DC1 and said he was very unhappy and that it required board approval.

• DC1 had assured DT on Saturday, Sunday and again on Monday that the money would be back in the BHS account: the money was still not back on Tuesday 5th April 2016.

• DT stressed to the Board that this was not acceptable. If RAL was owed money it must invoice BHS and in the current circumstances, the Board must approve payment after proper consideration. BHS currently had £30m of unpaid creditors. DT did not think paying RAL was appropriate.”

406.

The minutes record that Mr Chappell said that he had given instructions for the return of the money and that the meeting ended on the basis that both BHSGL and RAL would take advice. On 5 April 2016 Mr Parladorio instructed Mr Plainer and on 6 April 2016 he produced a note of advice which was headed “Project Pipe Note Prepared for BHS Limited (the "Company”)”. His advice in relation to the payments to RAL was as follows:

“1.

Given the financial position of the Company, the directors should properly consider all material payments being made to creditors whether to RAL or otherwise;

2.

Where appropriate, the Board should consider at a duly constituted board meeting whether payments should be made and the decision, together with any other considerations taken into account, should be documented in the minutes of the board meeting;

3.

There is no requirement for RAL to be subordinated behind other unsecured creditors. As long as due consideration is given to the payment, there is no prohibition on the Board authorising payments to RAL pursuant to the MSA;

4.

Optically, the Board may consider that it is appropriate to pay RAL on the same terms as other non-landlord creditors which we understand is currently on 60 day terms.”

407.

In the covering email Mr Plainer suggested that a board meeting should take place so that the RAL payment could be ratified (if thought appropriate) and any further payments to RAL. He also stated that “pre-60 day RAL invoices could be made immediately if thought appropriate, but see paragraph 4 of our Note for our views on recent invoices”. On 8 April 2016 Mr Parladorio circulated a “Note to BHS Board” in which he stated that BHS owed RAL £1,595,297.33 and argued that the BHSGL board should ratify the payment to RAL on the basis that RAL used it to pay professional fees.

408.

On 8 April 2016 a conference call took place between Mr Plainer and Mr Parladorio, Mr Chandler and Mr Topp. Mr Plainer’s note of that meeting records that he advised them that the “better route is to put £600,000 back into the BHS company, however, if the BHS board ratify then optically doesn’t look as good but if long outstanding then up to BHS board”.

409.

On 10 April 2016 Mr Chandler sent this note to Mr Smith, Mr Henningson and Mr Topp asking them to agree to four resolutions: (A) to ratify the payment of £600,000 to RAL and also payments of £350,000 to Mr Morris and £150,000 to Manleys, (B) that the payments should be made on or before 12 April 2016, (C) that the outstanding loan of £741,280 from RAL to BHS should be paid by setting off outstanding invoices and (D) that the payment of remaining invoices should be deferred. In the covering email he stated:

“I attach a note prepared in relation to payments proposed under the MSA. It was discussed at length between myself, DT, EP and Adam Plainer. Can I please ask that you each look at the note ASAP and if appropriate, signal your approval. The primary purpose of the payments is that they are urgent, and so please do let me know - today if possible. Note that I have not included DC1 who has confirmed his conflict.”

410.

Later that evening, Mr Henningson replied stating: “Let’s do A and B and discuss the rest on Tuesday. We has [sic] to have a conclusion on this sooner than later.” There was no evidence that Mr Smith or Mr Topp replied although Mr Topp gave evidence that he now felt comfortable ratifying the payment to RAL. It was common ground that no board meeting took place to ratify the payment of £600,000 made by Edwin Coe to RAL on Mr Chappell’s instructions.

(11)

Administration

411.

By email dated 7 April 2016 Mr Roberts wrote to Linklaters updating them about the outcome of the Creditors Meeting and raising the question of subordination. He stated that whilst Arcadia might have been hesitant to subordinate its interests in the past, he hoped that “the landscape” was much clearer now. He set out a number of reasons why it was in Arcadia’s interests to subordinate before making a formal request for it to do so:

“Taking all of the above into account, the BHS board respectfully requests that Arcadia agrees to subordinate its £40 loan and debenture as well as provide the relevant consents required to allow the ABL facility to co-exist with the existing facilities and address any breaches caused by the CVA. Similar consents are being given by Grovepoint.”

412.

Mr Roberts also stated that the BHSGL board had been advised that it would be in the interests of the BHS Group’s creditors to try and take steps to compel Arcadia to subordinate the QFC and that they had been advised to give this active consideration. On the same day Mr Turner prepared and sent a memorandum of advice in relation to the ABL Facility. He pointed out that the funds drawn down had to be paid into a “Collection Account” controlled by GB Europe. He then stated as follows (and he used the term “BL” to refer to BHSL):

“BL, as Borrower, will only be able to withdraw funds from the Collection Account provided that it can demonstrate that the value of its Inventory and Receivables, as determined under the Facilities Agreement, exceeds the outstanding Loans, accrued interest and costs…Should there be insufficient funds in the Collection Account to make up that shortfall (being a Borrowing Base Shortfall) then there will be an obligation on BL to pay funds into the Collection Account to make up that Borrowing Base Shortfall. We understand that £10,000,000 to £15,000,000 per week should be paid into the Collection Account from Remittances (including trading receipts) each week. Therefore the Inventory and Receivables borrowing base would have to be at least that much less than the Term Loan Obligations before BL would be required to pay additional funds into the Collection Account.”

“As will be noted from the summary of the key terms of the Transaction set out at Schedule 1, the Facilities Agreement includes a broad range of Events of Default. Furthermore, each Obligor, including BGL and BL, has granted security such that Gordon Brothers is the holder of a qualifying floating charge from each such Obligor company for the purpose of the Insolvency Act 1986. It is not unusual that a lender in this situation would seek qualifying floating charge security. Therefore, following the occurrence of any Event of Default, Gordon Brothers would have the ability if it so chose to appoint an administrator to each Obligor company.

Accordingly, each Board should understand that this power arises on the occurrence of any Event of Default, whether material or not. Despite trying to negotiate such, Gordon Brothers have been unwilling to agree any materiality threshold for Events of Default and have only agreed limited grace periods for certain defaults before an Event of Default arises. Furthermore, notwithstanding the significant work that has been undertaken to mitigate the risk, it is likely that if Gordon Brothers chose to do so, in the real world they could identify an Event of Default at any time as a basis for enforcing their security and appointing an administrator.

Thus, the commercial reality is that if Gordon Brothers wishes to work with the Obligors as a responsible lender, then it will do so and will not look to enforce on the basis of minor Events of Default but only where there are genuine concerns in making a full recovery (usually in the case of non-payment or insolvency). However, if Gordon Brothers' motive is to gain control of the BHS business then, as mentioned above, as it is difficult to ensure there are no defaults outstanding, it would be difficult to prevent them doing so once the Transaction is implemented.”

“We understand that BL has approached more than ten other possible ABL lenders each of which was not prepared to enter into a transaction for various reasons, including the size of the loan, the borrowing base being weighted heavily towards Inventory and the fact that it was too early in the turnaround plan. Therefore, we understand that BL is of the view that the Transaction represents the best opportunity for BL to raise finance in the current situation, and the terms of the Transaction reflect that reality.”

413.

On 11 April 2016 Mr Chandler attended a meeting with GB Europe at which Mr Chappell and Mr Topp were present. On 13 April 2016 a BHSGL board meeting took place at which Mr Chappell, Mr Chandler and Mr Henningson were all present too. The minutes record that Mr Carver told the meeting that the GB Europe covenant “would be onerous for the business and would require the business to hold between £3 million and £5 million more than shown on the cashflow graph so that they could make weekly draw downs”.

414.

Mr Chandler’s evidence in Chandler 1 was that the purpose of the meeting with GB Europe was to seek comfort that it did not intend to use the ABL Facility as a “loan to own” device and immediately seek to enforce its security. However, by email dated 12 April 2016 Mr Chandler wrote to Mr Plainer raising a concern that Mr Chappell had misled GB Europe at the meeting. Mr Chandler’s evidence was that these misleading statements might trigger an immediate Event of Default.

415.

It was common ground that in order to enter into the ABL Facility, it was necessary to persuade Arcadia to subordinate its QFC to rank behind GB Europe’s security and in early April 2016 Olswang raised the issue with Linklaters. On 18 April 2016 a meeting took place between the board of BHSGL and Arcadia to resolve this issue. Mr Chandler’s evidence was that in advance of that meeting the BHSGL board met to decide whether the ABL Facility would provide the BHS Group with sufficient funds to enable it to continue to trade. Mr Chandler’s evidence about that meeting was as follows (footnotes removed):

"246.

Mr Morris set out the terms of the facility which was intended to release £30 million of cash into the business immediately, with further drawdowns planned for later in the year, up to a maximum of £60 million. I remember that, over the course of the discussion of the terms, I understood that there were a number of potential concerns. First, the amount of cash released into the business was not going to be £30 million, which the business required, but was more likely to be around £25 million because a certain amount of the loan had to be retained in the provider’s account. Secondly, the process for making requests for a draw down was unsuitable because of the systems we had on stock monitoring. And thirdly, the events of default terms were very strict and so there was a risk that any minor event could allow the debt to be called in.

247.

At the meeting, various views were expressed. My own view was that the facility was insufficient on its own: at best it would allow the business to limp on for a few more weeks, and it would replace Arcadia with a new loan provider with whom we had no relationship and whose interests were (in contrast to Arcadia) better served by the Companies failing rather than succeeding. I therefore made it clear that I would not support the signing of the facility. Mr Topp also voiced the same view.

416.

The subsequent meeting with Arcadia was attended by Mr Chappell, Mr Topp, Mr Parladorio, Mr Treacy, Mr Sherwood, Mr Morris and Mr Chandler on behalf of RAL and the BHS Group together with Mr Roberts. It was also attended by Sir Philip Green, Baroness Brady, Mr Budge, Ms Hague, Mr Chris Harris and Ms Siobhan Forey on behalf of Arcadia. Mr Chandler’s handwritten notes of the meeting record that Mr Chappell presented the cashflow forecast and that Sir Philip Green questioned Mr Morris closely about the ABL Facility.

417.

Mr Chandler’s notes also record that Mr Topp said that the BHS Group required £30 million immediately and comfort for £20 million and that Sir Philip Green expressed the view that there was no money in the business and that GB Europe were “rottweilers not lenders” and that the ABL Facility required “£100k per week in costs on the money” and “20% plus”. Later, Mr Chandler made the following notes of what Sir Philip Green said:

“→ asking Arcadia to give up £40m

⸺ never see it again

⸺ we have pensions issue (they know you’re not going to give money) → we’re trying to find settlement figure

⸺ Nothing I’m hearing is a commercial rational [sic] to do that

⸺ we’ve offered them the £40m note – the trustees said no thanks”

“Not a buyer

→ probably trading whilst insolvent

⸺ it doesn’t work

⸺ no credibility

⸺ where it all blows up

⸺ try to find a sensible closure process buy 100 stores

⸺ controlled way, sensible administrator

⸺ no one gets injured too badly”

418.

There was a difference between Mr Chandler and Mr Topp about the reason why Sir Philip Green refused to subordinate Arcadia’s QFC to rank behind the ABL Facility. Mr Chandler’s evidence was that Sir Philip Green considered the question to be academic because Mr Topp and Mr Treacy considered its terms to be unsuitable. Mr Topp’s evidence was that the BHS Group needed a bigger injection of cash and Sir Philip Green was not prepared to provide the necessary support. But both agreed that at the meeting on 18 April 2016 Sir Philip Green refused to agree to subordinate Arcadia’s QFC and the BHS Group lost its remaining source of funding.

419.

Mr Chandler and Mr Topp also gave evidence that on 18 April 2016 Mr Chappell gave instructions for £1.5 million to be paid to a bank account in the name of BHS Sweden and that they both spoke to Mr Chappell and challenged this payment. I will refer to this as the “Swedish Payment”. By email dated 19 April 2016 Mr Chappell wrote to board members suggesting a meeting the following day and it is clear that he wanted to dismiss both Mr Topp and Mr Chandler for gross misconduct. On 20 April 2016 a BHSL board meeting took place. The minutes record that at the end of the meeting the board approved the engagement letter to Duff & Phelps Ltd (“D&P”) as administrators and that Mr Chappell asked the board to approve payments totalling £1 million including £560,000 to Olswang and £300,000 to RAL. They continue:

“5.2

PAYMENT TO RAL

5.2.1

DC2 then referred to the payment to RAL. EP said £300k was owed to RAL and providing that the payment could be lawfully made, he requested it be done. 5.2.2 AP explained that the analysis that had applied to the LS and Olswang invoices also applied here. 5.2.3 EP confirmed he understood that it was for the administrator to decide whether the payment was appropriate.

5.3

RETURN OF MONIES

5.3.1

DC2 asked whether the monies sent to Sweden had been returned. LH said that he had been in contact with the bank and would confirm the instruction to return the monies once the meeting had closed. 5.3.2 DC2 summarised that all payments would need to have the agreement of D&P, but that the monies from Sweden needed to be returned before such payments could be made. 5.3.2 DC1 said he wanted the payments made otherwise he would divert money to pay people, he did not want the decision to be conditional on the monies being returned from Sweden. 5.3.3 KS asked whether the Board could reach agreement that the invoices be paid provided D&P were in agreement. DC2 was not able to come to this agreement. 5.3.4 DC1 confirmed the monies held in Sweden would be returned today. 5.3.5 DC2 said the Board could consider two resolutions: i. That the money would be sent back from Sweden today on a personal undertaking from D&P; ii. That in the meeting scheduled with D&P for the afternoon, payment would only be made on their advice. 5.3.6 DC1 said he wanted the Board to recommend the payment. DC2 concluded that it was not possible for the Board to reach an agreement and should move to the next agenda item.”

420.

Finally, both Mr Chandler and Mr Topp gave evidence (which was not challenged) that Mr Chappell returned (or D&P were able to recover) most of the £1.5 million apart from about £50,000. On 21 April 2016 BHSGL and BHSL board meetings took place at which Mr Chappell, Mr Chandler and Mr Henningson were present at which the board of each of the Companies resolved to enter administration. The minutes record that Mr Plainer gave the following advice before they took the decision to do so:

“3.1

AP confirmed that, as per previous advice. Directors should be mindful of their duties to creditors. As of yesterday, all efforts of the Directors, which had been considerable, in order to find the financing required pursuant to the CVA had been finally exhausted. AP understood that DCl, DC2 and DT had attended a meeting with Arcadia Group Limited ("Arcadia"), the qualifying floating charge holder, on 20 April 2016, whereby Arcadia reviewed the future cash flow forecast of the business and concluded that they were not prepared to support the business going forward whether by the provision of letters of credit facilities for delivering of essential supply in September 2016 or otherwise. Additionally, the facilities offered by Gordon Brothers, which the Directors had worked hard to put in place, were inadequate given the cashflow requirements of the business.

3.2

AP understood that additionally the Company had received a seven day winding up notice from HMRC on 15 April 2016, the balance of which outstanding was £2,671,808 which the Company could not meet. Given this, together with the fact that that the Company was dependent upon BHS Limited for funding and the BHS Limited Board had passed a resolution to file for administration, there was no likelihood of future financing being available to the Company, and therefore there appeared to be no reasonable prospect of the Company avoiding insolvent liquidation. The Directors, however, should take their own views. If the Directors agreed then they should take steps to put the Company into administration in short order. AP invited any Director who disagreed with the above, or wished to make any further comments, to do so. No Director had any comments.”

421.

On 25 April 2016 Mr Philip Duffy and Mr Benjamin Wiles of D&P were appointed as joint administrators and on 7 June 2016 they filed their statement of proposals. On 13 June 2016 they filed their report to creditors with the Court. In it they stated that after the meeting with Arcadia on 18 April 2016 Arcadia contacted Duff & Phelps, that they met the BHSGL board on 19 April 2016 and that the BHSGL board told them that they had no choice but to put the BHS Group into administration. They also stated that on 21 April 2016 the RAL board was contacted by a UK retailer with a view to rescuing the group, that negotiations took place over the weekend of 23 and 24 April but these negotiations failed and on Monday 25 April 2016 the board finally resolved to put the group into administration.

422.

By email dated 28 April 2016 Mr Henningson wrote to Mr Norman Strong of BSG Valentine, a firm of accountants, stating that in March 2015 Mr Chappell had asked him to set up a company in Sweden to control the name and brand and that their intention was to open two stores. He then stated (my emphasis):

“I have since March 2015 been occupied with everything within BHS UK and hasn't got the time to start to expand within the Nordic countries. I was the head of BHS International department and we started to build up contacts within China. Thailand, Indonesia and Kenya. We are also on our way to start up in Iran again. The company has just been invoicing twice and both of the invoices has gone to BHS. One has been paid in April 2015 and the other one sent in I think August 2015 hasn't been paid at all and I just told Dominic to pay it but he has forgot it as usual.

The reason to send as much as M£1,5 to Sweden was to protect all the invoices coming in from Olswangs and some other of the necessary advisers to the board of BHS. M£1,45 was sent back to BHS the day after after [sic] discussions with the CEO and the rest of the board. At the time when the money was sent Dominic and one other director could send all of the money in BHS everywhere in the world if we want. The only reason to send it to BHS Sweden was that they were still in the control of us in the board. I have copies of some of the invoices sent to me at the same time from Olswang etc etc. Anyway now they are screaming to me to send all the money back and its still more ore [sic] less £41000 at the account of BHS Sweden and part of it has gone to our accountants and advisers.”

423.

Under cover of a letter dated 24 October 2016 Mr Ring sent the Insolvency Service Mr Henningson’s answers to a number of questions which had been put to them. In paragraph 42 he dealt with the Swedish Payment (again my emphasis):

“The BHS board approved payments to a number of parties, principally professional advisors who had been working and were continuing to work to save the companies and bring in cash. There were property sales still being organised and a deal to sell approximately 50% of the stores to SDI. DC moved £1.5m to BHS Sweden of which I was one of the directors. I was asked to hold this money on the basis that it may need to be disbursed from the BHS Sweden account to make payments for the benefit of BHS companies. All BHS board directors were advised on the day of the transfer (19 April 2016) that DC acted to ensure that the BHS group was able to pay professional services in order to pursue its continuing strategy that had been agreed by the board. I was advised that funds must be used in a way consistent with the boards adopted strategy and, subsequently, I was requested by the Administrators to transfer the money back. It did so.”

K. Subsequent Events

424.

The collapse of the BHS Group was a high profile event and a number of investigations were undertaken by a number of bodies and interested parties. Where the evidence given to them or their findings are relevant to the issues which I have to decide, I have set them out in the narrative above or in my determination of the issues and I do not propose to set out a chronology of those investigations in what is already a very long recitation of the facts. For present purposes it is enough to identify some individual events which took place after the Companies went into administration. There was also no dispute that both ACE and Grovepoint were repaid in full.

(1)

The Pensions Settlement

425.

On 2 November 2016 the Pensions Regulator issued warning notices to Sir Philip Green, TIL, Taveta, RAL and Mr Chappell. They were over 300 pages long and supported by 13,000 documents (which gives me some comfort about the length of this judgment). The Pensions Regulator proposed to issue a CN for a contribution from Sir Philip Green and Taveta and to issue an FSD for financial support from TIL and Taveta. In the TPR Intervention Report the authors made it clear that the Pensions Regulator had turned down an offer in March 2016 because it lacked sufficient detail and more fundamentally because it was insufficient to ensure that the new scheme could continue on an ongoing basis with little or no supporting covenant.

426.

In October 2016 a further offer was made but it was also rejected. However, on 28 February 2017 the Pensions Regulator entered into a settlement agreement with Sir Philip Green and all relevant parties to stop the regulatory action. The authors of the TPR Intervention Report summarised its terms as follows:

“£343m has been placed in a fully independent escrow account to fund a new scheme. An additional amount of up to £20m is being held in other accounts to cover expenses and the costs of implementing the voluntary member options and the new scheme.

Existing members of the schemes now have three options: to transfer to the proposed new pension scheme, to opt for a lump sum payment if eligible and to remain in their current scheme (which is expected to eventually transfer to the PPF) The lump sum payment option will be available to members with small pots of up to £18,000 in total value. Those who choose not to take a lump sum and opt to transfer to the new scheme will be entitled to the same benefit structure as all other members. The new scheme will also be eligible for the PPF.

The starting pension (on transfer to the proposed new scheme) will be the same as with the original BHS schemes. Members under 60 who transfer to the proposed new scheme will therefore not be subject to the 10% reduction in their starting pension that applies to members in the PPF. Benefits payable in retirement and built up before April 1997 will increase at 1.8% per year. This compares to nil increases for pre-1997 benefits provided within the PPF.

Each member will be notified by the BHS schemes trustees about the options available to them. In order to support members facing potentially difficult financial decisions, we insisted on a free helpline offering members support with their options.

If the proposed new scheme structure cannot be implemented within 15 months, £343m will be transferred to the original BHS schemes. This amount is expected to be sufficient for the trustees to purchase annuities for all members at a level in excess of the PPF compensation.”

(2)

Disciplinary Action

427.

The settlement did not extend to Mr Chappell. In January 2018 Mr Chappell was convicted of an offence under section 77 of the PA 2004 for refusing to provide information required by The Pensions Regulator and on 15 January 2018, the Determinations Panel of the Pensions Regulator determined that a CN should be issued to Mr Chappell for £9,542,985.33 under section 38 of the PA 2004. In October 2019 Mr Chappell was disqualified as a director for a period of 10 years.

428.

Mr Henningson was not the subject matter of a CN or FSD by the Pensions Regulator. He was, however, the subject of disqualification proceedings brought by the Insolvency Service in relation to the Swedish Payment. Shortly before the trial Mr Henningson gave an undertaking not to act as a director for a period of five years. On 14 January 2020 the Insolvency Service gave notice of his disqualification and described the relevant conduct as follows:

“BHS 1 On 19 April 2015, one day after the potential appointment of an administrator for BHS had been discussed by the BHS board of directors, Lennart Henningson breached his fiduciary duty owed to BHS by causing a payment of £1.5m to be made from BHS to BHS Sverige AB, without the knowledge of the BHS board of directors. 1.1 On 23 March 2016 BHS had entered into a CVA and was therefore in insolvency proceedings; 1.2 On 18 April 2016, the potential appointment of an administrator for BHS was discussed at a meeting of the Arcadia Board, BHS Board and RAL Board; 1.3 On 19 April 2016, he caused a payment of £1.5m to be made from BHS to BHS Sverige AB ( BHS Sweden ) without the knowledge of the BHS Board; 1.4 At the time of the payment he was a director of BHS and also the sole director and shareholder of BHS Sweden; 1.5 The payment was made in breach of BHS’s bank mandate and with no documentation put in place to protect BHS s position; 1.6 On 19 April 2016, a co-director demanded the return of the payment of £1.5m; 1.7 Following that demand, on 22 April 2016, a sum of £1,450,310.22 was returned to BHS; 1.8 On 22 April 2016, a resolution was passed for the appointment of an administrator for BHS; 1.9 As at 25 April 2016, the date of BHS being placed into Administration, £49,689.78 was still outstanding from BHS Sweden.”

(3)

RAL: winding up

429.

On 7 September 2016 Mr Wiles and Mr Duffy issued a winding up petition against RAL based on a demand of £5,981,871.65. On 3 May 2017 Mr Registrar Briggs (as he then was) rejected RAL’s defence that it had a substantial cross-claim under the MSA and it entered into compulsory liquidation: see BHS Group Ltd v Retail Acquisitions Ltd [2017] 2 BCLC 472. He held that RAL was both cashflow insolvent and insolvent on a balance sheet basis.

(4)

Other Settlements

430.

By a settlement agreement dated 17 April 2020 and made between Sir Philip Green together with a number of other former directors and the Joint Liquidators on behalf of the Companies, Sir Philip Green agreed to pay the Joint Liquidators the sum of £8 million and in return the Joint Liquidators agreed to enter into a general release of claims against him and the other Relevant Directors and Relevant Persons (as defined). The Relevant Persons included Mr Topp because he was a member of the management team before the acquisition. Sir Philip Green negotiated the widest possible release for them presumably in order to avoid any risk of ricochet claims.

431.

By a settlement agreement dated 16 June 2023 and made between Mr Smith and the Joint Liquidators on behalf of the Companies Mr Smith agreed to pay the Joint Liquidators £3.5 million in return for a general release of claims. It follows, therefore, that the Joint Liquidators have recovered £11.5 million from former directors of the Companies (or some of them).

(5)

The S75 Debt

432.

On 7 July 2017 Mr Dolan of the PPF submitted proof of debt forms for the Main Scheme of £621 million and for the Senior Scheme of £58 million as at 2 December 2016. In support of the proof he relied on the report of the Schemes’ actuary, Mr Ben Pullen FIA of Barnet Waddingham LLP, dated 6 July 2017 in which Mr Pullen had calculated the S75 Debt at this figure. The Joint Liquidators admitted the debt to proof. But I was also referred to solicitors’ correspondence in which Olephant challenged whether the PPF was entitled to prove in the liquidation after the settlements with Sir Philip Green and Jones Day stated that the PPF was entitled to prove for the S75 Debt in full.

III. The Evidence

L. Witnesses of Fact

433.

The Joint Liquidators called Mr Martin, Mr Wright and Mr Bourne to give evidence of fact. I have described both Martin 1 and Martin 2 above. Mr Wright made a single statement dated 24 January 2023 and Mr Bourne made a single statement dated 15 August 2022 which was largely confined to proving his notes. Mr Lightman cross-examined Mr Martin and Ms Hilliard cross-examined Mr Wright and Mr Bourne. The Joint Liquidators also called Mr Sherwood under a witness summons and had served a witness summary on his behalf. Mr Curl asked a few questions in examination in chief and Mr Lightman cross-examined Mr Sherwood.

434.

Mr Chandler gave evidence in chief in Chandler 1, his second witness statement dated 3 August 2023 (“Chandler 2”) and his third witness statement dated 10 November 2023 (“Chandler 3”). Mr Lightman also called Mr Topp who made two witness statements dated 19 January 2023 (“Topp 1”) and 2 August 2023 (“Topp 2”). Mr Curl cross-examined both witnesses. Mr Henningson did not give evidence but I must nevertheless consider what weight to give to his witness statements.

(1)

Mr Martin

435.

In their written closing submissions Ms Hilliard and Mr Lightman challenged the evidence of Mr Martin. Ms Hilliard described him as uneasy and reluctant and Mr Lightman described him as unreliable. Both placed reliance on the fact that he corrected the word “inevitable” in Martin 1 and substituted the words “likely” and “highly likely”. Mr Lightman also submitted that Jones Day had placed words in his mouth when he used the word “obfuscation” and submitted that he went out of his way to criticise Mr Chandler.

436.

I reject the criticisms of Mr Martin’s evidence. He was a measured and straightforward witness and his evidence was almost entirely supported by the documentary evidence and the notes which he carefully kept at the time. Moreover, Mr Martin was fully aware of the significance of his use of the word “inevitable” but it was evidence of both his honesty and his fair-mindedness that he changed his evidence in cross-examination to assist the Respondents. Finally, as I find below, I consider that the word “obfuscation” was a fair reflection of the conduct which Mr Martin described whether or not it was a word which he ordinarily used and that he was justified in making criticisms of Mr Chandler (if that is what they were).

(2)

Mr Wright

437.

Both Ms Hilliard and Mr Lightman accepted that Mr Wright was an honest witness but submitted that it was of limited assistance to the Court. In particular, Mr Lightman submitted that it was unclear why the Joint Liquidators had called him. The answer was a simple one, namely, to answer a defence to the Wrongful Trading Claim advanced by both Mr Henningson and Mr Chandler and I found his evidence to be useful in assessing what weight to attach to the CVA. Mr Lightman submitted that he was cautious in answers and sought to avoid exposing KPMG to any criticism. I consider this fair. But I am satisfied that he was a reliable witness attempting to help the Court where he could.

(3)

Mr Bourne

438.

Both Ms Hilliard and Mr Lightman accepted that Mr Bourne was an honest and straightforward witness. I agree. This case is an unusual one because it involves a Wrongful Trading Claim against directors almost from the moment they took office. I found Mr Bourne’s evidence useful in assessing how an experienced corporate finance professional would have approached appointment and what they could have expected on Day One. I also found his notes useful and Ms Hilliard and Mr Lightman did not challenge them.

(4)

Mr Sherwood

439.

Ms Hilliard and Mr Lightman both submitted that Mr Sherwood gave honest and credible evidence and was doing his best to assist the Court. In general terms, I accept that submission although I found Mr Sherwood to be defensive and a witness who tried to downplay his own involvement in the events which I have described. Nevertheless, I accepted his evidence without qualification on the key points which I identify in section V (below).

(5)

Mr Chandler

440.

Mr Chandler was subjected to a searching cross-examination by Mr Curl over three days. It is unnecessary for me to explore his evidence in detail in this section because I analyse it in considerable detail below. My overall assessment of Mr Chandler is that he was an honest witness trying to assist the Court and willing to answer Mr Curl’s questions fully and fairly. There were occasions where he tried to reconstruct events or present the facts more positively and where he did so, I rejected his evidence in the light of the documents and other witness evidence. But they were few in number I am satisfied that he was not deliberately trying to mislead the Court.

441.

Mr Curl put a number of questions to Mr Chandler which went to credit only. In particular, he put to Mr Chandler the email which he sent to Mr Davis on 10 March 2015 and also the Atherstone plan. Mr Curl suggested that these examples showed that he deliberately preferred the interests of Mr Chappell and RAL to the interests of the Companies. I do not accept that Mr Chandler deliberately preferred RAL’s interests which would have been dishonest (or bordering on dishonesty).

442.

However, what these and other examples which Mr Curl put to him demonstrate is that Mr Chandler was heavily influenced or even manipulated by Mr Parladorio who was his principal at Manleys and responsible for his appointment to the Companies’ boards. Mr Parladorio attended most BHSGL board meetings as a “shareholder representative” and fully participated in the decision-making process. But he owed no loyalty to BHSGL or the other Companies and was clearly motivated by personal loyalty to Mr Chappell and his own personal interests.

443.

In my judgment, the clearest example of this influence or manipulation was the attempt by Mr Chandler to ratify the management fee of £600,000 in early April 2016. I have considered carefully whether Mr Chandler’s conduct and his explanation should have led me to the conclusion that he was prepared to act dishonestly to give effect to Mr Parladorio’s wishes and I have come to the conclusion that he was not dishonest although he was willing to do what Mr Parladorio asked of him.

444.

I have already dealt briefly with Mr Chandler’s evidence about the Creditors Meeting. In my judgment, the questions which Mr Curl put to Mr Chandler were not unfair. They arose out of Chandler 1 and clearly went to the accuracy of his written evidence and Mr Chandler’s credibility more generally. However, they did not go to a pleaded issue and if the Joint Liquidators had wanted to allege that Mr Chandler deliberately misled creditors in a way which would have entitled them to set aside the CVA, they ought to have pleaded this case. This was, therefore, a classic example of a collateral issue which the Court should not decide since it was heavily disputed but went to credibility alone. I make it clear, therefore, that I have attributed no weight to these questions in assessing Mr Chandler’s credibility even though I am satisfied that his answers had some relevance to the issue which the Joint Liquidators had pleaded, namely, whether KPMG and Weil were misled.

445.

Finally, Mr Chandler’s heavy reliance on Mr Parladorio can be explained by his own lack of experience. He was a criminal barrister by training and had no experience as a corporate lawyer. As Mr Curl put to him, he was clearly out of his depth. He frankly admitted that he did not know what a QFC was and whilst I accept that he would not necessarily be familiar with the finer drafting points or the relevant sections of the IA 1986, experienced corporate counsel would have understood the effect of the Arcadia Security Agreement and how it impacted on the Companies’ future ability to raise finance. I also find it extraordinary that Mr Chandler took no advice about the ABL Facility and whether its terms were acceptable until after the CVA. This can only be explained by his lack of experience.

(6)

Mr Topp

446.

Both Mr Henningson and Mr Chandler relied very heavily on the evidence of Mr Topp. Ms Hilliard and her team described his evidence as “frank and impressive” and Mr Lightman and his team described Mr Topp “uniquely placed to provide evidence” and “an extremely impressive witness”. I accept that Mr Topp was an honest, straightforward and engaging witness and I accepted his evidence. However, his evidence had significant limitations, as Mr Curl and Mr Perkins submitted. His experience was retail and he had been promoted to become CEO after the acquisition and he was not involved in any of the attempts to raise finance which give rise to the Joint Liquidators’ claims. Indeed, he admitted to having very little visibility in relation to any of them.

447.

Ms Hilliard and Mr Lightman treated Mr Topp as the litmus test of a reasonable director. But I do not accept that decisions which Mr Topp took or supported can be automatically treated as reasonable. His judgment was questionable at times and he was influenced by his relationship with Sir Philip Green. On 16 April 2015 he approved the payment to Swiss Rock after speaking to Sir Philip Green and a year later he was prepared to ratify the £600,000 payment to RAL. Moreover, I also found his support for the July 2015 Turnaround Plan over-optimistic. It was always dependent upon the group obtaining a sustainable working capital facility and BHSGL never achieved this. Finally, I have to bear in mind that Mr Topp was not a defendant but only because he was a Relevant Person under the settlement agreement with Sir Philip Green.

(7)

Mr Henningson

448.

I accept that Mr Henningson has had cancer and had a good reason for not giving evidence in these proceedings. I would be the first to accept that litigation may lose all importance in the face of serious or even terminal illness. Although Ms Hilliard did not adduce satisfactory medical evidence to show that Mr Henningson could not give evidence or could not do so remotely or with reasonable adjustments, I accept that he had a good reason not to give evidence and I do not reject his evidence for that reason.

449.

Nevertheless, I was unable to attach any weight to either Henningson 1 or Henningson 2. I was unable to do so primarily because I am satisfied that he deliberately lied about the Carlwood Payment of £300,000 which he received for introducing ACE to the purchase of North West House. But even if I had found that the did not receive that commission, I would have attached almost no weight to his witness statements. He gave a very partial and misleading account about his involvement with the BHS Group which was at odds with answers he had given in the course of the investigations after its collapse. He also omitted to deal with key events without any explanation and those omissions can only be explained on the basis that they were deliberate.

450.

In particular, Mr Henningson did not address the Swedish Payment at all in either of his witness statements. In my judgment, it is clear from the admissions which Mr Henningson made in the email dated 28 April 2016 and in Mr Ring’s letter to the Insolvency Service dated 24 October 2016 that Mr Henningson was a party to an attempt by Mr Chappell to defraud creditors of £1.5 million immediately before the BHS Group went into administration and that he was prepared to give undertakings to the Insolvency Service not to act as a director for five years to avoid disqualification.

451.

In general, however, I have not been willing to make findings of fact about Mr Henningson’s participation in events or his knowledge without clear documentary evidence to support those findings. Indeed, this is another good reason for undertaking the task in section V. On 30 May 2017 Mr Ring submitted Mr Henningson’s answers to a number of questions asked by the Insolvency Service. In his second answer Mr Henningson stated this:

“I believe that the Minutes of BHS would be the best guide to what was happening at a senior level within BHS on a regular basis. I do not have copies of the BHS minutes, but these will be available from the Administrators of BHS.”

(8)

The Minutes

452.

I agree with Mr Henningson that the best guide to the findings of fact which I have to make are the minutes of the meetings of the boards of BHSGL and the other Companies. Where those minutes are clearly intended to be a contemporaneous record I have relied upon them. Mr Chandler accepted that it was his responsibility to ensure that they were accurate and shortly after his own appointment, he appointed Ms Emma Reid as company secretary to take and keep the minutes. I have given less weight to minutes which have obviously been prepared in advance by lawyers to approve a particular transaction. I have also given much less weight to language or statements which were drafted by Olswang and repeated at every meeting.

453.

There are only three occasions on which I have rejected what is recorded in the minutes as an accurate record. The first occasion is the 17 April Board Meeting where it is common ground that Mr Turner of Olswang added wording to the minutes after the meeting. But in the event I am not satisfied that this made any difference. The second occasion is 8 May 2015 when the minutes were clearly false and intended by Mr Chappell to lay a false paper trail for third parties. The third occasion is 1 September 2015 where I am not satisfied that there was any consideration of the interests of creditors. The minutes use the same formula which Mr Turner introduced in April 2015 but contain no discussion of the interests of creditors at all. Moreover, neither Mr Chandler nor Mr Henningson placed any reliance on those minutes at all.

M. Expert Witnesses

(1)

Accountancy Evidence

454.

The Joint Liquidators called Mr Mark Shaw, a partner and head of business restructuring at BDO LLP, to give expert accountancy evidence and Mr Henningson and Mr Chandler called Mr Michael Pilgrem, a senior managing director in FTI Consulting’s economic and financial consulting practice. Both were chartered accountants by professional qualification and both were very experienced practitioners and expert witnesses. The only professional difference between them was that Mr Shaw was an insolvency practitioner and Mr Pilgrem’s expertise was primarily the valuation of companies. Ms Hilliard cross-examined Mr Shaw and Mr Perkins cross-examined Mr Pilgrem.

455.

The critical issue to which the accountancy expert evidence was relevant was the IND. It is a testament to their independence and expertise that Mr Shaw and Mr Pilgrem were able to agree the relevant figures. Their evidence on other issues was less important and Mr Lightman and his team rightly accepted that the determination of the Wrongful Trading Claim did not depend on the expert evidence:

“30.

It is important to keep in mind the assistance that can – and cannot – properly be derived from the expert accountancy evidence in this case. As Mr Pilgrem rightly acknowledged, neither accountancy expert can answer the question that the Court must answer in order to decide the Wrongful Trading Claims, namely: whether the Notional Director knew or ought he to have concluded at any of the Knowledge Dates that insolvent liquidation of the Companies was inevitable.

31.

As regards the Wrongful Trading Claims, the accountancy expert evidence can assist the Court in understanding the relevant financial information that was available to the directors at the time and how it was presented to them. But that is as far as it goes. The Court must ultimately view the relevant question through the lens of what the Notional Director knew or ought to have known and, as is explained more fully below, the Notional Director as regards the claims against Mr Chandler in this case is not an accountant, let alone a licensed insolvency practitioner.”

456.

I agree. I found the expert accountancy evidence most useful as background reading and then as providing the answers to very detailed financial questions which I had. The only issue on which I found it necessary to decide between the evidence of the experts was on the question whether the Companies were insolvent at each of the Knowledge Dates. However, even this was not an ingredient of the cause of action for wrongful trading and only a cross-check against the findings on the facts which I had to make. The other key issue on which I accepted Mr Shaw’s evidence was in relation to the “degenerative effect” of the facilities which the BHS Group accepted to continue trading. I accepted his evidence and adopted his language. But this seemed to me to be largely a matter of common sense and Mr Pilgrem accepted this when it was put to him.

457.

Nevertheless, Mr Lightman and his team sought to argue that Mr Shaw’s evidence was unhelpful and Ms Hilliard and her team embarked on a sustained attack on his evidence to demonstrate that he was an unreliable witness and had gone well beyond the remit of an expert. I found these criticisms unjustified and unrealistic. I make it clear that I found Mr Shaw to be reasonable, fair-minded and independent witness who was doing his best to assist the Court in what was a difficult exercise for an expert. He was subjected to a very detailed cross-examination and he answered Ms Hilliard’s questions both carefully and thoughtfully and made concessions where he considered it necessary to do so.

(2)

Pensions Evidence

458.

The Joint Liquidators called Mr Bob Scott FIA, the senior partner of Lane Clark & Peacock LLP, to give evidence on the pensions issue. Mr Henningson and Mr Chandler called Mr Gary Squires, a senior adviser in Cardano Advisory Ltd’s pensions restructuring and litigation support practices and put in evidence a report by Mr Martin Potter, a scheme actuary and owning partner at Hymans Robertson LLP. Mr Lightman cross-examined Mr Scott and Mr Curl cross-examined Mr Squires. Both were experienced expert witnesses and the professional difference between them was that Mr Scott was a scheme actuary and able to calculate the pension deficit on various assumptions.

459.

Again, the principal issue for the pensions expert was the amount of the pensions deficit on each of the Knowledge Dates and since they fed this figure into the IND figures calculated by the accountancy experts and since those figures were finally agreed, their other evidence was of very limited value. Indeed, I found it unnecessary to rely on their expert evidence in relation to any of the other issues which I had to decide. This was largely because both Mr Martin and Mr Shaw accepted that it was highly unlikely that the Trustees would ever have issued a winding up petition or attempted to put the sponsoring employer into administration or liquidation.

(3)

Property Evidence

460.

The Joint Liquidators put in evidence two reports by Ms Victoria Seal MRICS, a chartered surveyor and senior director of BNP Paribas Real Estate. Mr Henningson and Mr Chandler put in evidence reports by Mr Andrew White MRICS and Mr Gerard Finn FRICS, both chartered surveyors, and Mr Henningson also put in evidence a report by Mr Nick Powell MRICS FCIArb. In the event, the Joint Liquidators did not call Ms Seal to give evidence about the value of Darlington and Ms Seal and Mr Powell agreed that the value of North West House on Day One was £40.5 million shortly before Ms Seal was due to give evidence.

IV. The Law

N. Wrongful Trading

461.

Section 275 of the Companies Act 1929 introduced the concept of fraudulent trading and it created both a power to grant a civil remedy and a criminal offence. Section 332 of the Companies Act 1948 re-enacted that provision and it remained in force until the law was reconsidered by the Review Committee on Insolvency Law and Practice (which included not only Sir Kenneth Cork but also Peter Millett QC and Muir Hunter QC). In their final report (1982 Cmnd. 8558) known as the “Cork Report” the committee recommended that the law be reformed as a matter of urgent necessity. They stated at §1776 to §1779 and §1805:

“1776.

Section 332 not only creates a civil and personal liability, it also creates a criminal offence. The constituent elements of the two are identical. As a result the Courts have consistently refused to entertain a claim to civil liability in the absence of dishonesty and, moreover, have insisted upon a strict standard of proof. It is the general experience of those concerned with the administration of the affairs of insolvent companies that the difficulty of establishing dishonesty has deterred the issue of proceedings in many cases where a strong case has existed for recovering compensation from the directors or others involved.

1777.

It is right that it should be an offence to carry on a business dishonestly; and right that, in the absence of dishonesty, no offence should be committed. Where, however, what is in question is not the punishment of an offender, but the provision of a civil remedy for those who have suffered financial loss, a requirement that dishonesty be proved is inappropriate. Compensation ought in our view to be available to those who suffer foreseeable loss as a result, not only of fraudulent, but also of unreasonable behaviour.

1178.

Accordingly, we recommend the whole of section 332 should be repealed so far as it provides a civil remedy, and that it should be replaced by an entirely new section under which civil personal liability can arise:

(a)

without proof of fraud or dishonesty; and

(b)

without requiring the criminal standard of proof.

1779.

We recommend that the phrase ‘fraudulent trading’ should in future be reserved for trading which is of such a nature that it constitutes an offence under what is left of section 332, while the kind of trading which may give rise to personal liability under the new section should be called ‘wrongful trading’.”

“1805.

A balance has to be struck. No one wishes to discourage the inception and growth of businesses, although both are unavoidably attended by risks to creditors. Equally a climate should exist in which downright irresponsibility is discouraged and in which those who abuse the privilege of limited liability can be made personally liable for the consequences of their conduct.”

462.

Section 15 of the Insolvency Act 1985 introduced the civil remedy of wrongful trading for the first time. It was almost immediately repealed and replaced by section 214 of the IA 1986 which came into force on 29 December 1986. Section 214 (“S.214”) now provides as follows:

214.— Wrongful trading.

(1)

Subject to subsection (3) below, if in the course of the winding up of a company it appears that subsection (2) of this section applies in relation to a person who is or has been a director of the company, the court, on the application of the liquidator, may declare that that person is to be liable to make such contribution (if any) to the company's assets as the court thinks proper.

(2)

This subsection applies in relation to a person if— (a) the company has gone into insolvent liquidation, (b) at some time before the commencement of the winding up of the company, that person knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation or entering insolvent administration, and (c) that person was a director of the company at that time; but the court shall not make a declaration under this section in any case where the time mentioned in paragraph (b) above was before 28th April 1986.

(3)

The court shall not make a declaration under this section with respect to any person if it is satisfied that after the condition specified in subsection (2)(b) was first satisfied in relation to him that person took every step with a view to minimising the potential loss to the company's creditors as (on the assumption that he had knowledge of the matter mentioned in subsection (2)(b)) he ought to have taken.

(4)

For the purposes of subsections (2) and (3), the facts which a director of a company ought to know or ascertain, the conclusions which he ought to reach and the steps which he ought to take are those which would be known or ascertained, or reached or taken, by a reasonably diligent person having both— (a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by that director in relation to the company, and (b) the general knowledge, skill and experience that that director has.

(5)

The reference in subsection (4) to the functions carried out in relation to a company by a director of the company includes any functions which he does not carry out but which have been entrusted to him.

(6)

For the purposes of this section a company goes into insolvent liquidation if it goes into liquidation at a time when its assets are insufficient for the payment of its debts and other liabilities and the expenses of the winding up.

(6A) For the purposes of this section a company enters insolvent administration if it enters administration at a time when its assets are insufficient for the payment of its debts and other liabilities and the expenses of the administration.”

463.

The Joint Liquidators had to satisfy three conditions before the Court’s discretion under S.214(1) was engaged: first, they had to establish that the Companies had gone into insolvent liquidation. Secondly, they had to establish that Mr Chandler and Mr Henningson were directors at the time when the third condition is satisfied. Thirdly, they had to establish that at some time before the commencement of the winding up, Mr Chandler or Mr Henningson “knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation or entering insolvent administration”. I follow Edwin Johnson J in Chandler v Wright and refer to this third condition as the “Knowledge Condition”. I have already defined the relevant date at which the condition must be satisfied as the “Knowledge Date”.

464.

In Chandler v Wright Edwin Johnson J also adopted the analysis of His Honour Judge Jack QC (as he then was) in Re Sherborne Associates Ltd [1995] BCC 40. He had to decide whether a wrongful trading claim survived the death of the director and also whether the normal rules of pleading applied. In answering these questions he described a wrongful trading claim as a cause of action in the traditional sense. He said this at 46B-F:

“I will however for completeness consider whether a liquidator may have a cause of action under s. 214 within the meaning of s. 1(1) of the 1934 Act. A cause of action is traditionally defined as a set of facts which give rise to a right of action: thus 'every fact that it would be necessary for the plaintiff to prove, if traversed, in order to support his right to the judgment of the court' - per Lord Esher in Read v Brown (1888) 22 QBD 128. This definition was provided in the course of considering where a cause of action arose. In Sugden v Sugden Denning LJ distinguished rights which can be enforced and mere hopes or contingencies. He accepted that a party may have a cause of action even though the remedy is discretionary.

Section 214 provides in effect that if a liquidator can establish a factual situation he may request the court to declare that the director should make a contribution to the company's assets, the amount of which is in the court's discretion. Here the factual situation which the liquidator seeks to establish in respect of each respondent director is that he should have concluded that there was no reasonable prospect that Sherborne would avoid going into insolvent liquidation. I accept that the line may be difficult to define but in my view this right plainly amounts to a cause of action. The position is that the liquidator has to establish a factual situation defined by the Act and he may then ask the court to exercise its discretion in his favour. That discretion will be exercised in accordance with the principles which are being established by the decided cases in so far as they are peculiar to this new section. The position is not very far removed from that where a plaintiff asked the court to grant him an equitable remedy. The family law cases lie on the other side of the line in that there are no facts to be proved, no factual situation to be established, defined by the law beyond the status of husband, wife or child, before the applicant can ask for relief.”

465.

The Joint Liquidators could satisfy the Knowledge Condition by proving that Mr Chandler or Mr Henningson had actual knowledge in the sense that they subjectively concluded that the Companies had no real prospect of avoiding insolvent liquidation or insolvent administration. But they could also satisfy the Knowledge Element by showing that one or both of them should have concluded that this was the case after an objective evaluation of the facts which they knew or the information which was provided to them at each Knowledge Date.

466.

In deciding whether Mr Chandler or Mr Henningson should have known that the Companies had no real prospect of avoiding insolvent liquidation or administration, S.214(4)(a) requires the Court to apply the standard of a reasonably diligent person having both the general knowledge, skill and experience reasonably expected of a person carrying out the same functions but also the general knowledge, skill and experience of Mr Chandler and Mr Henningson themselves. In his oral submissions in opening Mr Lightman described this standard as the “Notional Director” test and I adopt that expression as shorthand for the statutory test. I begin with some general propositions which were not in dispute:

(1)

The Notional Director test is to be applied to each individual director and not to the board of directors as a whole: see Re Continental Assurance plc [2007] 2 BCLC 287 (above) at [385] to [386] (Park J). I must, therefore, consider the individual allegations against Mr Chandler and Mr Henningson separately by reference to their own knowledge and against the different functions which they carried out.

(2)

The Court’s enquiry into the functions performed by each director will go beyond the mere consideration of his title and will “examine the substance of what they actually do or did”: see Re Langreen Ltd (in liquidation) (Registrar Derrett, unreported, 21 October 2011) at [92]. In that case the registrar found that two non-executive directors soon stepped over the line and became executive directors and should be judged by that standard.

(3)

The standard to be expected of the Notional Director will also depend on the size and sophistication of the company. In Re Produce Marketing Consortium Ltd [1990] BCC 569 Knox J stated this principle at 594G-595A:

“Two steps in particular were taken in the legislative enlargement of the court's jurisdiction. First, the requirement for an intent to defraud and fraudulent purpose was not retained as an essential, and with it goes the need for what Maugham J called "actual dishonesty involving real moral blame". I pause here to observe that at no stage before me has it been suggested that either Mr. David or Mr. Murphy fell into this category. The second enlargement is that the test to be applied by the court has become one under which the director in question is to be judged by the standards of what can be expected of a person fulfilling his functions, and showing reasonable diligence in doing so. I accept Mr. Teverson's submission in this connection, that the requirement to have regard to the functions to be carried out by the director in question, in relation to the company in question, involves having regard to the particular company and its business. It follows that the general knowledge, skill and experience postulated will be much less extensive in a small company in a modest way of business, with simple accounting procedures and equipment than it will be in a large company with sophisticated procedures.”

(4)

Further, in determining what a director ought to have known, the Court is not limited to consideration of the material available to the director during the relevant period but its consideration may extend to material to which the director could with reasonable diligence have access. In Re Produce Marketing Consortium Ltd (above) Knox J stated this principle at 595D-E:

“The knowledge to be imputed in testing whether or not directors knew or ought to have concluded that there was no reasonable prospect of the company avoiding insolvent liquidation is not limited to the documentary material actually available at the given time. This appears from sec. 214(4) which includes a reference to facts which a director of a company ought not only to know but those which he ought to ascertain, a word which does not appear in sec. 214(2)(b). In my judgment this indicates that there is to be included by way of factual information not only what was actually there but what, given reasonable diligence and an appropriate level of general knowledge, skill and experience, was ascertainable. This leads me to the conclusion in this case that I should assume, for the purposes of applying the test in sec. 214(2), that the financial results for the year ending 30 September 1985 were known at the end of July 1986 at least to the extent of the size of the deficiency of assets over liabilities.”

(5)

Likewise, a director is expected to obtain sufficient financial information to monitor the company’s solvency. In Re Nine Miles Down UK Ltd [2010] BCC 674 Kitchin J (as he then was) identified this as a component of the Knowledge Condition:

“Thirdly, the requirement of subs.(2)(b) is satisfied if the applicant establishes that, as of that date, the director knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation. As for the latter, a director is expected to have provided himself with adequate accounting information to monitor the solvency of the company, and the standard to be applied in considering what conclusion a director should have drawn is that of a reasonably prudent businessman acting without unwarranted optimism and on a realistic factual basis.”

(6)

A director is not liable simply for permitting a company to continue to trade at a time when they know that the company is insolvent either on the balance sheet test or the cashflow test. In Re Hawkes Hill Publishing Co Ltd [2007] BCC 937 Lewison J (as he then was) stated this at [28]:

“It is important at the outset to be clear about the relevant question. The question is not whether the directors knew or ought to have known that the company was insolvent. The question is whether they knew or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation. As Chadwick J. pointed out in Re C S Holidays Ltd; Secretary of State for Trade and Industry v Gash [1997] BCC 172; [1997] 1 WLR 407 (at p.178; 414): “The companies legislation does not impose on directors a statutory duty to ensure that their company does not trade while insolvent; nor does that legislation impose an obligation to ensure that the company does not trade at a loss. Those propositions need only to be stated to be recognised as self-evident. Directors may properly take the view that it is in the interests of the company and of its creditors that, although insolvent, the company should continue to trade out of its difficulties. They may properly take the view that it is in the interests of the company and its creditors that some loss-making trade should be accepted in anticipation of future profitability. They are not to be criticised if they give effect to such view.”

(7)

The principle that directors may properly take the view that the company should continue to trade at a loss has been accepted many times. Where, for instance, the directors properly take the view that they can trade out of difficulty or overcome the company’s cashflow deficiency, they are not liable for wrongful trading. In Re Ralls Builders Ltd (in liquidation) [2016] EWHC 243 (Ch) Snowden J (as he then was) had this to say at [168]:

“As an initial observation, it is important to note that the fact that a company is insolvent (on a balance sheet or cash-flow basis) and carries on trading does not mean that a director (even one with knowledge of that fact) will be liable for wrongful trading if the company fails to survive. Many companies show a balance-sheet deficit from time to time, but nevertheless have every real prospect of trading out of that position or otherwise recovering from the deficiency and thereby avoiding an insolvent liquidation: see e.g. BNY Corporate Trustee Services Ltd v Eurosail-UK [2013] Bus LR 715. Likewise, trading companies often suffer cashflow difficulties and fail to pay their creditors on time, but are able to overcome that cash-flow insolvency by (for example) selling an asset or raising external finance on the security of their assets.”

(8)

The decision to put a company into liquidation is a difficult one and the Court should be slow to encourage directors to put a company into liquidation or administration at the first sign of trouble. Park J described the dilemma which directors often face in Re Continental (above) at [281]:

“An overall point which needs to be kept in mind throughout is that, whenever a company is in financial trouble and the directors have a difficult decision to make whether to close down and go into liquidation, or whether instead to trade on and hope to turn the corner, they can be in a real and unenviable dilemma. On the one hand, if they decide to trade on but things do not work out and the company, later rather than sooner, goes into liquidation, they may find themselves in the situation of the respondents in this case – being sued for wrongful trading. On the other hand, if the directors decide to close down immediately and cause the company to go into an early liquidation, although they are not at risk of being sued for wrongful trading, they are at risk of being criticised on other grounds. A decision to close down will almost certainly mean that the ensuing liquidation will be an insolvent one. Apart from anything else liquidations are expensive operations, and in addition debtors are commonly obstructive about paying their debts to a company which is in liquidation. Many creditors of the company from a time before the liquidation are likely to find that their debts do not get paid in full. They will complain bitterly that the directors shut down too soon; they will say that the directors ought to have had more courage and kept going. If they had done, so the complaining creditors will say, the company probably would have survived and all of its debts would have been paid. Ceasing to trade and liquidating too soon can be stigmatised as the cowards’ way out.”

(9)

For this reason (if no other) the Court should be very careful to avoid hindsight in scrutinising directors’ decisions. Lewison J counselled against hindsight in Re Hawkes Hill at [41] and [47]:

“41.

However, there is a crucial stage in the analysis that is missing. Accepting as I do that the directors ought to have known that the company was insolvent, it still leaves open the question: did they know (or ought they to have concluded) that there was no reasonable prospect that the company would avoid an insolvent liquidation? The answer to this question does not depend on a snapshot of the company’s financial position at any given time; it depends on rational expectations of what the future might hold. But directors are not clairvoyant and the fact that they fail to see what eventually comes to pass does not mean that they are guilty of wrongful trading…47. Of course, it is easy with hindsight to conclude that mistakes were made. An insolvent liquidation will almost always result from one or more mistakes. But picking over the bones of a dead company in a courtroom is not always fair to those who struggled to keep going in the reasonable (but ultimately misplaced) hope that things would get better.”

(10)

Nevertheless, if directors appreciate that the company is insolvent but reach the conclusion that they can trade out of insolvency, there must be a rational basis for that conclusion. For example, in Re Kudos Business Solutions Ltd [2012] 2 BCLC 65, Ms Sarah Asplin QC (as she then was), sitting as a Deputy Judge of the High Court, held that a director was liable for wrongful trading on the following basis:

“[60] As Lewison J pointed out in the Hawkes Hill Publishing Co case [2007] All ER (D) 422 (May), the real question is whether Mr Stevenson knew or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation. In my judgment as a result of the matters referred to above, he ought to have known that there was no prospect. This is not a case of a director properly taking the view that it was in the interests of the company and its creditors that it should be allowed to trade out of its difficulties. Given the level of the pre-payments by DX creditors in comparison with the company’s turnover and profit from other sources and the level of payments made to Mr Ramsden, Mr Stevenson and Mr Darcy, the only way in which insolvency was likely to be avoided was if there were a real prospect that the DX contracts would be fulfilled, something which I have found not to be the case.

[61] As Lewison J put it the answer to the question of whether a director knew (or ought to have concluded) that there was no reasonable prospect that the company would avoid an insolvent liquidation depends on rational expectations of what the future might hold. Directors are not required to be clairvoyant. In this case, the way in which Mr Stevenson put it was that the company would not have been insolvent if Mr Ramsden had returned. However, given the state of the company’s finances of which he ought to have been aware, the fact that I am unable to accept his evidence that he understood the DX contracts to be otherwise than with the company and my finding that there was nothing upon which Mr Stevenson could properly have based a belief that arrangements had been entered into in order to fulfil the DX contracts at the outset, in my judgment, the rational expectation on 17 March 2006 could not have been other than that there was no reasonable prospect of avoiding insolvent liquidation.”

(11)

Likewise, there must be something more than blind optimism or micawberism (meaning the unfounded and naïve belief that something will turn up in the future to conquer financial adversity) for a director to justify the company continuing to trade whilst insolvent. In Roberts v Frohlich [2011] 2 BCLC 625 Norris J found two directors liable for wrong trading. He described their state of mind at [112]:

“What drove Mr Frohlich and Mr Spanner at this stage was wilfully blind optimism; the reckless belief that, provided they did not inquire too deeply into the figures, provided ODL did not let on to FCL that there was no funding and did not let on to HBoS that there was no fixed price contract, then something might turn up (if only because FCL and HBoS could be sucked into the development to such a degree that, in order to salvage something, they would crack under pressure and would ‘share the pain’). But the hope that ‘something might turn up’ was on any objective view groundless and forlorn. Insolvent liquidation was all but inevitable.”

467.

A number of the authorities also provide guidance as to how the Court should approach the Knowledge Condition in factual circumstances which resemble the present case. In Re Ralls Builders Ltd (above) Snowden J found that the directors knew the company was insolvent by July 2010 and also the scale of the insolvency. He also found that at no relevant time after that date was there any basis for believing that the company had a realistic prospect of trading out of insolvency. He decided, therefore, that the real issue was whether there was a real prospect of completing a deal with a new investor. After a detailed analysis of the evidence, he concluded that it should have been obvious by the end of August 2010 that there was no longer any reasonable prospect of the investor providing the necessary funds. He set out his conclusion at [216]:

“I caution myself against the application of hindsight, and remind myself that I should not too readily criticise the directors’ contemporaneous actions from the comfort of a courtroom. None the less the lack of any progress with Mr James and his repeated failures to produce the moneys that he indicated would be available during August ought in my judgment to have led the directors to conclude by the end of August 2010 that there was no longer any reasonable prospect of Mr James providing the necessary funding in time to save the company. Although Nicholas Ralls’s evidence was that he was still being assured by Mr James that he was going to make an investment, and it seems that the directors still had some faith in Mr James, I think that this can only have been based on hope and optimism. By the end of August 2010 I do not think there was any longer a rational basis upon which to expect that he would provide the necessary money that the company urgently needed. In my view, a realistic assessment at the end of August 2010 should have led the directors to conclude that Mr James could not be relied upon, and that there was no reasonable prospect of the company avoiding an insolvent liquidation.”

468.

In Rubin v Gunner [2004] BCC 684 the fact pattern was similar. Etherton J (as he then was) held that although the company was insolvent by April 1998 the directors had a reasonable belief that a third party would provide sufficient funding to enable it to avoid going into insolvent liquidation before October 1998. However, he also held that by 15 October 1998 they should have concluded that there was no reasonable prospect of avoiding insolvent liquidation. He summarised his reasons at [101]:

“The evidence shows that letters were written on October 27, 1998, by Mr Stables to Mr Scrope concerning the BIL facility and the discounting of the bonds, but, on the respondents’ own evidence, these were no longer relied upon by the respondents as a likely source for saving RGO from insolvency. In any event, I conclude, on the basis of the facts and matters I have set out, that, by October 15, 1998, at the latest, neither the sale of Mr Stables’ interest in ICC, nor raising of funds from the value of the bonds, nor the issue of the letters of credit, nor the payment of funds by FKF could have provided any reasonable basis for the respondents to conclude that RGO would avoid going into insolvent liquidation. That date was a month after the letters of September 15, 1998, written by Mr Kuhns and Mr Zecchin respectively, over seven weeks after BIL’s letter of August 25, 1998, and over five weeks since Mr Stables wrote to Mr Scrope on September 7, 1998, giving details of the bonds. The failure of all those matters to come about ought, in the mind of any reasonable director in the position of the respondents, to have out-weighed whatever benefit of the doubt they had previously given Mr Stables by virtue of the funds he had provided for RGO and the production of the film, his charming and persuasive manner, and the desire that Mr Stables could be expected to have to save RGO in view of his substantial investment in it.”

(1)

“No reasonable prospect that the company would avoid going into insolvent liquidation or entering insolvent administration”

469.

The first significant issue between the parties was how the Court should interpret and apply the Knowledge Condition and the extent to which the Court should interpret S.214(2)(b) in the light of the decision of the Supreme Court in BTI 2014 LLC v Sequana [2024] AC 211. I will have to consider that decision in greater detail in the context of the Misfeasance Claims. But all of the members of the Supreme Court considered the creditor duty against the backdrop that Parliament had granted a specific statutory power to order a director to contribute to a company’s deficiency on insolvency.

470.

Lord Reed PSC expressly considered how the modified duty to promote the success of the company (below) interacted with S.214 at [92] to [99] and identified a number of differences between the two before concluding that they were not incompatible. In relation to the point in time at which the relevant duties arise, he stated this at [94]:

“First, the points in time at which the relevant duties arise differ considerably. The fiduciary duty applies at all times, but if it is modified by the rule in West Mercia from the point when the company is bordering on insolvency or an insolvent liquidation or administration is probable, as I have suggested, it therefore applies in that modified way before the time when section 214 might become relevant, ie when a reasonably diligent and competent director would know that there was no reasonable prospect of avoiding insolvency proceedings.”

471.

Lord Briggs JSC (with whom Lord Kitchin agreed) used the word “inevitable” on a number of occasions to describe the point in time at which S.214 is engaged: see [148], [165], [172] and [176]. He also contrasted the modified duty arising under the rule in West Mercia Safetywear Ltd v Dodds [1988] BCLC 250 and S.214 at [174]:

“If the fact of insolvency always and immediately rendered the interests of creditors paramount, then directors would be likely to decide, or to be advised for their own protection, to cause the company immediately to cease trading, because that course would usually minimise the risk of further loss to creditors, whereas continued trading with a view to a return to solvency might increase that risk. It would in my view be wrong for the common law to impose that fetter on the directors’ business judgment. Section 214 is framed in terms which point to a very different parliamentary intention, because it permits directors to cause a company to continue to trade whilst insolvent, for as long as they reasonably discern light at the end of the tunnel.”

472.

Lord Hodge DPSC used the expressions “near the onset of insolvency” and “irretrievably insolvent” at [231]. Lady Arden also used the expression “irretrievably insolvent” in the following passage at [321] to [323]:

“321.

Section 214 is finely calibrated. Section 214 does not impose any obligation in relation to creditors until the company's liquidation is inevitable. By implication, it rejects the idea that a liability as Draconian as that found in section 214 can be fixed at any earlier date. Section 214 therefore gives the directors the necessary space to continue running the business if that is appropriate to enable them to pursue the possibilities of a rescue. Furthermore, there is a defence for directors who can show they took all reasonable steps to prevent any loss to creditors.

322.

Section 214 of the 1986 Act is very important in practice because directors are not liable for wrongful trading if having acted with due care they do not know of the threat to the company's insolvency or, where they know or have reason to believe that the company is threatened with insolvency, they have reasonable grounds for believing that the company will overcome its difficulties.

323.

Section 214 provides that when a company becomes irretrievably insolvent the court may make the directors liable for the losses to creditors unless the directors, from the time they should have known that to be the position, took “every step with a view to minimising the potential loss to company's creditors” that they ought to have taken. Under this duty the directors know precisely when they incur liability and what they must do to avoid it. The steps which they must take may involve a corporate rescue or restructuring or an injection of equity funding ranking behind creditors, or both. The liability can only be enforced in administration or liquidation, but directors will know prior to that event that they may be liable under section 214 if the company does go into liquidation or administration. (When l refer to liquidation in this judgment in the context of wrongful trading, it should be read as including administration unless otherwise stated.)”

473.

Mr Curl submitted that S.214(2)(b) was clear and that I should apply it without adding a gloss to it or reformulating the test so that a director is not liable for wrongful trading unless he or she knew or ought to have known that the company was irretrievably insolvent or that insolvency was inevitable. I agree that the Court must apply the statutory test and not substitute its own form of words. But in the light of Sequana I am satisfied that the bar is a very high one and that the Joint Liquidators have to demonstrate that Mr Henningson and Mr Chandler knew or ought to have known that insolvent liquidation or administration was inevitable. I also add the following comments:

(1)

S.214(3) is framed in negative terms and, in my judgment, this is no accident. Where a company is cashflow or balance sheet insolvent, the usual question for the Court is whether the directors honestly and reasonably believed that there was a prospect that they could trade out of insolvency and, given time, avoid liquidation or administration altogether.

(2)

The critical question, therefore, is whether there was “light at the end of the tunnel” to use Lord Briggs’ expression. As the authorities emphasise, directors are not liable for wrongful trading because the company was insolvent but only if they either knew or ought to have known that insolvent liquidation or administration could not be avoided and was now inevitable.

(3)

Nevertheless, the Court must be satisfied that the prospect of trading out of insolvency and avoiding liquidation or administration was more than fanciful and a reasonable one. Again, this explains why the authorities emphasise that the directors’ belief that they could trade out of insolvency must have been a rational one and that blind optimism or micawberism is not sufficient to defeat liability.

(4)

S.214 must be applied as a whole. The effect of the section is not to impose an immediate liability on the directors for wrongful trading but a duty to take every step with a view to minimising the potential loss to the company’s creditors: see S.214(3). Lord Hodge articulated this most clearly at [231]:

“Further, it appears to me that in order to make sense of the power of the court to impose personal liability for wrongful trading in section 214 it is implicit that there is a point in time at or near the onset of insolvency at which directors are required to consider and in certain circumstances give priority to the interests of the company's creditors when they are in conflict with the interests of the company's shareholders. It is consistent with section 214 that where directors know or ought to know that the company has become irretrievably insolvent, they come under a duty to the company to give priority to the interests of its creditors as a body.”

(5)

It is important to approach the formulations in Sequana in this context. The members of the Supreme Court were comparing and contrasting a director’s modified duty to promote the success of the company with S.214 and considering in general terms when S.214 is engaged. It is engaged when the directors have no rational basis for continuing to trade and they are only liable for continuing to trade if at that point they fail to take steps to minimise the loss to creditors.

(2)

“At some time before the commencement of the winding up of the company”

474.

A second and closely related issue is whether the Court could properly find that Mr Henningson and Mr Chandler were guilty of wrongful trading if the Knowledge Date was months or even years before the onset of liquidation. Mr Lightman and Ms Hilliard submitted that the Court had to be satisfied that at each Knowledge Date Mr Chandler or Mr Henningson knew or ought to have known that the Companies could not avoid going into liquidation or administration either by a specified date or within a very short period of time. They also submitted that it was not enough to find that they must have known that the Companies would go into liquidation or administration at some vague point in the future.

475.

I do not accept that submission as a matter of law. S.214 does not impose a time limit or limitation period and for obvious reasons. Each case will depend on its own facts. It is fair to say that Lord Hodge used the expression “near the onset of insolvency” in Sequana. But it would create a real difficulty if the Court laid down a time limit or bracket even as a rule of thumb. In Sequana in the Court of Appeal David Richards LJ (as he then was) described the difficulty with a temporal test in discussing the modified duty. He stated this ([2019] Bus LR 2178 at [218] and [219]):

“The precise moment at which a company becomes insolvent is often difficult to pinpoint. Insolvency may occur suddenly but equally the descent into insolvency may be more gradual. The qualified way in which judges have expressed the trigger (and I am among them; see Burnden Holdings (UK) Ltd v Fielding [2016] EWCA Civ 557, [2017] 1 WLR 39 at [18]) reflects that the directors may often not know, nor be expected to know, that the company is actually insolvent until sometime after it has occurred. For this reason, among others, a test falling short of established insolvency is justified. I consider there to be a problem with formulations in the second category, such as being on the verge of insolvency, because they suggest a temporal test. If the test is that insolvency is "imminent", or if similar words are used, it suggests that actual insolvency will be established within a very short time. That may well describe many situations in which the duty is triggered, but it does not or may not cover the situation where, although the company may be able to pay its debts as they fall due for some time, perhaps a considerable time, to come, insolvency is nonetheless likely to occur and decisions taken now may prejudice creditors when the likely insolvency occurs.

476.

In the present case, it is common ground that the BHS Group was trading at a loss between Day One and 25 April 2016 and that there was a very large IND at each one of the Knowledge Dates. Moreover, the principal reason why the BHS Group was able to trade over that period was that it had the Dowry and property assets which it was able to realise. If the Court were satisfied that Mr Chandler and Mr Henningson fully appreciated that the Companies would enter insolvent administration once they had sold Oxford Street and the rest of their property portfolio but that they might keep going for a year or so in the meantime, I see no reason why they should escape liability for wrongful trading on the basis that they were unable to predict precisely when they would have to put the Companies into administration or wind them up.

477.

On the other hand, the lapse of time between the Knowledge Dates and the decision to put the Companies into administration is an important evidential factor which the Court must weigh in the balance. It was an important part of the rationale for the sale to RAL that the Dowry, the release of debt and the property assets would give BHSGL breathing space to achieve a separation from Arcadia and turnaround the business. The BHSGL board expected to trade at a loss and to sustain the Companies by selling property assets for the short to medium term. The Joint Liquidators have to demonstrate, therefore, that at a very early or relatively early stage in this process Mr Chandler and Mr Henningson knew or ought to have known there was no light at the end of a very long tunnel which lasted over a year.

(3)

The Notional Director

478.

Mr Curl and Mr Perkins submitted that S.214(4)(a) imposes a minimum objective standard and not a subjective one and that if the general knowledge, skill and experience of the individual directors are inadequate for the task which they undertook, that is not sufficient to protect them: see Re DKG Contractors Ltd [1990] BCC 904 at 912B-C (Mr John Weeks QC). Mr Lightman accepted that S.214(4) imposed a “twofold objective standard” but he submitted that: “the director’s actual abilities at the relevant time are assessed and then grafted on to the reasonably diligent person carrying out the same functions”.

479.

I am not certain that there was any real difference between the parties. But at various stages in his oral submissions Mr Lightman suggested that this was a subjective test or had a significant subjective element which turned on the skill and experience of the individual director. In case there is any doubt, I accept Mr Curl’s submission on this point. In my judgment, S.214(4)(a) imposes a minimum objective standard of the general knowledge, skill and experience reasonably expected of a person carrying out Mr Chandler and Mr Henningson’s functions. If the general knowledge, skill and experience of a director is higher than that of a reasonably diligent person, then they should be held to the higher standard. But if the general knowledge, skill and experience of a director is lower than that of the reasonably diligent person discharging the same functions, then it is no defence that they did not have that knowledge, skill or experience. This issue is of particular relevance to the Wrongful Trading Claim against Mr Chandler.

(4)

Delegation

480.

It is trite law that the duties and responsibilities of a director are personal and that a director cannot delegate them to a fellow director or a non-board employee. However, the board of directors may delegate management functions to each other or to employees who are not also directors: see Re City Equitable Fire Insurance Co Ltd 1925] Ch 407 at 426-7. In Re Westmid Packing Services Ltd (No 3) [1998] BCC 836 Lord Woolf drew a distinction between “a proper degree of delegation and division of responsibility” (which is permitted) and “a total abrogation of responsibility” (which is not). Examples of total abrogation of responsibility often involve total inactivity: see Re Park House Properties Ltd [1997] 2 BCLC 530 (Neuberger J) and Lexi Holdings PLC v Luqman [2007] EWHC 2652 (Ch) (Briggs J).

481.

Even if directors delegate a number of functions either to individual directors or employees, it remains their duty to monitor and supervise the discharge of those functions: see Re Barings plc (No 5) [1995] BCLC 433 at B7 (Jonathan Parker J), Re Continental (above) at [399] and Brumder v Motornet Services & Repairs Ltd [2013] 1 WLR 2783 at [55] (Beatson LJ). In Madoff Securities International Ltd (in liquidation) v Raven [2014] Lloyd's Rep FC 95 Popplewell J (as he then was) explained the balance between the personal duties of a director and the reliance on other directors or employees at [191] to [194]:

“191.

It is legitimate, and often necessary, for there to be division and delegation of responsibility for particular aspects of the management of a company. Nevertheless each individual director owes inescapable personal responsibilities. He owes duties to the company to inform himself of the company’s affairs and join with his fellow directors in supervising them. It is therefore a breach of duty for a director to allow himself to be dominated, bamboozled or manipulated by a dominant fellow director where such involves a total abrogation of this responsibility:...Similarly it is the duty of each director to form an independent judgment as to whether acceding to a shareholder’s request is in the best interests of the company:…The duty to exercise independent judgment is now reflected in section 173 Companies Act 2006.

192.

Moreover, it has long been established that a trustee who knowingly permits a co-trustee to commit a breach of trust is also in breach of trust. A director who has knowledge of his fellow director’s misapplication of company property and stands idly by, taking no steps to prevent it, will thus not only breach the duty of reasonable care and skill (which is not fiduciary in character:…), but will himself be treated as party to the breach of fiduciary duty by his fellow director in respect of that misapplication by having authorised or permitted it:..

193.

In fulfilling this personal fiduciary responsibility, a director is entitled to rely upon the judgment, information and advice of a fellow director whose integrity skill and competence he has no reason to suspect:... Moreover, corporate management often requires the exercise of judgement on which opinions may legitimately differ, and requires some give and take. A board of directors may reach a decision as to the commercial wisdom of a particular transaction by a majority. A minority director is not thereby in breach of his duty, or obliged to resign and to refuse to be party to the implementation of the decision. Part of his duty as a director acting in the interests of the company is to listen to the views of his fellow directors and to take account of them. He may legitimately defer to those views where he is persuaded that his fellow directors’ views are advanced in what they perceive to be the best interests of the company, even if he is not himself persuaded. A director is not in breach of his core duty to act in what he considers in good faith to be the interests of a company merely because if left to himself he would do things differently.

194.

Where a director fails to address his mind to the question whether a transaction is in the interests of the company, he is not thereby, and without more, liable for the consequences of the transaction. In such circumstances the court will ask whether an honest and intelligent man in the position of a director of the company concerned could, in the whole of the existing circumstances, have reasonably believed that the transaction was for the benefit of the company:….”

482.

Mr Henningson was an executive director of the other Companies. But Ms Hilliard submitted that his functions were limited to introducing financial contacts and dealing with the international side of the business. I have to decide whether to accept that evidence. But even if it was agreed that Mr Henningson’s responsibilities would be limited to these two areas of expertise, it was not open to him to leave to his fellow directors those decisions which were required to be made by the BHSGL board (or the boards of the other companies). In Re Landhurst Leasing plc [1999] 1 BCLC 286 Hart J dealt with this issue at 346e-h:

“Closely allied to the difficulty of distinguishing the responsibilities and conduct of the individual directors from that of the board as a whole is the question of the extent to which an individual director may trust his or her colleagues. The judgment of Romer J in Re City Equitable Fire Insurance Co Ltd [1925] Ch 407 is usually taken as authority for the general proposition that a director may rely on his co-directors to the extent that (a) the matter in question lies with their sphere of responsibility given the way in which the particular business is organised and (b) that there exist no grounds for suspicion that that reliance may be misplaced. But even where there are no reasons to think the reliance is misplaced, a director may still be in breach of duty if he leaves to others matters for which the board as a whole must take responsibility. Re City Equitable Fire Insurance vividly illustrates that rider to the general proposition, since Romer J there held all (save one) of the respondent directors to have been negligent in approving accounts for three successive years without having caused detailed lists of the company’s investments first to be drawn up for their examination. In that case reliance had been placed on the chairman, Mr Bevan, of whom it was said ‘... he was one of the greatest authorities on finance in the City of London. In reputation and in credit he stood second to none. His advice on questions of investment was eagerly sought and readily followed’ (at 445). Later events proved him in fact to have been ‘daring and unprincipled scoundrel’ (at 474). The case is not in that respect without its resonance here.”

(5)

Professional Advice

483.

Ms Hilliard and Ms Earle submitted that where directors relied on the advice of reputable professionals, then they will prima facie have fulfilled their duties and in support of that proposition they cited Green v Walkling [2008] BCC 256 at [34] to [38] (Bernard Livesey QC), Burnden Holdings (UK) Ltd v Fielding [2019] EWHC 1566 (Ch) at [158] (Zacaroli J) and Pro4Sport Ltd (in liquidation) v Adams [2016] 1 BCLC 257 at [45] and [46] (HHJ Behrens). They also relied on Ralls Builders (above) at [176]:

“In deciding what conclusion a director ought to have come to as regards the prospects for his company, the courts have been prepared to place some weight upon the evidence as to whether the directors took professional advice, and if so, what that advice was. So, for example, in In re Hawkes Hill Publishing Co Ltd [2007] BCC 937, para 45, Lewison J placed some weight upon the fact that the company’s auditor did not advise the directors that the position was hopeless, but in fact told them that the business had a promising future, albeit that he also told them that they needed to find a capital injection or sell the business.”

484.

Mr Lightman relied on Sharp v Blank [2019] EWHC 3096 (Ch) where Sir Alastair Norris stated that in general a director who takes and acts upon expert advice “has gone a long way towards performing his duties with reasonable care”: see [629]. He also stated that in testing whether a director has been negligent the question is not simply what the Court thinks it would be reasonable for the director to have done but what the evidence before the Court establishes were the courses open to reasonably competent directors: see [631].

485.

I accept these submissions as a general proposition. However, the weight which the Court will attach to the professional advice which directors take will depend on the scope of the engagement, the instructions which the adviser was given, the knowledge which they had or the assumptions which they were asked to make, the advice which they gave (or did not give) and the extent to which the directors relied on that advice (or not). Where a professional adviser did not advise the board of directors of a company that they should put the group into administration or liquidation, the weight to be attributed to the absence of that advice will depend on a detailed assessment of the facts.

486.

For example, in Rubin v Gunner (above) Etherton J attributed little weight to the advice which the directors took from a chartered accountant, who had been a former director and remained the secretary of the company, because his advice was based on the assumption that they would obtain the necessary funding from the third party: see [115] to [117]. On the other hand, in Ralls Builders Snowden J considered that the advice given by an insolvency practitioner was fatal to the wrongful trading claim at one Knowledge Date but not at the other because he advised the directors that they should give their efforts “a limited period to succeed”: see [210] to [213].

(6)

The S.214(3) Defence

487.

The burden of proof is on Mr Henningson and Mr Chandler to show that they took every step with a view to minimising the potential loss to the Companies’ creditors as they ought to have taken: see Re Idessa (UK) Ltd (in liquidation) [2012] BCC 315, [113] (Ms Lesley Anderson QC sitting as a Deputy High Court Judge) and Brooks v Armstrong [2016] BCC 661 at [5] to [7] (Mr Registrar Jones). Brooks v Armstrong was successfully appealed on quantum: see [2017] BCC 99 (Mr David Foxton QC (as he then was) sitting as a Deputy High Court judge). But Mr Henningson and Mr Chandler did not challenge that proposition and Mr Lightman relied on Brooks v Armstrong himself.

488.

S.214(3) imposes a high hurdle to overcome. It is not enough for the directors to prove that they continued trading with the intention of reducing the net deficit of the company. They must also show that it was designed to minimise the risk of loss to individual creditors. Ralls Builders provides authority for these propositions at [243] to [244]. It is also instructive to consider how Snowden applied S.214(3) on the facts of that case at [246]:

“243.

I do not, however, think that the defence under section 214(3) can be made out, as the directors suggest in this case, simply by showing that their actions after the relevant case were aimed at reducing the net deficit of the company.

244.

The function and wording of the two subsections of section 214 are different. Section 214(1) provides for a financial remedy in effect to restore the financial position of the company to what it would have been had the wrongful trading not occurred. Section 214(1) is thus a provision that focuses on the consequences of wrongful trading for unsecured creditors as a whole. In contrast, section 214(3) focuses on the regime which the director puts in place to protect creditors after the relevant time, rather than the result. If a director can show that he took “very step... as he ought to have taken” after the relevant time “with a view” to minimising the potential loss to creditors, he avoids liability under section 214(1), even if he does not actually succeed in his objective.

245.

Given the express wording of section 214(3) (“every step”), I think that it is plain that section 214(3) is intended to be a high hurdle for directors to surmount. I therefore think that it is right to construe section 214(3) strictly and to require a director who wishes to take advantage of the defence covered by that subsection to demonstrate not only that continued trading was intended to reduce the net deficiency of the company, but also that it was designed appropriately so as to minimise the risk of loss to individual creditors. Otherwise a director could make out the defence under section 214(3) by claiming that he traded on with a view to reducing the overall deficiency for creditors as a general body, irrespective of how he achieved that result as between creditors.

246 The facts of the instant case provide a very good example. Whether or not the directors succeeded in reducing the net deficiency of the company as regards its general body of unsecured creditors, they ought not, in my judgment, be entitled to an outright defence under section 214(3) on the facts of this case. That is because the manner in which they chose to continue trading meant that the bank and some of the existing unsecured creditors were paid at the expense of new creditors who ended up not being paid. Irrespective of whether or not that amounted to a breach of duty to the company, a preference under section 239, or fraudulent trading under section 213, that is not, in my judgment, a regime which the directors ought to have allowed to operate after the time at which they ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation. Their failure to take steps that they £ought to have taken” to protect the interests of new creditors prevents them from being able to rely upon section 214(3).”

489.

Mr Curl and Mr Perkins submitted in their opening submissions that the only proper steps which Mr Chandler and Mr Henningson could reasonably have taken were to seek insolvency advice from lawyers and financial advisers shortly after each of the Knowledge Dates and to put the Companies into insolvency proceedings shortly after each of the Knowledge Dates. Mr Lightman challenged that submission as a matter of law. He placed particular reliance on Armstrong v Brooks (above) where Mr Registrar Jones set out a number of steps which the directors should have taken at [259]:

“What “every step” which a reasonably diligent person with the knowledge of or attributed to the director will be must depend upon the facts. As a matter of guidance the following factors fall to be considered by directors and kept under review both generally and when considering specific financial decisions assuming the business remains sustainable: Ensuring accounting records are kept up to date with a budget and cash-flow forecast; preparing a business review and a plan dealing with future trading including steps that can be taken (for example cost cutting) to minimise loss; keeping creditors informed and reaching agreements to deal with debt and supply where possible; regularly monitoring the trading and financial position together with the business plan both informally and at board meetings; asking if loss is being minimised; ensuring adequate capitalisation; obtaining professional advice (legal and financial); and considering alternative insolvency remedies.”

490.

I agree that what “every step” will be must depend on the facts. I also accept that a director may be able to rely on S.214(3) even if he or she does not take insolvency advice or consider whether to put the company into insolvency proceedings when the three conditions in S.214(2) are satisfied. However, if the director does not take insolvency advice or consider whether insolvency proceedings should be taken immediately, it will be more difficult for the directors to demonstrate that they properly considered whether continuing to trade would reduce the deficiency and what the risks were to individual creditors (and, in the present case, the risk to unsecured creditors).

(7)

Causation

491.

In this section it is convenient for me to address the question of causation and how it applies both to wrongful trading under S.214 and to the general law of equitable compensation for breach of directors’ duties. It is convenient for two reasons: first, because the Misfeasance Claims require the Court to apply the general law and, secondly, because I have to resolve the question whether the same test applies to both categories of claim and how to apply it to the facts of this case.

(i)

Wrongful Trading

492.

It was common ground between the parties that it was necessary for the Joint Liquidators to prove causation in the sense that there must be a causal connection between the relevant wrongful conduct and the losses suffered by the company. In Continental Assurance (above) Park J stated the general proposition at [378]:

“My general point is that, before a court will be prepared to impose liability on directors in a case where there has been an unjustified decision to carry on trading, it is not enough for a liquidator claimant merely to say that, if the company had not still been trading, a particular loss would not have been suffered by the company. There must, in my view, be more than a mere ‘but for’ nexus of that type to connect the wrongfulness of the directors’ conduct with the company’s losses which the liquidator wishes to recover from them. In many cases the connection will be obvious and may not require any discussion. If the company’s business was inherently loss-making, and the directors ought to have known that but unjustifiably turned a blind eye to it, it is plainly appropriate to use the section to seek recovery from them of continued trading losses of precisely the kind which they ought to have known would result if the company carried on with its trading operations.”

493.

In Ralls Builders Snowden J cited this passage and agreed that it is not sufficient for the Joint Liquidators to satisfy the “but for” test in the sense that but for continuing to trade, the company would not have suffered the relevant loss. He accepted the proposition that there must be a causal nexus and that the Court must begin by asking whether there was an increase or reduction in the net deficiency:

“241 From these cases I therefore conclude that the correct approach to determining whether the directors should be required to make a contribution under section 214(1) is, as the directors contended, to ascertain whether the company suffered loss which was caused by the continuation of trading by the company after 31 August 2010 until the company went into administration on 13 October 2010, and that as a starting point this should be approached by asking whether there was an increase or reduction in the net deficiency of the company as regards unsecured creditors between the two dates.

242 I think that the authorities to which I have referred also make good the submission on behalf of the directors that there has to be some causal connection between the amount of any contribution and the continuation of trading. Losses that would have been incurred in any event as a consequence of a company going into a formal insolvency process should not be laid at the door of directors under section 214. That factor is of particular importance in this case as a result of the evidence (including the contemporaneous comments of Mr Tickell) of the particular difficulties in dealing with customers in the insolvency of any construction company.”

494.

Finally, Edwin Johnson J accepted in Chandler v Wright (above) that it was necessary for the Joint Liquidators to plead and prove causation. He stated this at [22](4):

“If a claim under section 214 is to succeed the court must find that there has been a loss, and that there is a causal connection between the continuation of trading and the loss; see Snowden J (as he then was) in In re Ralls Builders Ltd [2016] Bus LR 555, paras 241–242. Put more simply, causation of loss must be demonstrated in a claim under section 214.”

495.

In both Continental Assurance and Ralls Builders the argument which the Court had to resolve was analogous to the issue which often arises in auditors’ negligence claims which is whether the negligent conduct of the auditors in allowing the company to trade was the effective cause of the continued trading losses or whether the company would have suffered the losses in any event. This can be seen from the detailed analysis which Snowden J carried out in Ralls Builders before deciding on a balance of probabilities that the continuation of trading did not cause any material increase in the net deficiency: see [268]. Moreover, I am not satisfied that Edwin Johnson J had anything more detailed in mind in Chandler v Wright other than the general proposition accepted by Snowden J in Ralls Builders.

496.

This issue does not arise in the present case because the experts have agreed that the Companies suffered substantial losses by continuing to trade after all of the Knowledge Dates. They have also agreed the IND from each Knowledge Date until the Companies went into administration. In the present case, I am faced with the prior question which is whether the conduct of Mr Chandler and Mr Henningson had any causative effect at all on the Companies continuing to trade. They did not provide a majority of the board of directors and neither was a shareholder of RAL. They argue, therefore, that whatever they would or should have done, their conduct was not the cause of the losses which the Companies suffered as a consequence of continuing to trade.

497.

In Re Ralls Builders Ltd (No 2) [2016] 1 WLR 5190 the principal issue was whether the liquidators were entitled to recover the increased costs which the company had unnecessarily incurred as a consequence of continuing to trade even though they were unable to prove an IND. After citing Continental Assurance (above) Snowden J expressed the following view at [31] and [32]:

“31.

I agree with Park J that section 214 requires something more than just a “but for” test of causation. A director’s conduct is not wrongful for the purposes of section 214 simply because there is a relevant date at which he actually concluded or ought to have concluded that insolvent liquidation was inevitable. Nor is it wrongful per se for a director not to put the company into administration or liquidation once that relevant date has been reached. This much seems clear from the fact that the terms of section 214 do not simply require directors to cease trading and put the company into administration or liquidation as soon as the relevant date is reached; and it also appears from section 214(3), which provides that the court cannot make any order under section 214(1) even if the company does not go into administration or liquidation at the relevant date, provided that the directors take every step thereafter that they ought to take with a view to minimising the potential loss to creditors.

32.

Accordingly, I cannot see that merely establishing that there was a relevant date beyond which the directors did not immediately place the company into administration in this case provides any basis for characterising their behaviour as “wrongful” for the purposes of section 214, or that of itself it provides a basis for ordering them to pay for the fees and costs subsequently incurred by the joint liquidators in investigating or pursuing litigation to establish when the relevant date occurred in this case. That is especially so since I did not accept the primary argument advanced by the joint liquidators as to when the relevant date occurred (i e 31 July 2010 as opposed to 31 August 2010).”

498.

In Biscoe v Milner [2022] 1 BCLC 368 Meade J applied Ralls Builders and accepted that it was necessary to prove a causal connection between the director’s conduct and the losses suffered but that it was not necessary to prove that this conduct was their sole cause. He stated the principles at [262] to [264]:

“[262] There was one point of dispute in relation to wrongful trading. The Respondents argued that, for a claim in wrongful trading to succeed, it must be shown that the loss complained of would not have been suffered had the respondent complied with his or her duties. For this proposition they rely on Lexi Holdings plc v Luqman (No 2) [2008] EWHC 1639 (Ch), [2008] 2 BCLC 725. In that case, a company in administration made claims against two non-executive directors for breach of duty. It was alleged that their total inactivity had caused the company to suffer loss as a result of misappropriations by the managing director and transactions infringing ss 330 and 320 Companies Act 1985. The Court considered (at [28] et seq) whether the breaches of duty had caused loss, so that the causation requirement was established. [263] The Applicants say that Lexi Holdings was not a claim under s 214 of IA86. Accordingly, they argue that it is not relevant and does not establish that there is a causation requirement of the kind alleged in relation to a wrongful trading claim. [264] I agree with the Applicants on this point. Their position is consistent with the language of s 214(1) and with the decision in Re Ralls Builders, which requires a causative link between the continuation of trading and an increase in the deficiency to creditors. [265] In any event, on the facts as I find them below David Clarkson’s behaviour was a key causative factor in causing the losses ELC suffered and the increase in loss to the creditors. His behaviour was not the sole cause because others, including in particular Lillie Milner, also played a major part. I mention this because it means that this point would go nowhere for David Clarkson unless it were to be submitted on his behalf that s 214 only bites where the failures of the director in question were the sole cause of loss. No authority was provided in support of such a proposition and in my view it would be obviously wrong.”

(ii)

Misfeasance

499.

In general terms, the law distinguishes between two types of claim for breach of fiduciary or statutory duty against a director, a claim to recover trust assets (or their substitute) and a claim for compensation. This is a complex area of the law and it is unnecessary for me to analyse it in detail. For present purposes, it is sufficient to cite Davies v Ford [2023] EWCA Civ 167 in which Sir Launcelot Henderson provided a very helpful distillation of the principles before summarising the position at [131]:

“Bribes and the taking of secret commissions are persistent scourges of commercial life which fully justify the most stringent remedies against agents who take them, but it by no means follows that the same principles should be translated, in their entirety, to the generality of cases where compensation is sought from an erring fiduciary. In such cases, as it seems to me, the right approach is that the principal may seek a substitutive remedy in respect of existing trust property which is misapplied by the agent, or an account of profits made by the agent, but that if the principal elects not to seek an account of profits, he should be confined to a reparative remedy compensating him for any actual loss caused by the breach of duty.”

500.

In that case David Holland QC (sitting as Deputy High Court Judge) dismissed the claim for compensation: see [2021] EWHC 2550 (Ch). The Court of Appeal upheld his decision and Sir Launcelot Henderson described his reasoning as “impeccable”: see [132]. The issue of law which the judge had to decide was whether it was open to the director to advance a counter-factual case that if he had complied with his duties, the company would still have suffered no loss. The judge decided that the director was entitled to advance such a case and he stated this at [107] and [108]:

“However, in cases of breach of trust or fiduciary duty which do not involve the misappropriation of existing trust property, such as (per David Richards LJ in the PATEL (Footnote: 4) case) breaches of duties of loyalty, and those which involve the trustee in making profits at the expense of the trust or the use of information or opportunities available to the trustee in that capacity or breaches of duties of skill and care, resulting in loss to the trust, equitable compensation will be assessed on the reparative basis. This requires the court to determine what would have happened but for the breach of fiduciary duty. The breaching trustee or fiduciary is entitled to argue the counterfactual. The court can be asked to consider how the principal or company would have acted if the trustee or fiduciary had not acted in breach of duty. The GWEMBE VALLEY (Footnote: 5) case is an example of this type of breach. This seems to me to be a principled approach as, with the latter type of breach, the court is not seeking to replace property or assets which already belonged to the trust or company and were wrongfully diverted away, but rather to assess sums or profit which the trust or company did not make because the opportunity to make the profit was wrongfully diverted away.”

501.

In Lexi Holdings v Luqman [2007] EWHC 2652 (above) Briggs J (as he then was) declined to grant summary judgment on the issue of causation against directors who had failed to take any action to prevent a fellow director from committing breaches of duty. He concluded that the critical question was one of causation (at [225]):

“The real issue in relation to Monuza is the question of causation. It is not suggested that the Claimant can establish beyond the possibility of a real defence that she was aware of improper practices by her brother to an extent sufficient to affix her with liability as someone who authorised or permitted his misconduct. This is so, notwithstanding that she is alleged to have been the recipient of one of Shaid’s misappropriations, to which I shall refer in more detail in due course. The case which Mr Marshall submits meets the summary judgment test is that her inactivity caused the losses suffered by the Claimant at the hands of Shaid because, had she performed her duty, she would have prevented them. That this is a necessary part of any case in which a company seeks to establish liability against one of its directors for culpable inactivity is sufficiently established in Bishopsgate Investment Management Ltd v Maxwell (No.2) (supra): see for example per Hoffmann LJ at page 1285 c-e. Causation is no less a part of a claim based upon breach of fiduciary duty by inactivity, as it is a part of a claim based upon breach of a common law duty of care, although aspects of the causation tests, such as the rules as to remoteness, may differ in detail: see per Chadwick J in the same case at [1993] BCLC 814, at 830d to 831g.”

502.

The claim also failed on causation when it came to trial: see Lexi Holdings plc v Luqman (No 2) [2008] 2 BCLC 725. This was the decision which Meade J cited in Briscoe v Milner (above) and the passage from Briggs J’s judgment to which he was referring is at [28]:

“The question whether a breach of duty constituted by total inactivity causes a particular loss raises issues of law, fact and hypothesis. The law serves to define the relevant duty, and the steps which that duty required these defendants to take is ascertained by the application of those legal principles to the relevant factual background including, importantly, the particular knowledge, experience and skill which each of Monuza and Zaurian actually had. Thereafter, the court must construct a necessarily hypothetical edifice so as to ascertain what would probably have happened if the relevant duties had been performed, so as to ascertain whether in that event the losses actually suffered by Lexi would, probably, not have been suffered. Subject to any relevant questions of remoteness and (in relation to a duty of care) contributory negligence, the difference between Lexi's actual financial position and its hypothetical financial position derived from an assumption that the relevant duties had been performed represents the measure of the loss caused by the defendants' breach of duty.”

503.

The company appealed and the Court of Appeal allowed the appeal: see [2009] 2 BCLC 1. For the appeal counsel accepted that the test applied by the judge was accurate subject to one qualification which Sir Andrew Morritt C addressed at [38]:

“The qualification in relation to proof of causation counsel seeks to emphasise relates to the need to distinguish in relation to any particular link in the chain what, consistently with his duty as a director or auditor, a person should have done and what, in all probability, he would have done. He submits that if consistently with his duty to the company, whether as director or auditor, a person should have performed a particular action then he is liable for the consequences of not doing it. It is no answer to prove that he would have done something else for that would be to enable one breach of duty to be used to excuse another. If, hypothetically, a director should have done something then it is no answer to prove that in all probability he would have done something different. I would accept that submission in the abstract; it remains to be seen if it is susceptible of being applied in relation to any part of the judgment of Briggs J.”

504.

Sir Andrew Morritt then conducted a detailed analysis of the facts found by the judge and came to the conclusion that if the defendant directors had complied with their duties the company would have avoided the relevant losses. In particular, he concluded that if they had complied with their duties, they would have identified a fictitious loan account and notified the auditors who would have been unable to provide a “clean” audit certificate and the company would have been unable to obtain increased loan facilities: see [48] to [50]. He continued as follows:

“[51] Had Zaurian performed her duty as a director of Lexi when and in the manner that she should have done it is probable that Lexi would have gone out of business before Monuza and Mr Davis were appointed as directors on 14 October 2003. But not having done so then and Lexi continuing in business, it was the duty of Zaurian to inform the incoming directors of what she knew or ought to have known, namely the convictions and the fact that the directors’ loan account was fictitious. If Monuza had not known before that the directors’ loan account was fictitious she ought to have known shortly after her appointment both from Zaurian and from performing her own duties as a director of Lexi. [52] At that stage there were four directors: Shaid, Zaurian, Monuza and Mr Davis. The three last-named directors had the ability to remove Shaid from his positions of managing director and ordinary director under art 13.2 of Lexi’s Articles. Given both that power and the knowledge they are deemed to have had, proper performance of their duty must have involved the imposition of external controls on Shaid or his removal altogether so that, in either event, the subsequent misapplications would not have occurred.”

505.

Lexi Holdings (No 2) at first instance is authority for the proposition that in deciding whether a breach of duty by directors caused loss, the Court must consider what would have happened if the directors had complied with the relevant duties and ask the counter-factual question whether the company would have suffered the loss. Lexi Holdings (No 2) in the Court of Appeal is authority for the proposition that in answer to that question the Court must assume that the directors would have complied with all of their duties in the relevant counter-factual situation.

506.

The decision is also instructive because it is a case in which the directors failed to act and stood by whilst another director misappropriated assets. Nevertheless, there are cases in which the company will be unable to prove any loss even if the director had complied with its duty. Davies v Ford (above) is one example. Dickinson v NAL Realisations (Staffordshire) Ltd [2018] BCC 506 is another. In that case His Honour Judge David Cooke held as follows at [160] to [162]:

“160.

Having said that, it does not automatically follow that this breach of duty was causative of any loss to the company. Insofar as the company has suffered loss the immediate cause of it is that Mr Dickinson caused it to enter into transactions for which he required, but did not obtain, the authority of the board and/or shareholders and which as a consequence were not binding on it. The fact that other directors were disengaged did not cause him to do this, nor did it in any real sense enable him to do what he did. The directors did not stand by knowing of a misapplication of company funds, since they knew little or nothing of these transactions until after they had happened. They cannot thus be made liable as parties to any such misapplication. Further, to the extent they might previously have declined to be as disengaged as they were and sought to impose some system of control on Mr Dickinson, I have little doubt he would simply have engineered their removal so that he could continue to act in the unfettered way he considered was his right. Mr Barker did not put any positive case as to what they might have done that would have led to a different outcome. 161. I find therefore that Mr Williamson and Mrs Dickinson are not liable, notwithstanding the breach of duty by them. 162. In case the matter goes further, had I reached the opposite conclusion I would not have granted relief to either director under Companies Act 2006 s.1157. The circumstances in which a director is found to have been in breach of duty to act in the interests of the company but nevertheless to have acted honestly and reasonably must be rare. No dishonesty is alleged here, but it simply cannot be said that a director with an inescapable duty to join in the management of a company acted reasonably in abandoning any effective role at all in doing so.”

507.

Finally, in Cohen v Selby [2001] 1 BCLC 176 (a decision upon which Mr Lightman and his team placed particular reliance) Chadwick LJ expressed the view that there was a difference between the tests for causation for a misfeasance claim and a wrongful trading claim. He stated as follows at [20] and [21]:

“20.

The submission that the judge failed to appreciate the distinction between ss 212 and 214 of the Insolvency Act 1986 was not developed before us in any depth. It is enough, I think, that I should emphasise that the distinction exists and is of importance. Section 212 is the successor to s 333 of the Companies Act 1948. It, and its statutory predecessors, have been in the Companies Acts since 1862. It provides a summary procedure in a liquidation for obtaining a remedy against delinquent directors without the need for an action in the name of the company. It does not, of itself, create new rights and obligations: see Re City Equitable Fire Insurance Co Ltd [1925] Ch 407 at 507. The scope of the section was enlarged by the 1986 Act (or, more accurately, by the Insolvency Act 1985, in which s 212 was enacted as s 19) to include ‘breach of other duty’; thereby removing the limitation imposed by the concept of misfeasance which had been identified by Evershed MR in Re B Johnson & Co (Builders) Ltd [1955] 2 All ER 775 at 781, [1955] Ch 634 at 648. There can be no doubt, now, that a liquidator can proceed under s 212 of the Insolvency Act 1986 where all that is alleged is common law negligence. But, if he does so, he must establish a cause of action at common law; that is to say he must show that the breach of duty of which he complains has caused loss or damage. In my view, when exercising the power, conferred by s 212(3)(b), to compel a delinquent director ‘to contribute such sum to the company’s assets by way of compensation in respect of the … breach of … other duty’ in a case where the breach of duty complained of is a breach of the common law duty to take care, the court has to be satisfied that the negligence has caused a loss in respect of which compensation can be awarded. The position, in this respect, is the same as it would be if the company had brought an action in its own name. In so far as the judge suggested, in the passage of his judgment to which I have already referred, that the position was otherwise, I have no doubt that he was wrong. But the point is not, I think, material in the present case because, as the judge thought, causation had been established.

21.

Section 214 of the Insolvency Act 1986 (‘Wrongful trading’) is new. It was first enacted as s 15 of the Insolvency Act 1985. It supplements the provisions in earlier legislation (s 332 of the Companies Act 1948 and its predecessors) as to fraudulent trading. Those provisions now appear in s 213 of the 1986 Act. But s 214 applies only where, at some time before the insolvent liquidation, a person knew or ought to have concluded that there was no reasonable prospect that that fate could be avoided. It has no application to the present case. Its only relevance, in the present context, is that sub-s (4) provides a useful exposition of the standard of care required of a director in relation to the facts which he ought to have known, the conclusions which he ought to have reached and the steps which he ought to have taken. I am content to assume (without so deciding) that, on an application under s 214 of the Insolvency Act 1986, it may not be necessary to establish a causal link between the wrongful trading and any particular loss. But this is not an application under s 214 of the Act; and, on the facts alleged, it could not have been brought under that section.”

(iii)

Conclusions

508.

For the purpose of both the Misfeasance Trading Claim and the Individual Misfeasance Claims I apply Lexi Holdings (No 2) and ask myself the question whether the Company would have continued trading and suffered the individual losses if Mr Henningson and Mr Chandler had not committed any breaches of duty which I may have found against them. This is a particularly important question in the context of the Misfeasance Trading Claim where the Liquidators allege that if they had complied with their duties, the Companies would have gone into administration or insolvent liquidation.

509.

For the purpose of the Wrongful Trading Claim I agree with Meade J in Briscoe v Milner that it is not necessary for the Joint Liquidators to prove that the conduct of Mr Henningson and Mr Chandler was the sole or effective cause of any individual losses which the Companies suffered and I consider that the assumption made by Chadwick LJ in Cohen v Selby is correct. However, in my judgment it remains necessary for the Joint Liquidators to establish that the conduct of Mr Henningson and Mr Chandler caused the Companies to continue trading and that they would have ceased trading and gone into administration if Mr Henningson and Mr Chandler had complied with their duties.

(8)

Discretion

510.

S.214(1) confers a discretion upon the Court to declare that a director is liable to make such contribution (if any) to the company’s assets as it considers proper. In Commissioners for HM Revenue & Customs v Holland [2010] 1 WLR 2793 at [124] Lord Walker stated that the discretion is not a wide one but enables the Court to adjust the remedy to the circumstances of the particular case: see [124]. He also referred to West Mercia (above) where Dillon LJ illustrated the scope of the discretion under section 333 of the Companies Act 1948 at 253c-e:

“The question then remains: what financial relief ought to be granted against him? Prima facie the relief to be granted where money of the company has been misapplied by a director for his own ends is an order that he repay that money with interest, as in Re Washington Diamond Mining Co. The section in question, however, sec. 333 of the Companies Act 1948, provides that the court may order the delinquent director to repay or restore the money, with interest at such rate as the court thinks fit, or to contribute such sum to the assets of the company by way of compensation in respect of the misapplication as the court thinks fit. The court has a discretion over the matter of relief, and it is permissible for the delinquent director to submit that the wind should be tempered because, for instance, full repayment would produce a windfall to third parties, or, alternatively, because it would involve money going round in a circle or passing through the hands of someone else whose position is equally tainted.”

(i)

Quantum

511.

It was common ground that the maximum amount which the Court could declare directors liable to contribute under S.214(1) was the IND at the relevant Knowledge Date or Dates. In Continental Assurance Park J explained the reasoning for the quantification of the maximum in this way at [296] and [297]:

“296.

The statute merely provides that, where the conditions for a director to be liable exist, the court may declare that the director ‘is to be liable to make such contribution (if any) to the assets of the company as the court thinks proper.’ So clearly there is a major element of discretion. However, no-one suggests that the discretion is entirely at large. Counsel agree that the court should start with a maximum, which should be ascertained on an appropriate objective criterion, and that within that maximum the court’s discretion comes into play. I could require the directors to contribute less than the maximum, but not more than it. In this part of my judgment I am concerned with what, on the facts of this case, that maximum is. There could also be another stage at which the court’s discretion would come into play. This would concern whether any liabilities imposed on more directors than one are to be joint and several, or only several, or partly one and partly the other. I will say something about that in a subsequent part of this judgment, but for the moment I consider the quantum question globally, considering the company as a whole and the members of the board collectively.

297.

I first had to consider the maximum quantum of liability for the purposes of the interim ruling which I gave, my judgment on which is in Annex B. I ruled that the measure was not, as the liquidators were contending, ‘the l0C basis’ which in my view was a calculation of loss to Continental’s creditors, but rather what I called in that ruling and in this judgment the ‘increase in net deficiency’, which in my view reflects the loss to Continental itself as a result of liquidation being delayed. The concept is that, if the directors had decided on 19 July 1991 that Continental was insolvent, and had caused it to be put in liquidation then or soon thereafter, there would have been a deficiency in the hypothetical 1991 liquidation of one amount, say £x. In the actual case Continental did not go into liquidation until 27 March 1992, and in the actual 1992 liquidation there was a deficiency of a different amount, say £y. If £y is greater than £x the excess is the increase in net deficiency.”

512.

In Ralls Builders (above) Snowden J took this as his starting point: see [241]. In Brooks v Armstrong (above) David Foxton QC also considered this to be the starting point unless the IND cannot be calculated as a result of the directors’ failure to keep proper books and records: see [63] to [74]. In the present case, there is no dispute that the Companies’ continued trading led to an IND at each Knowledge Date and Ms Hilliard and Mr Lightman did not attempt to persuade me that this was not the correct starting point. They argued instead that reductions should be made to reflect a number of discretionary factors.

(ii)

Several or joint and several

513.

The Court has a discretion whether to impose joint and several liability or several liability. In Re Continental Assurance Park J stated that if he had been imposing liability at all, he would have imposed it on a several basis for the following reasons at [388] and [389]:

“[388] On the facts of this case, if I was imposing any liability at all, I would not be willing to exercise my discretion to impose it on a joint and several basis. I think that that would be inappropriate given the composition of the Continental board, the differing backgrounds of its members, and the ways (in all cases commendable, but varying) in which they sought to react to the financial crisis which suddenly confronted them in the middle of 1991. I think that it would be all the more inappropriate where the liquidators’ real complaints are ones of accounting inadequacies, and the liquidators have not brought any claims in respect of them against the auditors and have settled the claim which they did bring against the finance director, Mr Davis. If I had agreed with the liquidators’ case I would have considered that by far the greater part of the increase in net deficiency flowed from accounting inadequacies (as the liquidators would have it) on the part of MacIntyre Hudson and Mr Davis, and I would have required the continuing respondents to contribute, on the basis of several liability, only small proportions of such amount of increase in net deficiency as the liquidators had succeeded in establishing and in showing to have sufficient connection with the wrongful decision of the directors that Continental should carry on trading.

[389] That would have been my view in relation to Mr Burrows as well as in relation to the non-executive directors. Mr Burrows was the managing director and an executive director, but he was a businessman with particular knowledge and experience of insurance. He had no more specialist knowledge of accountancy and of the particular complexities of accounting for an insurance company than was possessed by the non-executive directors. Perhaps if the question had arisen I would have felt it appropriate to attribute to him a slightly larger proportion of the increase in net deficiency than I would have attributed to the non-executive directors, taking that view because of the greater responsibility which he ought to bear simply by virtue of having been the managing director. But the increase in liability for him would not in my view have been of any major size, perhaps no more than an extra five percentage points.”

(iii)

Exercise

514.

This passage also suggests that where the directors have varying levels of responsibility and culpability for the IND, the Court should impose several liability and assess the culpability of each director and the causative potency of their conduct separately in order. These remarks were necessarily obiter and I was not taken to a decision in which the Court had applied these principles. Mr Lightman cited Nicholson v Fielding (unreported, Deputy Registrar Prentis, 15 September 2017) where the judge applied Continental Assurance (above) but also dismissed the application.

515.

In applying S.214 I gain some assistance by comparing and contrasting the approach which the Court takes in relation to claims for contribution under section 1(1) of the Civil Liability (Contribution) Act 1978. Section 2(1) provides that the amount of a person’s contribution shall be “such as may be found by the court to be just and equitable having regard to the extent of that person’s responsibility for the damage in question”. The editors of Jackson & Powell on Professional Liability 30th ed (2021) summarise the principles which the Court will apply at 4—018 (footnotes removed):

“Where the client suffers loss or injury as a result of the negligence of two or more of his professional advisers, the apportionment of liability between them is governed by the same general principles as apply to any other wrongdoers. The court should have regard both to the culpability of the various parties and to the extent to which each party’s conduct “caused” the damage in question. This includes consideration of each party’s “moral responsibility in the sense of culpability and organisational responsibility in the sense of where in the hierarchy of decision-making and in the organisational structure leading to the damage the contributing party was located”. The “just and equitable” criterion is wide enough to enable the apportionment take account of blameworthiness as well as causative potency, and even, to an extent, of non-causative matters, but the financial means of the party from whom contribution is sought have held not to be relevant. However, the main factor to consider is each party’s responsibility for the damage.”

516.

There is, however, a limit to this analogy. In Brian Warwick Partnership PLC v HOK International Ltd [2006] PNLR 5 Arden LJ explained that Parliament had given clear guidance in relation to the Contribution Act 1978. She stated this at [45]:

“Parliament has particularly directed the courts when exercising their powers under s.2(1) of the 1978 Act to have regard to the extent of the defendant's responsibility for the damage in question. Section 2(1) is not an unstructured discretion. It is a semi-structured discretion which directs the court to attach most weight to the defendant's responsibility for the damage in question. If the defendant's action did not cause the damage in question, it cannot, as such, form part of the responsibility for the damage. It may, quite separately, be relevant to the court's evaluation of the blameworthiness component of responsibility. Putting that possibility aside, and while the point has not been fully argued, I would provisionally express the view that, if non-causative material is brought into account, there is only a limited role it can play. It must be given less weight than the material showing the defendant's responsibility for the act in question. Moreover, if any non-causative material is brought into account, the resulting order for contribution must, nonetheless, be just and equitable within s.2(1) . Therefore, there will have to be some sufficient relationship between it and the damage in question.”

517.

Counsel were not able to draw my attention to any authority which shows how the Court should weigh up the relevant factors or whether the Court is entitled to take into account means or insurance cover. In my judgment, I am entitled to take into account all factors and to give them such weight as I consider proper. S.214 does not involve the same “semi-structured” discretion as the 1978 Act. Nor does it direct the Court to attach most weight to a particular factor or factors. In particular, it does not direct the Court to attach most weight to causative factors or non-causative factors such as means.

518.

In deciding whether to impose liability on a joint and several basis or on a several basis and to declare the amount of the contribution, the Court is entitled to take into account the culpability of the director, the extent to which the director’s conduct caused the IND, the organisational responsibility of the director, their place in the hierarchy of decision-making and non-causative matters such as means and the scope of their insurance cover. The weight which I give to each factor is also a matter of discretion. However, I return to the starting point. The discretion is not intended to be a wide one but one which enables the Court to mould the remedy to the facts of the particular case.

O. Misfeasance

519.

Section 212 of the IA 1986 (“S.212”) provides a procedure for the recovery of property or compensation by a liquidator against an officer of a company. It is headed “Summary remedy against delinquent directors, liquidators etc” and it provides as follows:

“(1)

This section applies if in the course of the winding up of a company it appears that a person who— (a) is or has been an officer of the company, (b) has acted as liquidator or administrative receiver of the company, or (c) not being a person falling within paragraph (a) or (b), is or has been concerned, or has taken part, in the promotion, formation or management of the company, has misapplied or retained, or become accountable for, any money or other property of the company, or been guilty of any misfeasance or breach of any fiduciary or other duty in relation to the company.

(2)

The reference in subsection (1) to any misfeasance or breach of any fiduciary or other duty in relation to the company includes, in the case of a person who has acted as liquidator of the company, any misfeasance or breach of any fiduciary or other duty in connection with the carrying out of his functions as liquidator of the company.

(3)

The court may, on the application of the official receiver or the liquidator, or of any creditor or contributory, examine into the conduct of the person falling within subsection (1) and compel him— (a) to repay, restore or account for the money or property or any part of it, with interest at such rate as the court thinks just, or (b) to contribute such sum to the company's assets by way of compensation in respect of the misfeasance or breach of fiduciary or other duty as the court thinks just.”

520.

It was common ground that S.212 does not create a new cause of action (unlike S.214) or create new substantive rights but it permits a liquidator to enforce an existing cause of action which the company claims to have against a director. It was also common ground that a liquidator is entitled to bring claims against directors for breach of their duties under the CA 2006 on behalf of a company and without bringing a separate claim: see, e.g., Parkinson Engineering Services plc (in liquidation) v Swan [2010] 1 BCLC 163 at [12] and [13] (Lloyd LJ). It is necessary, therefore, for me to consider the scope of those duties.

(1)

Duty to act within powers

521.

Section 171 of the CA 2006 (“S.171”) is headed “Duty to act within powers” and it provides as follows:

“A director of a company must– (a) act in accordance with the company's constitution, and (b) only exercise powers for the purposes for which they are conferred.”

522.

The Joint Liquidators relied on both limbs of S.171. Mr Curl and Mr Perkins submitted that it was a breach of S.171(a) to act without the authority of the board or a majority of shareholders: see Rolled Steel Products (Holdings) Ltd v British Steel Corporation [1986] Ch 246 at 286H to 287A (Slade LJ) and Stimpson v Southern Private Landlords Association [2010] BCC 387 at [33] (HHJ Pelling QC). I am not convinced that the dicta in either of those cases go so far as to lay down a rigid rule but I am prepared to accept that a director who enters into a transaction knowing that it has not been authorised by the board acts in breach of S.171(a) (always assuming that the transaction is not ratified). But in my judgment, the failure to call a meeting or to minute a decision properly is not by itself a breach of S.171(a).

523.

The Joint Liquidators also relied on S.171(b) and the “proper purposes” rule. Mr Curl and Mr Perkins submitted that Mr Chandler and Mr Henningson acted either for their own private purposes or for the purposes of RAL and in so doing they acted in breach of S.171(b). In Eclairs Group Ltd v JKX Oil & Gas plc [2016] BCLC 1 Lord Sumption JSC described the origin of the rule and stressed that it is not concerned with excess of power but with abuse of power, i.e., performing acts which fall within the scope of the power but for an improper reason: see [14] and [15]. The test is, therefore, a subjective one. He continued at [16]:

“A company director differs from an express trustee in having no title to the company’s assets. But he is unquestionably a fiduciary and has always been treated as a trustee for the company of his powers. Their exercise is limited to the purpose for which they were conferred. One of the commonest applications of the principle in company law is to prevent the use of the directors’ powers for the purpose of influencing the outcome of a general meeting. This is not only an abuse of a power for a collateral purpose. It also offends the constitutional distribution of powers between the different organs of the company, because it involves the use of the board’s powers to control or influence a decision which the company’s constitution assigns to the general body of shareholders. Thus in Fraser v Whalley (1864) 2 H & M 10 the directors of a statutory railway company were restrained from exercising a power to issue shares for the purpose of defeating a shareholders’ resolution for their removal. In Cannon v Trask (1875) LR 20 Eq 669, which concerned the directors’ powers to fix a time for the general meeting, Sir James Bacon V-C held that it was improper to fix a general meeting at a time when hostile shareholders were known to be unable to attend. In Anglo-Universal Bank v Baragnon (1881) 45 LT 362 Sir George Jessel MR held that if it had been proved that the power to make calls was being exercised for the purpose of disqualifying hostile shareholders at a general meeting, that would be an improper exercise of the directors’ powers. In Hogg v Cramphorn Ltd [1966] 3 All ER 420, [1967] 1 Ch 254 Buckley J held that the directors’ powers to issue shares could not properly be exercised for the purpose of defeating an unwelcome takeover bid, even if the board was genuinely convinced, as the current management of a company commonly is, that the continuance of its own stewardship was in the company’s interest. The company’s interest was an additional and not an alternative test for the propriety of a board resolution.”

524.

Where a director has a number of different purposes, the conventional approach is to ask what the primary or dominant purpose of the act or omission was: see, e.g., Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 421. However in Eclairs Lord Sumption identified the practical difficultly involved in “a forensic enquiry into the relative intensity of the directors' feelings about the various considerations that influenced them”: see [20]. He expressed the view (with which Lord Hodge concurred) that directors commit a breach of the proper purposes rule if they permit themselves to be influenced by any improper purpose and that the question whether the decision would have been made is better addressed at the causation stage. He stated this at [21]:

“The fundamental point, however, is one of principle. The statutory duty of the directors is to exercise their powers “only” for the purposes for which they are conferred. That duty is broken if they allow themselves to be influence by any improper purpose. If equity nevertheless allows the decision to stand in some cases, it is not because it condones a minor improper purpose where it would condemn a major one. It is because the law distinguishes between some consequences of a breach of duty and others. The only rational basis for such a distinction is that some improprieties may not have resulted in an injustice to the interests which equity seeks to protect. Here, we are necessarily in the realm of causation. The question is which considerations led the directors to act as they did. In Hindle v John Cotton Ltd (1919) 56 Sc LR 625 , 631, Lord Shaw referred to the “moving cause” of the decision, a phrase taken up by Latham CJ in Mills v Mills , supra , at p 165. But this cryptic formula does not help much in a case where the board was concurrently moved by multiple causes, some proper and some improper. One has to focus on the improper purpose and ask whether the decision would have been made if the directors had not been moved by it. If the answer is that without the improper purpose(s) the decision impugned would never have been made, then it would be irrational to allow it to stand simply because the directors had other, proper considerations in mind as well, to which perhaps they attached greater importance.”

525.

Mr Curl and Perkins cited a number examples to show that the ambit of the proper purposes rule extended beyond the classic situations described by Lord Sumption: see Bishopsgate Management Ltd v Maxwell Ltd v Maxwell (No 2) [1993] BCC 120 at 139H to 140C (giving away company assets to another company for no consideration), MacPherson v European Strategic Bureau Ltd [2000] 2 BCLC 683 at [48] and [49] (payments for consultancy services by insolvent company without proper provision for creditors), Re HLC Environmental Projects Ltd [2014] BCC 337 at [116] and [124] (payments to a director and associated company) and Re McCarthy Surfacing Ltd [2009] 1 BCLC 622 at [73] to [77] (bonus arrangements).

526.

Ms Hilliard submitted that the test was objective and relied on Extrasure Travel Insurance Ltd v Scattergood [2003] 1 BCLC 598 in which Mr Jonathan Crow (sitting as a Deputy Judge of the High Court) stated as follows at [92] and [93]:

“[92] The law relating to proper purposes is clear, and was not in issue. It is unnecessary for a claimant to prove that a director was dishonest, or that he knew he was pursuing a collateral purpose. In that sense, the test is an objective one. It was suggested by the parties that the court must apply a three-part test, but it may be more convenient to add a fourth stage. The court must: 92.1. Identify the power whose exercise is in question; 92.2. Identify the proper purpose for which that power was delegated to the directors; 92.3. Identify the substantial purpose for which the power was in fact exercised; and 92.4. Decide whether that purpose was proper. [93] Finally, it is worth noting that the third stage involves a question of fact. It turns on the actual motives of the directors at the time: Re a company, ex p Glossop [1988] BCLC 570 at 577.”

527.

In my judgment, there was no real difference between the parties. The test is objective in the sense that it is unnecessary to demonstrate that the director knew or believed that they were acting for a collateral or improper purpose. But it is subjective in the sense that the Court is required to examine the purpose or motive for which the power was exercised and decide whether it was a proper purpose. Moreover, in Re Cardiff City Football Club (Holdings) Ltd [2023] 1 BCLC 133 Adam Johnson J applied Lord Sumption’s test in Eclairs (above) at [21] even though the view which he expressed was strictly an obiter dictum.

528.

The subjective and objective elements of the test are well illustrated by the facts of Extrasure itself. In that case the directors of E Ltd transferred £200,000 to C Ltd because it needed to pay a debt urgently. Both companies were subsidiaries of IH Ltd and the payment was routed through the parent. Jonathan Crow summarised the facts at [2]:

“In August 1999, both the first and second defendants (Mr Scattergood and Mr Beauclair respectively) were directors of Extrasure. It is common ground that on 17 August 1999 they both signed a fax from Extrasure to its bank, Royal Bank of Scotland plc (RBS), instructing the bank to transfer £200,000 from the company’s ‘IBA a/c No 20833257’ to an account in the name of Inbro Holdings Ltd (Inbro Holdings). The fax also instructed RBS to convert this sum into US dollars, and to transfer the resulting sum to an account in the name of Inbro Citygate Insurance Brokers Ltd (Citygate). Finally, the fax instructed RBS to pay ‘the transfer’ from Citygate’s account to an American company called United Capitol Insurance Corporation. No separate ‘transfer’ has been put in evidence, but it would appear to have referred to the US dollar equivalent of about £114,000.”

529.

The judge found that the directors did not believe that they were paying a debt due to IH but made the transfer because C Ltd needed the money: see [107]. He also rejected their evidence that they believed that the transfer was in E Ltd’s interests on the basis that it was calculated to preserve the group and to protect E Ltd itself: see [137]. In deciding whether the payment was made for a proper purpose, he applied the four stage test which I have set out (above) at [140] to [143]:

“[140] Applying the four-part test which I have set out above, I can answer this question equally briefly: 140.1. The power in question was the directors’ ability to deal with the assets of Extrasure in the course of trading. 140.2. The purpose for which that power was conferred on the directors was broadly to protect Extrasure’s survival and to promote its commercial interests in accordance with the objects set out in its memorandum. 140.3. The defendants’ substantial purpose in making the transfer was, as I have found, to enable Citygate to meet its liabilities, not to preserve the survival of Extrasure. 140.4. As such, the purpose for which the transfer was made was plainly an improper one.

[141] The parties made written submissions after trial by reference to the objects clause in Extrasure’s memorandum of association (which was not available at trial). The defendants drew attention to clause 3(F) of the memorandum, which enabled Extrasure to provide guarantees of the obligations of its parent or fellow-subsidiary companies, whether or not it received any consideration or advantage therefor. However, providing a guarantee is not the same as simply paying money to a fellow subsidiary. Furthermore, clause 3(Q) appears more nearly to fit the circumstances of this case: and under that provision a loan could only be made if it was calculated to benefit the company.

[142] In any event, as the claimants correctly observed, the fact that a transaction might fall within the terms of a company’s memorandum of association only means that it is intra vires the company. It does not mean that it necessarily represents a proper exercise of the directors’ powers.

[143] Finally, given that the third stage in the four-part test set out above is a question of fact, and given also my factual findings in relation to issues (1) and (2) above, I do not consider that the defendants can credibly suggest that they considered the transfer was made for the proper purposes of Extrasure’s business.”

530.

By contrast, the issue between Mr Curl and Mr Lightman was whether it was open to the Joint Liquidators to advance a case that Mr Chandler acted in breach of S.171(b) when he was not a director or shareholder of RAL although he was an employee of RAL from March 2016. The Joint Liquidators alleged that Mr Chandler “acted throughout for the purposes of RAL” and Mr Chandler served a request for further information in relation to that allegation. The response was as follows:

“RAL’s ownership of the BHS Group served only to promote the interest of RAL and those associated with it or who benefited from its patronage (or that of Mr Chappell as the majority owner and controlling mind of RAL). RAL benefited significantly from its ownership of the BHS Group and none of the Companies benefited in any way.

In the premises, and as a minimum, it is to be inferred from the circumstances and the inherent commercial probabilities that Mr Chandler had an interest in benefiting RAL, for otherwise he would not have acted in the way he did as particularised in the Points of Claim. Mr Chandler’s conduct is only explicable on the basis that he held such an interest. Put another way, any director without such an interest would not have acted in the way Mr Chandler did; most obviously, such a director would have reached the conclusion on 17 April 2015, or alternatively by a different Cessation Date (as defined in Paragraph 308 of the Points of Claim and some subsequent date prior to 25 April 2016 (as set out at Response 119)), that the Companies had no reasonable prospect of avoiding insolvent liquidation.

Further, Mr Chandler owed his position as a director of the Companies to RAL and/or Mr Chappell and, as such, had a personal interest in furthering the interests of RAL and/or Mr Chappell.”

531.

The Joint Liquidators also relied on the fact that Mr Chandler was the sole director of Tamed Productions and the payments made to that company. Mr Lightman submitted in opening that Mr Chandler did not at any time have an interest in acting for the purposes of RAL and that he did not do so. He also argued that the Joint Liquidators’ case involved a “warped view of the reality” and that it was circular. Mr Lightman did not go so far as to submit that it was not possible as a matter of law for Mr Chandler to commit a breach of S.171(b) if he had no interest in RAL. But he argued that there was no factual foundation for the allegation.

532.

In case there is any doubt, I see no reason why a director should not be held to have committed a breach of S.171(b) if he or she acts for the purpose of benefitting a third party at the expense of a company even though the director receives no personal benefit and acts out of friendship or to please the third party or out of a mistaken sense of loyalty. In Re Glossop [1988] 1 WLR 1068 (which Jonathan Crow cited in Extrasure) Harman J made the point that a director may be liable for breach of S.171(b) even if he had no personal interest in the outcome. He stated this at 1076G-1077C:

“It is, in my judgment, vital to remember that actions of boards of directors cannot simply be justified by invoking the incantation "a decision taken bona fide in the interests of the company." The decision of the Privy Council in Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 clearly establishes that a decision can be attacked in the courts and upset notwithstanding (a) that directors were not influenced by any "corrupt" motive, by which I mean any motive of personal gain as by obtaining increased remuneration or retaining office, and (b) that directors honestly believed that their decision was in the best interests of the company as they saw its interests. Lord Wilberforce's observations delivering the advice of the board at p. 831E acquits the directors of corrupt motive; at p. 832 he asserts the primacy of the board's judgment; but he goes on, at p. 835, to assert that there remains a test, applicable to all exercises of power given for fiduciary purposes, that the power was not to be exercised for any "bye-motives.

If it were to be proved that directors resolved to exercise their powers to recommend dividends to a general meeting, and thereby prevent the company in general meeting declaring any dividend greater than recommended, with intent to keep moneys in the company so as to build a larger company in the future and without regard to the right of members to have profits distributed so far as was commercially possible, I am of opinion that the directors' decision would be open to challenge. This is an application, in a sense, of the principle affirmed in so many local government cases and usually called "the Wednesbury principle:" Associated Provincial Picture Houses Ltd. v Wednesbury Corporation [1948] 1 KB 223. If it were proved that the board of directors had habitually so exercised its powers that could justify the making of an order for winding up on the just and equitable ground.”

(2)

Duty to promote the success of the company

533.

Section 172 (“S.172”) is headed “Duty to promote the success of the company” and it provides as follows:

“(1)

A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to– (a) the likely consequences of any decision in the long term, (b) the interests of the company's employees, (c) the need to foster the company's business relationships with suppliers, customers and others, (d) the impact of the company's operations on the community and the environment, (e) the desirability of the company maintaining a reputation for high standards of business conduct, and (f) the need to act fairly as between members of the company.

(2)

Where or to the extent that the purposes of the company consist of or include purposes other than the benefit of its members, subsection (1) has effect as if the reference to promoting the success of the company for the benefit of its members were to achieving those purposes.

(3)

The duty imposed by this section has effect subject to any enactment or rule of law requiring directors, in certain circumstances, to consider or act in the interests of creditors of the company.”

534.

Mr Lightman and Ms Hilliard both submitted (and I accept) that the test is a subjective one and that it required the Joint Liquidators to prove that Mr Henningson and Mr Chandler did not act in good faith. In Regentcrest plc v Cohen [2001] 2 BCLC 80 Jonathan Parker J formulated the test in this way (at [80]):

“The duty imposed on directors to act bona fide in the interests of the company is a subjective one (see Palmer’s Company Law para 8.508). The question is not whether, viewed objectively by the court, the particular act or omission which is challenged was in fact in the interests of the company; still less is the question whether the court, had it been in the position of the director at the relevant time, might have acted differently. Rather, the question is whether the director honestly believed that his act or omission was in the interests of the company. The issue is as to the director’s state of mind. No doubt, where it is clear that the act or omission under challenge resulted in substantial detriment to the company, the director will have a harder task persuading the court that he honestly believed it to be in the company’s interest; but that does not detract from the subjective nature of the test.”

535.

In Re Coroin Ltd [2012] EWHC 2343 (Ch) David Richards J cited this passage in Regentcrest and agreed that it was equally applicable to the duty under S.172. There are, however, exceptions to the rule. The Court may apply an objective test where the director did not consider whether their act or omission was in the interests of the company. Moreover, this is particularly relevant where the individual is a director of a number of companies. In Charterbridge Corporation Ltd v Lloyds Bank Ltd [1970] Ch 62 Pennycuick J made this point at 74E-F (although it was an obiter dictum):

“Each company in the group is a separate legal entity and the directors of a particular company are not entitled to sacrifice the interest of that company. This becomes apparent when one considers the case where the particular company has separate creditors. The proper test, I think, in the absence of actual separate consideration, must be whether an intelligent and honest man in the position of a director of the company concerned, could, in the whole of the existing circumstances, have reasonably believed that the transactions were for the benefit of the company. If that is the proper test, I am satisfied that the answer here is in the affirmative.”

536.

Jonathan Crow recognised this exception in Extrasure (above) at [138] and Mr John Randall QC (sitting as a Deputy Judge of the High Court) followed both decisions in Re HLC Environmental Projects Ltd (above) at [92](b). He also recognised a second exception to the rule or, perhaps better, an extension to the exception identified in Charterbridge and Extrasure. He stated this at [92](c):

“Building on (b), I consider that it also follows that where a very material interest, such as that of a large creditor (in a company of doubtful solvency, where creditors’ interests must be taken into account), is unreasonably (i.e. without objective justification) overlooked and not taken into account, the objective test must equally be applied. Failing to take into account a material factor is something which goes to the validity of the directors’ decision-making process. This is not the court substituting its own judgment on the relevant facts (with the inevitable element of hindsight) for that of the directors made at the time; rather it is the court making an (objective) judgment taking into account all the relevant facts known or which ought to have been known at the time, the directors not having made such a judgment in the first place. I reject the respondent’s contrary submission of law.”

537.

Ms Hilliard and her team recognised this second exception or extension in her written opening submissions and Mr Lightman and his team did not disagree with her either in writing or orally. In my judgment, Ms Hilliard and her team were right to do so. However, as both she and Mr Lightman submitted (and I accept), a director is not in breach of duty under S.172 if he or she forms an honest but unreasonable belief that a particular act or omission is in the interests of the company: see Extrasure (above) at [88] to [90] and [96] to [97] and ClientEarth v Shell PLC [2023] EWHC 1897 (Ch) at [29] and [30] (Trower J).

538.

Section 172(3) preserves the common law requirement for directors to consider the interests of creditors. In Sequana (above) the Supreme Court held that in discharging their duty under S.172 to promote the success of the company, the directors must in certain circumstances have regard to the interests of its creditors. The Court also held that this modified or extended duty did not arise whenever there was a real risk that insolvency might arise in the future. It was not necessary for the Court to express a view about the threshold at which the duty arose but all of the members of the Court expressed a view on that issue.

539.

I begin my analysis with the content of the duty. All of the members of the Court rejected the argument that the directors or officers of a company assumed a separate and free-standing duty to creditors or “creditor duty” but held that S.172(3) preserved the common law rule in West Mercia. Lord Briggs (with whom Lord Kitchin agreed) formulated the scope of that duty at [176]:

“In my view, prior to the time when liquidation becomes inevitable and section 214 becomes engaged, the creditor duty is a duty to consider creditors' interests, to give them appropriate weight, and to balance them against shareholders' interests where they may conflict. Circumstances may require the directors to treat shareholders' interests as subordinate to those of the creditors. This is implicit both in the recognition in section 172(3) that the general duty in section 172(1) is "subject to" the creditor duty, and in the recognition that, in some circumstances, the directors must "act in the interests of creditors". This is likely to be a fact sensitive question. Much will depend upon the brightness or otherwise of the light at the end of the tunnel; i.e. upon what the directors reasonably regard as the degree of likelihood that a proposed course of action will lead the company away from threatened insolvency, or back out of actual insolvency. It may well depend upon a realistic appreciation of who, as between creditors and shareholders, then have the most skin in the game: i.e. who risks the greatest damage if the proposed course of action does not succeed.”

540.

Lord Reed adopted a very similar formulation at [81] (set out below) and Lord Hodge adopted very similar reasoning (and I return to a particular example in his judgment below). Lord Briggs held that the modified duty arose where insolvency was imminent. He set out his formulation of the test at [203]:

“I would prefer a formulation in which either imminent insolvency (ie an insolvency which directors know or ought to know is just round the corner and going to happen) or the probability of an insolvent liquidation (or administration) about which the directors know or ought to know, are sufficient triggers for the engagement of the creditor duty. It will not be in every or even most cases when directors know or ought to know of a probability of an insolvent liquidation, earlier than when the company is already insolvent. But that additional probability-based trigger may be needed in cases where the probabilities about what lies at the end of the tunnel are there for directors to see even before the tunnel of insolvency is entered.”

541.

Lord Hodge agreed with Lord Briggs: see [227]. Lord Reed considered that the modified duty would arise where the company was “insolvent or bordering on insolvency” but contrasted that with “an inevitable insolvent liquidation or administration” at [81]:

“Where the company is insolvent or bordering on insolvency but is not faced with an inevitable insolvent liquidation or administration, the directors' fiduciary duty to act in the company's interests has to reflect the fact that both the shareholders and the creditors have an interest in the company's affairs. In those circumstances, the directors should have regard to the interests of the company's general body of creditors, as well as to the interests of the general body of shareholders, and act accordingly. Where their interests are in conflict, a balancing exercise will be necessary. Consistently with what was said in Kinsela at p 733 (para 33 above), and with the reasoning in paras 48-59 above, it can I think be said as a general rule that the more parlous the state of the company, the more the interests of the creditors will predominate, and the greater the weight which should therefore be given to their interests as against those of the shareholders. That is most clearly the position where an insolvent liquidation or administration is inevitable, and the shareholders consequently cease to retain any valuable interest in the company.”

542.

Lady Arden agreed with Lord Reed that the rule in West Mercia applied where the company was insolvent or bordering on insolvency or an insolvent liquidation or administration was probable. She stated this at [279]:

“In my judgment, the Rule in West Mercia comprises two parts, and there is a distinction between them which applies not just to the question of knowledge but generally. The first part is the requirement for directors to consider creditors' interests. This arises whenever a company is financially distressed. By that I mean, as Lord Reed puts it in para 12 of his judgment, the company is insolvent or bordering on insolvency, or an insolvent liquidation or administration is probable, or the directors plan to enter into a transaction in question would place the company in one of those situations. That requirement creates a responsibility not to harm creditors in the meantime. The Rule also includes a second requirement. This requires directors to act predominantly in creditors' interests.”

543.

The members of the Supreme Court also considered the state of knowledge which was required for the modified duty to arise. They did not cast doubt on the general principle that S.172(1) imposed a subjective test (subject to the exceptions which I have identified). However, Lord Briggs and Lord Hodge expressed the view that the modified duty would only arise where the directors knew or ought to have known that the insolvency was imminent or that insolvent liquidation was probable: see [203] (above) and [238] (below). Lord Reed and Lady Arden preferred not to express a view on this issue: see [90] and [281].

544.

Lord Hodge and Lady Arden also debated a particular example which has, in my judgment, direct application to the present case. Lord Hodge used the example as a reason for not overruling West Mercia and recognising the modified duty at the highest level. He explained the context at [237] and set out the example at [238]:

“237.

In section 172(3) Parliament has in effect authorised the courts to develop the common law duty of directors in relation to the interests of the company's creditors as a company nears insolvency. But that development must take place against the backdrop of the pre-existing section 214 of the 1986 Act and the courts must have regard to the boundaries which Parliament placed on the power which it conferred on the courts under that section. Section 214 is not concerned with the fiduciary duties of a director to the company. It creates a remedy where a director has failed to act in the interests of the company's creditors in circumstances in which he or she objectively should have so acted. Nonetheless, questions will arise as to how far section 214 , in which Parliament has identified the circumstances in which liability is to be imposed on directors in the context of insolvency, constrains judicial development of the common law to impose liability and give the company or its liquidator the remedies of an accounting or to order the making of equitable compensation for a breach of a fiduciary duty to the company in relation to the interests of its creditors in circumstances outside those identified in section 214 of the 1986 Act .

238.

It may be only in rare circumstances that such questions will arise. In many cases when a company is bordering on insolvency, an obligation to consider the interests of a company's creditors and balance them against the interests of the shareholders will involve directors in making a commercial judgment about the benefits and risks of a transaction or course of action which may not readily be impugned. A reasonable decision by directors to attempt to rescue a company's business in the interests of both its members and its creditors would not in my view involve a breach of the common law duty. But there may be more egregious circumstances in which the absence of a remedy beyond section 214 would appear to be a lacuna in our law. By way of example, suppose (i) a company has been unsuccessful and the capital of the shareholders has been lost through balance sheet insolvency; (ii) the company's directors know or ought to be aware in the exercise of their duty of skill and care that a formal insolvency process is more likely than not; (iii) there is a prospect of avoiding the formal insolvency if the company were to undertake a particularly risky transaction; but (iv) the company's assets that remain and which would be put at risk by the transaction would be lost to its creditors if the gamble were to fail. The shareholders, whether present or future, would probably have nothing to lose from the adoption of the very risky transaction as a last roll of the die because the likely alternative would be a formal insolvency from which they would receive nothing. A requirement that the directors consider and, if the facts of the particular case require it, give priority to the interests of the company's creditors in their decision- making in such circumstances appears to be a necessary constraint on the directors. I am not persuaded that the directors' duty to exercise care and skill set out in section 174 fills the gap in the law as, absent the West Mercia duty, the directors would be required to exercise their skill and care to achieve the purpose set out in section 172(1) . To my mind the law would be open to justifiable criticism if it were to provide no remedy in respect of the interests of such creditors where such a course of action was proposed or had been adopted in the exclusive interest of the shareholders and to the probable detriment of the company's creditors without a proper consideration of the interests of the latter.

545.

Lady Arden addressed this example in considering whether the rule in West Mercia is necessary given the range of statutory remedies available. She discussed the example at [289] and then expressed the view that there would be remedy in misfeasance without resort to the modified duty at [329] and [330]:

“289.

This formulation also addresses the specific problem of what I would call "'insolvency-deepening activity". This problem was raised by Mr Thompson KC in his submissions and is discussed by Lord Hodge in his judgment (para 238 above). The example (the "insolvency-deepening example") which Lord Hodge gives is of a financially distressed company which the directors know or ought to know will probably have to enter some formal insolvency but there is a prospect of a return to solvency if the company undertakes a particularly risky transaction. That transaction if it fails will deepen, not improve, the insolvency. A critical feature of this example is the slimness of the chance of avoiding irreversible insolvency. Creditors then have not even a sporting chance of gain. Lord Hodge concludes that in this situation directors should give creditors' interests priority over shareholders' interests.”

“329.

I can further illustrate this point by further reference to the example taken by Lord Hodge at para 238 of his judgment and first mentioned at para 289 above. This is a case where the company is balance sheet insolvent and liquidation is probable but there is a prospect that, if the directors apply the entirety of the company's free assets for this purpose, the company could be saved. However, in this example, "egregious" circumstances occur. Shareholders have little if anything to lose when the directors opportunistically wager the company's assets as the last throw of the dice on a single venture which is very risky to creditors and is thus not in their interests. Lord Hodge holds that "the law would be open to justifiable criticism if it were to provide no remedy in respect to the interests of such creditors where such a course of action was proposed or had been adopted in the exclusive interest of the shareholders and to the probable detriment of the company's creditors without a proper consideration of the interests of the latter." (para 238) So he is contemplating that the directors carry out, or threaten to carry out, an action in the interest of shareholders exclusively and fail properly to consider the interests of creditors.

330.

I respectfully disagree that there would be no remedy under the general law. There would be a remedy in misfeasance. The directors have clearly abused their position. If they go ahead with their scheme, and the company goes into liquidation as they foresaw with a larger deficiency than before, the liquidator will say, in my judgment with some force, that the scheme was a breach of duty for at least two reasons. First, reasonably diligent and skilful directors would not have implemented such a risky and potentially disadvantageous scheme. This is not a duty to balance shareholders' and creditors' interests: cf para 244 of Lord Hodge's judgment. The second ground would be that the scheme was driven by a desire to benefit current shareholders rather than for the benefit of the company as a whole. This point was made by the Supreme Court of Canada in Trustee of People's Department Stores Inc v Wise, above, at paras 42 and 47: see also Colin Gwyer & Associates Ltd v London Wharf (Limehouse) Ltd [2003] 2 BCLC 153, paras 411-412 below. Professor LS Sealy made a similar point about the insolvency-deepening activity of Mr Dodd in West Mercia (see paras 406-407).”

546.

Lord Hodge was not persuaded by this explanation: see [243] to [245]. Lord Briggs also preferred his view on this issue: see [204]. It follows that they and Lord Kitchin (who agreed with Lord Briggs) formed the majority on this point. But for present purposes, the critical point is that both Lord Hodge and Lady Arden were agreed that “insolvency-deepening activity” can amount to a breach of duty by directors even though insolvent liquidation is not inevitable and there is no liability under S.214. Roberts v Frohlich [2011] 2 BCLC 625 provides a good example of “insolvency-deepening” conduct. In that case Norris J considered that it was a breach of a director’s duty to exercise reasonable care, skill and diligence not to consider the interests of creditors at [98]:

“I turn to consider whether there is a breach of the duty to ODL to exercise reasonable skill and care (a question which is to be answered by reference to the law as it was before the coming into effect of the Companies Act 2006). In doing so I accept the submission of Mr Russen QC that it is important to recognise this as a duty to ODL to employ reasonable skill and care in the performance of the functions of a director of ODL (and to resist the temptation simply to treat it as if it were a duty to the creditors of ODL to see that they did not suffer loss). But if the solvency of ODL was doubtful then the functions of the director fall to be performed in that context. His skill and care would be called for in relation to acts which might threaten the continued existence of the company. The acts which a competent director might justifiably undertake in relation to a solvent company may be wholly inappropriate in relation to a company of doubtful solvency where a long-term view is unrealistic.”

(3)

Duty to exercise independent judgment

547.

Section 173 (“S.173”) is headed “Duty to exercise independent judgment” and it provides as follows:

“(1)

A director of a company must exercise independent judgment. (2) This duty is not infringed by his acting– (a) in accordance with an agreement duly entered into by the company that restricts the future exercise of discretion by its directors, or (b) in a way authorised by the company's constitution.”

548.

Mr Curl and Perkins submitted (and I accept) that a director may not defer to the wishes of a shareholder, another director or another personality without bringing their own independent judgment to bear on the issue. They relied on Bishopsgate (No 2) (above) as an example of a situation in which a director was liable for blindly following his brother. They also relied on the passage from Charterbridge (above) as illustrating the approach which the Court should adopt where there are a number of different group companies with different interests and different creditors. In Lonrho Ltd v Shell Petroleum Co Ltd [1980] 1 WLR 627 Lord Diplock also emphasised that it is the duty of directors of a subsidiary company to consider independently whether it is in the company’s interests to comply with a request by a shareholder and that the directors may take into account the interests of creditors: see 643E-G.

(4)

Duty to exercise reasonable care, skill and diligence

549.

Section 174 (“S.174”) is headed “Duty to exercise reasonable care, skill and diligence” and, perhaps unsurprisingly, it imposes the same standard of care as the Notional Director standard in S.214(4). It provides as follows:

“(1)

A director of a company must exercise reasonable care, skill and diligence. (2) This means the care, skill and diligence that would be exercised by a reasonably diligent person with– (a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company, and (b) the general knowledge, skill and experience that the director has.”

550.

Directors are under a duty to inform themselves about the company’s affairs on appointment: see Sequana at [90] (Lord Reed). I have set out the law as it applies to delegation and reliance on professional advice in addressing S.214 (above). Mr Curl and Mr Perkins also cited Re Barings plc [1998] BCC 583 where Sir Richard Scott V-C (as he then was) explored the standard of care to be expected of a director in a large corporate organisation where they have delegated functions to individual directors or employees. He stated this at 586D-G:

“That may be so up to a point in theory, but the higher the office within an organisation that is held by an individual, the greater the responsibilities that fall upon him. It is right that that should be so, because status in an organisation carries with it commensurate rewards. These rewards are matched by the weight of the responsibilities that the office carries with it, and those responsibilities require diligent attention from time to time to the question whether the system that has been put in place and over which the individual is presiding is operating efficiently, and whether individuals to whom duties, in accordance with the system, have been delegated are discharging those duties efficiently. It plainly becomes individuals holding high office to be responsive to warning signs that indicate some failure in the system, or in the discharge by individuals within the system of their respective responsibilities. It would, I think, be quite rare to find a case where there have been serious continuing failures on the part of individuals of which the senior executive officers could disclaim responsibility on the ground that they did not know, and were not told of the failures. There may be some cases of that sort, and if it is right that the senior executives did not know, were not told and could not have been expected to know about the failures, they may be absolved of criticism. But the responsibilities that go with the high office held by Mr Maclean, notwithstanding that there were others who held higher office, carry with them the obligation of diligent supervision. That seems to me to be the context against which I must examine the particular complaints made against Mr Maclean in the Secretary of State's case.”

551.

This is consistent both with the general statements in both Re City Equitable Fire Insurance Co Ltd and Re Produce Marketing Consortium Ltd (above). But whatever systems the directors have put in place, the Court must still be satisfied that the individual decision which is the subject matter of the claim went beyond an error of commercial judgment and was one which no director would have reached applying the Notional Director standard: see Optaglio Ltd v Tethal [2015] EWCA Civ 1002 at [23] (Floyd LJ). In Sharp v Blank (above) Sir Alastair Norris expressed this principle at [627]:

“Third, Romer J observed that a director is not liable for mere errors of judgment (an expression oft-repeated). By this I understand him to mean that where the opinions of reasonably informed and competent directors might differ over, for example, some entrepreneurial decision, the mere fact that a director makes what proves to be clearly the wrong choice does not make him liable for the consequences. When embarking upon a transaction a director does not guarantee or warrant the success of the venture. Risk is an inherent part of any venture (whether it is called “entrepreneurial” or not). A director is called upon (in the light of the material and the time available) to assess and make a judgment upon that risk in determining the future course of the company. Where a director honestly holds the belief that a particular course is in the best interests of the company then a complainant must show that the director’s belief is one which no reasonable director in the same circumstances could have entertained.”

(5)

Duty to avoid conflicts of interest

552.

The duty to exercise reasonable care, skill and diligence is a duty owed by a fiduciary but not a fiduciary duty. Sections 175 to 177 codify the no conflict rule for fiduciaries as it applies to directors. Section 175 is headed “Duty to avoid conflicts of interest” and it provides as follows:

“(1)

A director of a company must avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company.

(2)

This applies in particular to the exploitation of any property, information or opportunity (and it is immaterial whether the company could take advantage of the property, information or opportunity).

(3)

This duty does not apply to a conflict of interest arising in relation to a transaction or arrangement with the company.

(4)

This duty is not infringed– (a) if the situation cannot reasonably be regarded as likely to give rise to a conflict of interest; or (b) if the matter has been authorised by the directors.

(5)

Authorisation may be given by the directors– (a) where the company is a private company and nothing in the company's constitution invalidates such authorisation, by the matter being proposed to and authorised by the directors; or (b) where the company is a public company and its constitution includes provision enabling the directors to authorise the matter, by the matter being proposed to and authorised by them in accordance with the constitution.

(6)

The authorisation is effective only if– (a) any requirement as to the quorum at the meeting at which the matter is considered is met without counting the director in question or any other interested director, and (b) the matter was agreed to without their voting or would have been agreed to if their votes had not been counted.

(7)

Any reference in this section to a conflict of interest includes a conflict of interest and duty and a conflict of duties.”

553.

In Breitenfeld UK Ltd v Harrison [2015] EWHC 399 (Ch) Norris J stated that whether a director’s direct or indirect interest conflicts (or may conflict) with the interest of the company is to be ascertained by asking whether a reasonable man, looking at the relevant facts, would think that there was a real, sensible possibility of conflict: see [60](e) and (f). He also stated that conflicts of interest are identified not by shoe-horning the facts of a given case into various pre-determined categories of relationship but by the application of the general principle: see [67].

(6)

Duty not to accept benefits from third parties

554.

Finally, section 176 (“S.176”) codifies the element of the conflict rule which prohibits a fiduciary from exploiting his or her engagement for personal benefit (including the acceptance of secret commissions or bribes) without full disclosure of all material circumstances. It is headed “Duty not to accept benefits from third parties” and it provides as follows:

“(1)

A director of a company must not accept a benefit from a third party conferred by reason of – (a) his being a director, or (b) his doing (or not doing) anything as director.

(2)

A “third party” means a person other than the company, an associated body corporate or a person acting on behalf of the company or an associated body corporate.

(3)

Benefits received by a director from a person by whom his services (as a director or otherwise) are provided to the company are not regarded as conferred by a third party.

(4)

This duty is not infringed if the acceptance of the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest.

(5)

Any reference in this section to a conflict of interest includes a conflict of interest and duty and a conflict of duties.”

555.

The law is particularly stringent in relation to claims against an agent who has received a bribe or secret commission. In FHR European Ventures LLP v Cedar Capital Partners LLC [2014] AC 250 Lord Neuberger explained the wider policy considerations behind S.176 at [42]:

“Wider policy considerations also support the respondents’ case that bribes and secret commissions received by an agent should be treated as the property of his principal, rather than merely giving rise to a claim for equitable compensation. As Lord Templeman said giving the decision of the Privy Council in Attorney General for Hong Kong v Reid [1994] 1 AC 324, 330H, “bribery is an evil practice which threatens the foundations of any civilised society”. Secret commissions are also objectionable as they inevitably tend to undermine trust in the commercial world. That has always been true, but concern about bribery and corruption generally has never been greater than it is now: see for instance, internationally, the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions 1999 and the United Nations Convention against Corruption 2003, and, nationally, the Bribery Acts 2010 and 2012. Accordingly, one would expect the law to be particularly stringent in relation to a claim against an agent who has received a bribe or secret commission.”

556.

This stringency is reflected by the fact that an agent who accepts a bribe will hold it on trust for his or her principal even when there is no specific transaction in view: see Daraydan Holdings Ltd v Solland International Ltd [2005] Ch 119 and Fiona Trust & Holding Corp v Privalov [2010] EWHC 3199 at [73] (Andrew Smith J). Lawrence Collins J (as he then was) stated as follows in the first of these decisions at [53]:

“In proceedings against the payer of the bribe there is no need for the principal to prove (a) that the payer of the bribe acted with a corrupt motive; (b) that the agent’s mind was actually affected by the bribe; (c) that the payer knew or suspected that the agent would conceal the payment from the principal; (d) that the principal suffered any loss or that the transaction was in some way unfair: the law is intended to operate as a deterrent against the giving of bribes, and it will be assumed that the true price of any goods bought by the principal was increased by at least the amount of the bribe, but any loss beyond the amount of the bribe itself must be proved; (e) that the bribe was given specifically in connection with a particular contract, since a bribe may also be given to an agent to influence his mind in favour of the payer generally (e g in connection with the granting of future contracts).”

557.

It is also unnecessary for the principal to prove that the secret commission was paid or received dishonestly or that either party realised that it was unlawful or wrong to give or take a secret commission. In Re a Debtor (No 229 of 1927) [1927] 2 Ch 367 Scrutton LJ stated this at 376:

“A man who is the agent of A in a transaction between A. and B., and who also acts secretly for B in the same transaction, is presumed to act corruptly. Common law authorities require the Court to hold that that is a corrupt practice, and, in my opinion, the Court ought to presume fraud in such circumstances. It seems to me a dangerous thing to allow a man to say: ‘Although you did not know it, I was also agent for the other party.’”

558.

Nor is it a defence for the agent or fiduciary to prove that the secret commission was received by a connected or associated company. Mr Curl and Mr Perkins drew my attention to three examples in which the agent or fiduciary was held liable where the secret commission was paid to an offshore company: see Logicrose Ltd v Southend United Football Club Ltd [1988] 1 WLR 1256 (Millett J), Shell International Trading & Shipping Co Ltd v Tikhonov [2010] EWHC 1399 (QB) (Jack J) and Shetty v Al Rushaid Petroleum Investment Co [2013] EWHC 1152 (Ch) (Floyd LJ). They also submitted that the use of an offshore company should be seen as an aggravating factor, in that it shows that the fiduciary knew that what they were doing was wrong and took steps to disguise their wrongdoing. I agree that it may be appropriate to draw the inference that the agent knew that the conduct was unlawful or wrong from the use of an offshore company and the attempts by the agent to distance themselves from the bribe or secret commission and to this extent I accept that submission.

559.

Ms Hilliard and Ms Earle placed particular reliance on the recent decision in Republic of Mozambique v Privinvest Shipbuilding SAL (Holding) [2023] Lloyd’s Rep 564 where the Supreme Court had to decide whether claims for bribery, conspiracy and fraud fell within the scope of an arbitration agreement. In the course of his judgment Lord Hodge described a claim for bribery at [86] and [87] (their emphasis):

“86.

The Republic's first claim for damages and indemnity relates to its allegations of bribery. Leggatt J in Anangel Atlas Cia Naviera SA v Ishikawajima-Harima Heavy Industries Co (No.1) [1990] 1 Lloyd's Rep 167, 171 succinctly described a bribe as: "a commission or other inducement, which is given by a third party to an agent as such, and which is secret from his principal.” The components of a claim for bribery are (i) that a secret payment or other inducement has been made to an agent which gives rise to a realistic prospect of a conflict between the agent's personal interest and that of his principal, and (ii) the recipient of the bribe (or the person at whose order the bribe is made) must be someone with a role in the decision-making process in relation to the transaction in question. But the payment need not be linked to a particular transaction, it is sufficient that the agent is tainted with bribery at the time of the transaction between the payer of the bribe and the principal. The agent and the payer of the secret commission are jointly and severally liable not only to account to the principal for the amount of the bribe but also for damages for fraud for any loss suffered by the principal. See Novoship (UK) Ltd v Mikhaylyuk [2012] EWHC 3586 (Comm), paras 104-111 per Christopher Clarke J (his judgment was later overturned on a different point).

87.

It is clear from this description of a claim for bribery that the Republic's claim based on bribery does not require an examination of the validity of any of the supply contracts. Nor is it necessary to prove dishonesty or that any fraudulent representation was made to the principal. Further, a defence that the supply contracts were valid and were on commercial terms would not be relevant to the question of a defendant's liability to account for the bribe. The law assumes that the price of the goods and services purchased by or on behalf of the principal was increased by at least the amount of the bribe : Daraydan Holdings Ltd v Solland International Ltd [2004] EWHC 622 (Ch); [2005] Ch 119, para 53 per Lawrence Collins J. In this case, although this matter need not be proved, it is not disputed that the cost of the payments said to be bribes was financed by Credit Suisse's lending which the Republic purportedly guaranteed. A defence of the commerciality of a supply contract, ie that the Republic received value for the monetary obligation which it undertook in entering into a guarantee, would be relevant only in relation to the quantification of the Republic's claim for damages and indemnity beyond the amount of the bribes.”

560.

Ms Hilliard relied on the words which I have emphasised above and submitted that the Joint Liquidators had to prove that Mr Henningson was in a position of conflict at the time of the transaction. For my part, I do not consider Lord Hodge intended to depart from any of the authorities which I have set out above or lay down a prescriptive rule about claims for bribery or a secret commission. Indeed, he stated that it was unnecessary to prove that the payment was linked to a particular transaction. In any event, he was not considering a case in which a company made a claim against a director or the construction of S.176.

561.

Ms Hilliard and Ms Earle also submitted that an allegation of bribery or of a secret commission is tantamount to a claim for fraud and that allegations of this nature have to be properly pleaded and proved: see Three Rivers District Council v. Bank of England [2003] 2 AC 1 at [186] (Lord Millett). They also submitted that cogent evidence was required to prove such an allegation: see JSC BM Bank v. Kekhman [2018] EWHC 791 (Comm) at [51] to [56] (Bryan J). Finally, they submitted that this should be derived from primary facts, i.e. those observed by witnesses and proved by oral testimony or original documents: see British Launderers Association v Hendon Rating Authority [1949] 1 KB 462 at 471-2 (Denning LJ). This kind of “solid foundation” is to be contrasted with “speculation and inference”: see The Federal Deposit Insurance Corp v Barclays Bank plc [2020] EWHC 2001 (Ch) at [36] to [39] (Snowden J).

562.

I accept that an allegation of bribery is a serious one and must be properly pleaded. However, it is unnecessary for the company to plead that the director was dishonest or to give particulars of a transaction with which it is linked or even to plead that the director had a conflict. S.176 required the Joint Liquidators to plead and prove that Mr Henningson accepted a benefit from a third party conferred by reason of either (a) his being a director or (b) his doing (or not doing) anything as director. I also accept that an allegation of this nature must be proved by cogent evidence.

563.

However, I do not accept that the Court cannot draw an inference in appropriate circumstances. Indeed, this debate brought to mind the observations of Rix LJ about circumstantial evidence in relation to an allegation of contempt in JSC BTA Bank v Ablyazov (No 8) [2013] 1 WLR 1331 at [52]:

“It is, however, the essence of a successful case of circumstantial evidence that the whole is stronger than individual parts. It becomes a net from which there is no escape. That is why a jury is often directed to avoid piecemeal consideration of a circumstantial case: R v Hillier (2007) 233 ALR 634, cited in Archbold's Criminal Pleading, Evidence and Practice, 2012 ed, para 10-3. Or, as Lord Simon of Glaisdale put it in R v Kilbourne [1973] AC 729, 758, ‘Circumstantial evidence … works by cumulatively, in geometrical progression, eliminating other possibilities’. The matter is well put by Dawson J in Shepherd v The Queen (1990) 170 CLR 573, 579–580 (but also passim): ‘the prosecution bears the burden of proving all the elements of the crime beyond reasonable doubt. That means that the essential ingredients of each element must be so proved. It does not mean that every fact—every piece of evidence—relied upon to prove an element by inference must itself be proved beyond reasonable doubt. Intent, for example, is, save for statutory exceptions, an element of every crime. It is something which, apart from admissions, must be proved by inference. But the jury may quite properly draw the necessary inference having regard to the whole of the evidence, whether or not each individual piece of evidence relied upon is proved beyond reasonable doubt, provided they reach their conclusion upon the criminal standard of proof. Indeed, the probative force of a mass of evidence may be cumulative, making it pointless to consider the degree of probability of each item of evidence separately.”

564.

In the present case, Mr Henningson has admitted that he discussed the payment of a fee with a third party. The third party asserts that it paid the fee but Mr Henningson denies this. He also denies that the fee was paid either by reason of his being a director or his doing (or not doing) anything as director. In the absence of cross-examination, I have to decide whether I can properly draw the inference that the Carlwood Payment was made to him or for his benefit and, if so, whether it related to his duties as a director. This is an inference which I am entitled to draw after considering all of the evidence.

(7)

Ratification

565.

S.175 expressly permits authorisation of a conflict subject to certain procedural constraints. Ms Hilliard and Ms Earle also submitted that a director did not have to account for a benefit received from a third party where the director had disclosed it and the circumstances in which they had acquired it and the retention of the benefit had been sanctioned by a resolution of the members or their acquiescence if they were protected by an appropriately worded provision in the Articles of Association: see Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378.

566.

Neither Mr Henningson nor Mr Chandler raised the defence that RAL had ratified or authorised any breaches of duty which I found them to have committed. It may, therefore, be academic but in case there is any doubt Sequana also contains clear statements by a number of the members of the Supreme Court that shareholders cannot authorise or ratify a breach of duty once the modified duty to act in good faith in the interests of creditors arises. Lord Reed stated this most clearly at [91]:

“As has been explained at paras 40-45, the law governing shareholder authorisation and ratification has developed in recent times in parallel with the law governing the directors’ fiduciary duty, sometimes in the same cases. As the law was stated in Ciban Management Corpn v Citco (BVI) Ltd [2021] AC 122, para 40, the shareholders cannot authorise or ratify a transaction which would jeopardise the company’s solvency or cause loss to its creditors. That principle should ensure that, where the directors are under a duty to act in good faith in the interests of the creditors, the shareholders cannot authorise or ratify a transaction which is in breach of that duty.”

567.

It is an open question whether the directors could ratify a breach of any other duties (and, in particular, to sanction a bribe or secret commission) once the modified duty has arisen and it may be that it would in fact amount to a breach of S.174 for directors to ratify a benefit to one of their number under S.176 even if full disclosure is given. There is also authority that a shareholder cannot ratify an act which is ultra vires or incapable of ratification under section 239 of the CA 2006: see Franbar Holdings Ltd v Patel [2009] 1 BCLC 1 at [44] to [45] (William Trower QC, as he then was, sitting as a Deputy High Court Judge). I can see no reason why section 239(7) should not preserve the general principle as it applies to other breaches of duty. But this is a question for further consideration if and when it arises.

(8)

Quantum

568.

I have dealt with the question of causation in the context of the Wrongful Trading Claim (above). The parties did not address me on the way in which to assess the quantum of equitable compensation in the context of the Misfeasance Trading Claim. This is unsurprising given that on most findings which I was likely to make, the question was likely to be academic. Mr Curl and Mr Perkins assumed that if they succeeded on the Misfeasance Trading Claim, the measure of compensation would be the IND at the relevant Knowledge Date. Ms Hilliard and Mr Lightman focussed on defending the claim and the contribution which their respective clients would be liable to make if the Wrongful Trading Claim succeeded. In the event, this issue is not academic and I set out how I propose to deal with it at the end of this judgment.

(9)

Section 1157

569.

Section 1157(1) of the CA 2006 (“S.1157”) provides that the Court may relieve a director from liability for negligence, breach of trust or breach of duty. S.1157 provides as follows:

“(1)

If in proceedings for negligence, default, breach of duty or breach of trust against – (a) an officer of a company, or (b) a person employed by a company as auditor (whether he is or is not an officer of the company), it appears to the court hearing the case that the officer or person is or may be liable but that he acted honestly and reasonably, and that having regard to all the circumstances of the case (including those connected with his appointment) he ought fairly to be excused, the court may relieve him, either wholly or in part, from his liability on such terms as it thinks fit.”

570.

Mr Lightman and his team submitted in their opening submissions (and I accept) that a director who relies on the section must establish that: (i) they acted honestly, (ii) they acted reasonably (iii) they ought fairly to be excused having regard to all the circumstances. He also accepted that the burden is on the director to prove both honesty and reasonableness: see Coleman Taymar Ltd v Oakes [2001] 2 BCLC 749. In that case Robert Walker LJ gave the following guidance at [83] and [85] in relation to section 727 of the Companies Act 1985 (S.1157’s predecessor section):

“Section 727 requires an "essentially subjective approach": per Knox J in Re Produce Marketing Consortium Ltd [1989] 3 All ER 1 at 6. In my view this subjective approach must be limited to the "honesty" element of "honestly and reasonably". I do not see how the reasonableness requirement can be a subjective requirement. Any reasonableness test must by its very nature be objective. It does not follow that merely because a director has acted (subjectively) honestly and (objectively) reasonably the court is bound to excuse him. Proof that a director has acted honestly and reasonably are pre−conditions of the court's jurisdiction. Once the conditions are fulfilled, the court must consider whether in all the circumstances the director ought fairly to be excused, and if so may (not must) relieve him either absolutely or partly on the terms the court thinks fit: see National Trustees Co of Australasia Ltd v General Finance Co of Australasia Ltd [1905] AC 373 at 381 (PC).”

571.

Ms Hilliard and Ms Earle submitted that the test for reasonable conduct which the Court should apply is whether the director acted “in the way in which a man of affairs with reasonable care and circumspection could reasonably be expected to act in such a case”: see Re Duomatic Ltd [1969] 2 Ch 365 at 377 (Buckley J). Indeed, in PNC Telecom plc v Thomas (No 2) [2008] 2 BCLC 95 Mr Thomas Ivory QC (sitting as a Deputy High Court Judge) applied that test to S.1157: see [94]. Mr Curl and Mr Perkins did not submit that I should adopt a different test and I am content to adopt it. Finally, Mr Lightman and his team pointed out (and I accept) that the Court may grant relief under S.1157 even though the director has been found liable for negligence: see Re D'Jan of London Ltd [1993] BCC 646 at 649A (Hoffmann LJ).

572.

The parties did not address the Court on the question whether it had jurisdiction under S.1157 to relieve a director from liability or wrongful trading under S.214. But in Re Produce Marketing (above) Knox J rejected such an argument in relation to S.727 (above) and Mr Henningson and Mr Chandler did not challenge the correctness of that decision. In the event, this issue does not arise for consideration in the present case.

V. Knowledge

P. Completion

“101.

Each of the Respondents had access to the Olswang Report, the Olswang Letter and the GT Report prior to their being appointed as directors of the Companies and should in any event have familiarised themselves with the matters addressed in those documents before accepting appointment as a director of any of the Companies.”

(1)

Mr Chandler

573.

On 18 March 2015 Mr Chandler was appointed a director of BHSGL and on 20 March 2015 he was appointed a director of BHSL. He accepted that he would have read the Olswang Report, the Olswang Letter and the GT Report and made sure that he understood them. He could not recall precisely when he saw each of these documents for the first time but he accepted that he received the Olswang Letter on 10 March 2015 and the Olswang Report on 14 March 2015. He could not recall precisely when he received the GT Report but he accepted that he had read all three within a couple of weeks. I find that Mr Chandler had received and read all three documents by the 17 April Board Meeting.

(2)

Mr Henningson

574.

On 11 March 2015 Mr Henningson was appointed a director of all four Companies. His evidence was that he did not recall receiving the Olswang Report or the GT Report and being directed to those documents or reading them. He did not address the Olswang Letter at all. I accept that it is possible that Mr Henningson does not recall receiving or reading any of these documents. But I find that he did receive and read all three documents for the following reasons:

(1)

On 7 March 2015 Mr Roberts copied the Olswang Report and the Olswang Letter to Mr Henningson at River Rock. About an hour later Mr Henningson forwarded them to his gmail account. Shortly afterwards he also forwarded the pensions matrix to his gmail account. The inference which I draw is that he forwarded them to himself so that he could download and read them.

(2)

On 7 March 2015 Mr Martin of GT also sent Mr Henningson a draft of the GT Report. In the covering email he stated that this was for a meeting at 9 am on the following morning. Again, the inference which I draw is that Mr Henningson read that draft in preparation for the meeting.

(3)

The minutes of a RAL meeting on 11 March 2015 at which Mr Henningson was present record that the Olswang Report, the Olswang Letter were tabled and that Mr Roberts led a detailed conversation focussing on the key findings in the report and the key risks in the letter. Those minutes also record that GT had undertaken extensive due diligence.

(4)

By email dated 11 March 2015 Mr Martin wrote to Mr Henningson in his capacity as a director of RAL stating that later that day he would receive the final version of the GT Report. The inference which I draw is that he received and read the final report.

“By inter alia their own knowledge of RAL’s asset and liability position and/or access to publicly available filed accounts and/or the Olswang Report and/or the Olswang Letter and/or the GT Report, the Respondents knew (or ought to have known immediately on their appointment as directors of the relevant Companies) the following matters prior to completion taking place on 11 March 2015 and in any event prior to their being appointed as directors of the Companies: a. the BHS Group was dependent on the financial support of the Taveta Group without which it would have entered insolvent liquidation or administration before 11 March 2015;”

(1)

Mr Chandler

575.

Mr Curl put the terms of the SPA to Mr Chandler which was sent to him on 13 March 2015. Mr Chandler accepted that Sir Philip Green was effectively paying RAL to take the Companies off his hands and that before the sale they had been entirely dependent upon Taveta’s support. Mr Curl also put an email dated 18 February 2015 from Mr Roberts to Mr Brian Hendry of Paragon Brokers. In that email Mr Roberts stated that without the support of its parent the business was “technically insolvent”. Mr Chandler did not accept that he was aware that the BHS Group was insolvent:

“Q. You knew also that because this transaction was being done with a dowry and in consideration of £1 that the BHS companies had a negative value, didn't they? A. I -- I didn't think about that at the time, but it -- and if that's what you say then I knew that it was for £1 and I knew there was a cash dowry. Q. So if you'd thought about it, which you say you didn't, you would have known, as a matter of commonsense, that this meant that the BHS companies had a negative value; yes? A. Yes, possibly. Q. So you should have known that then, shouldn't you? A. Yes. Q. What this means is that Sir Philip Green is effectively paying RAL to take the BHS companies off his hands, isn't he? A. Yes. Q. And they have been entirely dependent on Taveta's support up until now? A. Yes. Q. And you know that RAL has no way of replicating the Taveta support because it has no money, don't you? A. Well, it has no way of replicating it from its own resources, yes. Q. And nor does the BHS Group? A. Well, we -- I mean, we don't agree about that, Mr Curl. So that's why we're here; right? Q. Could I have, please, bundle {C/187/2}. This is an e-mail from David Roberts to Brian Hendry of Paragon Brokers on 18 February 2015. I don't suggest you saw this at the time, but this is what David Roberts thought. He says -- to someone who is a potential lender -- in the third paragraph: "The business is technically insolvent without parent support and has a £500 million pension deficit so its difficult to ascribe an [enterprise value] of for [it should be "more" I think] than £1." Do you see that? A. Yes. Q. So the fact that the companies are insolvent without Taveta's support was well known to anyone who cared to look prior to completion; do you agree? A. No. Q. Do you think David Roberts is wrong? A. Well, I don't -- I don't know what David Roberts was intending to achieve in -- in that e-mail. Q. Oh, you think David Roberts might have been misrepresenting the position to a counterparty, like Eddie Parladorio had got you to do? A. Well, I don't know. Q. Well, have a think. What do you mean? A. Well, I don't know what "technically insolvent" is meant to imply in that respect. Q. Do you think you should have known what that meant before taking appointment as Group General Counsel of the BHS Group? A. I would have expected David Roberts to have said to us: this company is technically insolvent.”

576.

Mr Curl also put to Mr Chandler the email which he sent to Mr Parladorio on 18 March 2015 which showed that on or shortly after Day One he had particular concerns about the risk of insolvency:

“Q. You continue: "If there is an insolvency event, then there will be an investigation into the company's affairs. This could lead to directors disqualification proceedings. This has to be reported to the bar Council. This could lead to disbarment. Which would be bad. I think there are steps that could be taken that would inoculate me from risk sufficiently to assuage my concerns: importantly I think around company secretarial support, but other things too....I urgently need to discuss all this with you. I know we are all busy but this is critical to me/us. I will be at Marylebone house early reading the BHS articles ready for the board meeting. Speak in morning". Then if we could have the top of that page, please. Mr Parladorio replies that he will aim for 8/8.30 at Mario's which I'm guessing is a cafe or something like that? A. It is. Q. Now, worrying about being disqualified would ordinarily be a bizarre thing to be concerned about when contemplating taking an appointment as a director, wouldn't it? A. I couldn't disagree more with that. Q. Well, normally, one doesn't think that taking appointment as a director carries risk of disqualification, because one doesn't think that one is going into a business of the kind that this was, with people like this. So, Mr Chandler, you were right to be worried about that, given what you had learnt over the previous week. That was why you were worried, weren't you? A. You -- we've just been looking at document after document which explains that BHS was in a distressed situation; and one of the outcomes -- remember, as a lawyer, I'm interested in risk -- one of the outcomes was an insolvency event. And so I had been reading up about what happens in an insolvency event. And actually this -- this demonstrates that I was concerned from the start that my own position would not be damaged by taking unnecessary risks or -- or continuing to trade a company that I thought had no reasonable prospect of liquidation -- of avoiding insolvent liquidation.”

577.

I accept Mr Chandler’s evidence that on 18 March 2015 he did not know that the BHS Group was insolvent without the support of Arcadia or the Taveta Group. However, I also accept his evidence that he was consciously aware from Day One that there was a real risk of an “insolvent event”. By “insolvent event” I understood him to mean from the last sentence of his answer that the BHS Group or those members of the group of which he was a director would go into insolvent liquidation.

(2)

Mr Henningson

578.

I find that Mr Henningson was fully aware of the terms of the SPA. On the morning of 11 March 2015 Mr Roberts sent him the most recent draft and he forwarded it to his gmail account and at the meeting of the board of directors of RAL later that day he approved its terms. The inference which I draw is that Mr Henningson read the draft of in the morning and was fully familiar with its terms when the board of RAL met to make the decision to enter into the SPA later that day. I also find that Mr Henningson knew that the BHS Group remained solvent due to the financial support provided by the Arcadia Group because Mr Roberts stated this in terms in the Olswang Letter. This was also made clear to him by Mr Roberts who identified and discussed a number of key issues at that meeting and before the decision to enter into the SPA was taken.

“b…the BHS Group’s performance as a business had deteriorated while under the control and management of the Taveta Group, despite the extensive financial resources at the disposal of the Taveta Group;”

(1)

Mr Chandler

579.

The Liquidators’ case was that BHSL was consistently loss-making on an annual basis even while it had access to the extensive financial support and retail management expertise of the Taveta Group. They relied on the filed accounts of BHSL as the main trading entity of the BHS Group, which showed that turnover was declining between 2010 and 2014 and that BHSL had made losses before tax. Mr Chandler admitted the relevant figures. He also admitted that he knew on or shortly before 18 March 2015 that the BHS Group’s business was loss-making and had been for some time.

580.

Mr Chandler did not refer to the audited accounts of BHSL in Chandler 1 or suggest that he had read them (or read them in detail). Mr Curl did not put BHSL’s accounts to him or suggest to him that he should have been familiar with them or subjected them to the detailed analysis which, for example, Mr Shaw had carried out. On the other hand, Mr Chandler accepted that RAL had no way of replicating Taveta’s support from its own resources. Moreover, the Olswang Letter stated in terms that Arcadia had provided ongoing financial assistance which had produced an inter-company debt of £240 million. I find, therefore, that on or shortly after 18 March 2015 Mr Chandler knew that the BHS Group had been loss-making for some time and that Arcadia had provided financial support of £240 million prior to the sale. To this extent, therefore, I find that the Liquidators have proved their case.

(2)

Mr Henningson

581.

For the reasons which I set out at [578] I find that on or shortly after 11 March 2015 Mr Henningson knew that the BHS Group had been loss-making for some time and that Arcadia had provided financial support of £240 million prior to the sale.

“c.

RAL had no means of replicating the financial support that had hitherto been provided by the Taveta Group and in fact RAL had no financial resources at all;”

d.

RAL had no means of paying any of its transaction costs associated with the acquisition and intended to use certain BHS Group assets for that purpose, including the sale proceeds of Lowland’s North West House property (as more particularly set out at Paragraphs 113 to 139 below), which would deplete the cash available to the BHS Group from Day One”

(1)

Mr Chandler

582.

Mr Chandler accepted in Chandler 1 that after he became a director, he discovered that RAL had funded the acquisition by ACE 1 and the proceeds of North West House and that Olswang’s fees had been paid from these sources. He also stated that he understood from speaking to Mr Chappell and Mr Parladorio that it was not unusual for an acquiring company to use the target’s assets to fund the acquisition. Finally, he also stated that although he could not be sure when he had discovered ACE 1, he made a note of it at a meeting with Mr Roberts on 24 March 2015. This note records under the heading “ACE”: borrowed £5, has to repay £6, has paid £1m, in breach of obligation to pay £1m, BHS is obliged to pay the company”.

583.

Further, in the passage which I have set out in [575] above, Mr Chandler accepted that RAL had no resources of its own to replicate the financial assistance which Arcadia or Taveta had provided. Mr Curl also cross-examined Mr Chandler about the proceeds of sale of North West House:

“Q. Now, you were aware, before you took the appointment, that RAL had paid away to itself or caused to be paid away to itself a significant proportion of the incoming 32 million that was paid for North West House, weren't you? A. I think I was aware of that before the first – my appointment on the 18th, yes.”

584.

Mr Chandler also accepted that RAL had defaulted on ACE 1 within 5 days of completion on 11 March 2015 and that it was only able to stave of enforcement by charging assets belonging to the BHS Group:

“Q. And could I have the second page of this, please. {C/643/4}. Could I have bundle {C/948.1/1}, please. This is an e-mail, a little later on, from Michael Hitchcock, who joined in July 2015, to Mr Topp. And he says: "Intercompany between RAL and BHS is now 15.7 million, ie RAL owe BHS 15.8 million. I cannot see how this will ever get repaid and technically RAL could therefore be seen as 'bust' -- interesting!". Now, in fact, RAL has been bust ever since it took the 7 million from the North West House proceeds, hasn't it? A. No. Q. Well, it's got a debt that it can't repay, so it's bust, isn't it? A. Well, I think the test is when the debt becomes due; and it wasn't due. And I also think that by the time the companies went into administration the amount of that intercompany debt was standing at around 6 million. So it had repaid monies along the way. Q. Talking of debts becoming due, RAL immediately defaulted on ACE I, didn't it? Because it was supposed to pay 2 million within five days of day 1 and it didn't. That's right, isn't it? A. It is right. Q. Yes. So RAL was unable to pay its debts as they fell due as early as 16 March 2015. That's right, isn't it? A. Yes. Q. So it's bust then, isn't it? A. Well, a solution was found to that issue. Q. And that was putting another charge on to an asset belonging to BHS Properties, wasn't it? A. No, I don't think it was. No, it was. It was increasing the amount that was due on -- on the RAL loan charged against Atherstone, yes. Q. Yes. You cancelled ACE loan note 1, re-issued it for a lower amount, and then the difference you put on to the debt that was secured on Atherstone? A. Yes. Q. That's what happened, isn't it? A. Yes. Q. Yes. So RAL was only able to stave off enforcement by charging up an asset belonging to the companies -- sorry, an asset belonging to BHS Group? A. Yes. Q. This in circumstances where the whole premise of the RAL acquisition was that RAL would be putting money into the companies, rather than taking assets out. That's right, isn't it? A. Yes.”

585.

In the light of this evidence I find that Mr Chandler was aware RAL had no means of replicating the financial support that had hitherto been provided by the Taveta Group, that RAL had no financial resources at all, that RAL had no means of paying any of the transaction costs associated with the acquisition and that it intended to use the assets of the BHS Group for that purpose and, in particular, the proceeds of sale of North West House. I am also satisfied that Mr Chandler knew these facts by the latest on 24 March 2015 when he spoke to Mr Roberts.

(2)

Mr Henningson

586.

I also find that Mr Henningson knew that RAL had no financial resources at completion. He knew that RAL had to raise £5 million to pay the hurt money: see Mr Parladorio’s email dated 9 March 2015. He also knew that RAL had no means of paying any of its transaction costs associated with the acquisition of the BHS Group: see his email dated 5 March 2015 to Mr Robb. This email shows that Mr Henningson had approached Mr Robb for a loan of £1 million to pay the costs of RAL’s professional advisers. It also shows that the only guarantee or security which Mr Henningson was able to offer was a personal guarantee from Mr Chappell. Accordingly, I find that Mr Henningson knew that RAL had no means of paying any of its transaction costs associated with the acquisition. I make findings in relation to Mr Henningson’s knowledge about the application of the proceeds of sale of North West House in section VII.

“e.

the BHS Group’s performance as a retailer had deteriorated while it was under the control and management of the Taveta Group, despite the extensive experience and success as a retailer of the Taveta Group;”

(1)

Mr Chandler

587.

Mr Chandler gave evidence in Chandler 1 that he was aware of Sir Philip Green’s expertise as a successful businessman. Mr Shaw produced a table derived from the BHS Group’s financial statements showing that despite that expertise between 2010 and 2014 the group incurred total operating losses of £386 million and £72 million in the seven months before Day One. Mr Chandler accepted that the BHS Group had a negative value and that Sir Philip Green was effectively paying RAL to take the Companies off his hands. Even if Mr Chandler was not familiar with the group’s financial statements, I am satisfied that he knew that its performance had deteriorated whilst under the control of Taveta and despite Sir Philip’s experience and success.

(2)

Mr Henningson

588.

Mr Henningson also gave evidence about Sir Philip Green in Henningson 1 and it is clear that he was aware of Sir Philip’s expertise. In his amended written replies to the Insolvency Service dated 30 May 2017 Mr Henningson also stated that it was clear to all of the Directors that the BHS Group required financing and that he began working on the acquisition in late 2014 and early 2015. He also stated that he was “extremely focused and aware of the financial position of BHS”. Given these answers and Mr Henningson’s own expertise, I find on the balance of probabilities that he must have read and analysed the group’s financial statements and knew and appreciated the information contained in Mr Shaw’s table. I am satisfied that Mr Henningson also knew that the BHS Group’s performance had deteriorated whilst under the control of Taveta and despite Sir Philip’s experience and success.

“f.

the BHS Group’s major trade credit insurer had already notified it on or around 24 February 2015 that it would not be offering trade credit insurance due to uncertainty regarding the BHS Group's future;”

(1)

Mr Chandler

589.

On 24 February 2015 Euler Hermes withdrew cover. Mr Chandler accepted that when he was appointed he was aware that credit insurance had been withdrawn and I find, therefore, that he knew this by 13 March 2015. I do not find, however, that he knew that this was because of uncertainty about the BHS Group’s future and I return to the significance of trade credit insurance in greater detail below.

(2)

Mr Henningson

590.

Mr Henningson accepted in Henningson 1 that he was aware that there was an issue with trade credit insurance. In his written responses to the Insolvency Service, however, he was more emphatic. He described the difficulties with trade credit insurance as “the single most important matter as it drove cash flow”. The minutes of the board meeting of BHSGL on 18 March 2015 at which both Mr Henningson and Mr Chandler were present also record that Mr Chappell told the meeting that a meeting with Euler Hermes had been difficult and that it was not prepared to offer cover again without a substantial amount of information. I am satisfied that Mr Henningson knew that Euler Hermes had withdrawn cover either on or shortly after Day One and understood the significance of that decision.

“g.

RAL had no retail experience of any kind;”

(1)

Mr Chandler

591.

When Mr Curl put it to him that RAL had no retail experience of any kind, Mr Chandler did not disagree. However, he thought that Mr Tasker might have had some relevant experience. I do not accept that he had any relevant experience on the basis of this evidence or that Mr Chandler believed that he did. Mr Tasker was a solicitor and he described the “bedrock” of his practice as an “M&A lawyer” in his evidence to the Insolvency Service and he did not suggest that he had any retail managerial experience. Moreover, this was not put to Mr Bourne, who was a friend of his. Indeed, Mr Bourne’s evidence was that Mr Tasker resigned as a director on completion. I find that Mr Chandler knew from his appointment that RAL had no retail experience of any kind.

(2)

Mr Henningson

592.

Mr Henningson described RAL as a holding company and not a trading company in Henningson 1. He did not suggest that either he or any of the other directors of RAL had any retail experience or that he thought that they did. I find that Mr Henningson knew from his appointment that RAL had no retail experience of any kind.

“h.

BHSL required a working capital facility of at least £120 million”

(1)

Mr Chandler

593.

Mr Chandler’s evidence in his witness statement was that he was not aware that BHSL required a working capital facility of at least £120 million and he repeated this in cross-examination. Mr Curl put paragraphs 7 to 12 of the Olswang Letter (above) to him and, in particular, paragraph 12 in which Olswang advised RAL’s directors not to transact until they had maximum commercial comfort that they were able to satisfy the terms of the Farallon £120 million working capital facility. Mr Chandler accepted that he was aware that there was a funding gap, that it was critical and that it had not been filled at the date of the Olswang Letter. But he did not accept either that he knew a working capital facility of £120 million was required.

594.

I accept Mr Chandler’s evidence. Although it was one of the Points of Principle and Mr Chappell had told the Pensions Regulator that RAL would raise £120 million of new debt, the terms of the SPA did not require RAL to obtain such a working capital facility and in his email dated 17 March 2015 Mr Roberts informed Mr Chandler that the BHS Group did not require the Farallon facility of £120 million at the date of his appointment.

(2)

Mr Henningson

595.

In his amended written responses to the Insolvency Service dated 30 May 2017 Mr Henningson accepted that he knew that the BHS Group required financing and that he was working with River Rock and assisting RAL to negotiate a £120 million facility up to March 2015. I am also satisfied that he read and understood the warning in the Olswang Letter not to enter into the SPA until the facility was in place. However, as with Mr Chandler I am not satisfied that Mr Henningson knew or believed that a facility of £120 million was required on completion. The SPA did not impose such a term and the GT Report stated that a working capital facility of £25 million was critical to achieving minimum headroom of £62.8 million in August 2015.

“i.

negotiations with Farallon had been unsuccessful and no working capital facility had been arranged with Farallon or anyone else”

(1)

Mr Chandler

(i)

Farallon

596.

Mr Curl suggested to Mr Chandler that there was no prospect of Farallon granting a working capital facility to BHSL because Arcadia held a first-ranking QFC over its assets (and I set out the relevant passage below). He also took Mr Chandler to Mr Bourne’s evidence to the Select Committee that no one reading the Farallon term sheets dated 6 February 2015 or 6 March 2015 would have believed that BHSL could meet the conditions for the grant of the Farallon facility. Mr Chandler accepted in cross-examination that the views which Mr Bourne expressed were those of a reasonably informed person. Mr Lightman and his team did not suggest otherwise in closing submissions.

597.

I consider elsewhere the negotiations between the BHS Group and Farallon in May and June 2015. But I am satisfied that at the time of Mr Chandler’s appointment in March 2015 there was no real prospect of the BHS Group satisfying the conditions for the grant of the Farallon facility and that those negotiations had been unsuccessful. However, I also accept Mr Chandler’s evidence that he was not aware of those negotiations and had no involvement in them. He gave this evidence in Chandler 1 and stood by it in cross-examination. Moreover, I am not satisfied that it would have been reasonable for him to inform himself about those negotiations or why they might have failed given that they had taken place before his appointment and that Mr Roberts had informed him that the BHS Group no longer required the facility.

(ii)

Noah II

598.

On 24 March 2015 Mr Chandler attended a meeting at which Mr Roberts took him and the directors of BHSGL through the terms of Noah II. Mr Chandler’s handwritten notes record that Mr Roberts advised that any draw down of funds required the consent of Arcadia (such consent not to be unreasonably withheld). Mr Chandler accepted in cross-examination that Sir Philip Green was reluctant to grant permission to enable BHSGL to draw on Noah II. Mr Topp also accepted that it was not a “proper” facility and that on 28 April 2015 Sir Philip Green had refused to permit BHSGL to draw on it. Initially, Mr Pilgrem was not prepared to accept that it was a condition of drawdown that Arcadia gave its consent. But he did accept that on 28 April 2015 Arcadia refused to consent to BHSL drawing down the sum of £10 million (but ultimately consented only to an advance of £3 million).

599.

Clause 2.1(c) of the Noah II Facility Agreement expressly provided that the Borrower (BHSGL) could not submit a Drawdown Request (as defined) in respect of the Tranche B Facility of £25 million without the prior written consent of the Corporate Guarantor (Arcadia) such consent not to be unreasonably withheld or delayed. I am satisfied, therefore, that BHSGL’s ability to draw upon the Tranche B Facility (which was the only new money available) was conditional upon obtaining Arcadia’s consent and although clause 2.1(c) imposed a qualified obligation upon Arcadia not to withhold or delay unreasonably, it was not a facility upon which the BHS Group was in practice free to draw. In deciding whether to give its consent, Arcadia was entitled to put its own interests first rather than the interests of the BHS Group and, as Mr Curl submitted, the BHS Group needed Sir Philip Green’s goodwill and was in practice unable to challenge Arcadia’s decision. I therefore agree with Mr Topp that Noah II was not a “proper” working capital facility.

600.

However, I am not satisfied that Mr Chandler either knew or should have known that Noah II was not a proper working capital facility either on his appointment or at any time before the 17 April Board Meeting. His handwritten notes record that Mr Roberts was asked what reasonable grounds Arcadia might have for refusing consent and he advised that this might be the breach of any existing facility or insolvency. He also advised that there was “No upside on Arcadia letting BHS go under” and that it was “not a bad facility”. In my judgment, Mr Chandler was entitled to accept that advice on appointment. I am also satisfied that nothing occurred between 24 March 2015 and 17 April 2015 which should have caused Mr Chandler to reconsider the position.

(iii)

Bank of China

601.

The minutes of the 17 April Board Meeting record that Mr Chappell was negotiating with the Bank of China for a £120 million facility. The Joint Liquidators described this as a fantasy and they relied on the email dated 13 March 2015 from Mr Budge to Ms Hague as evidence that Mr Chappell lied to Sir Philip Green. In that email Mr Chappell is reported as telling him that he had £7 million on deposit at the Bank of China and that RAL was looking for finance from it. Mr Curl put this email to Mr Chandler in cross-examination:

“Q. And could I have document {C/359.3/1}, please. And this is an e-mail, towards the bottom of that page, from Paul Budge to Gillian Hague. And it says: "He [and I think we can take it that "he" is Sir Philip Green] is quite jumpy at only 25 of the 32 coming in, apparently 7 in Bank of China according to Dominic as they may be looking for finance from them too. "Anyway ways two things. "I promised to text him the end of day balance again -- so please give me a breakdown and the report again (sorry) ... he's keen to see the 5 million safely arriving." Now, it looks like Mr Chappell has told a lie to Sir Philip Green. It looks like he has pretended that the 7 million has gone on deposit with Bank of China, doesn't it? A. It does. Well, yes, I don't think there ever was any money in that account. So I think that is a lie. Q. When did you find out that none of the companies in the BHS Group had 7 million on deposit in the Bank of China or RAL for that matter? A. I can't remember. Q. You became aware, didn't you, that Mr Chappell had told this lie to Sir Philip Green, didn't you? A. Yes. Q. Can you remember when that was? A. No. I want to say May or around then -- June. I don't know. Can't be sure. Q. What did you do when you found out that Dominic Chappell had told this lie to Sir Philip Green? A. Nothing. Mr Chappell and Mr Green had an interesting jousting relationship, I think. There were reports of conversations all the time; and I didn't know what was -- what was true and what wasn't. Q. But you knew there was never 7 million in Bank of China, didn't you? A. Eventually, yes. Q. But you never -- you never believed there was 7 million in Bank of China, did you? A. Well, I think the first time I heard it, I didn't disbelieve it. Q. Where did you think it had come from? A. Well, I don't know where it would have come from. Eventually, of course, I worked out that it was the same 7 million that had disappeared from Lowlands. But I didn't know that at the time or at the time that I heard it.”

602.

I accept Mr Chandler’s evidence that he did not realise that Mr Chappell had told a lie to Sir Philip Green until either May or June 2015. He was entirely candid both in accepting that Mr Chappell told a lie and in accepting that he eventually worked out that the £7 million which Mr Chappell claimed to have put on deposit at the Bank of China was the balance of the proceeds of sale of North West House. However, it does not follow that he must have known all of this by 17 April 2015. He was not copied into the email dated 13 March 2015 and there is no contemporaneous documentary evidence that he was told about any negotiations with the Bank of China until the meeting itself.

603.

Indeed, I am satisfied that Mr Chandler only became aware that Mr Chappell had lied to Sir Philip Green shortly before an exchange of emails which he had with Mr Parladorio on 22 May 2015. Mr Curl put those emails to him and his evidence was as follows:

“MR CURL: Could I have page {C/698.1/2} of this clip, please. This is that same e-mail chain -- A. Okay. Q. -- and it's been forwarded to you, Mr Chandler; so you did see this at the time -- A. Okay. Q. -- didn't you? A. Yes. Q. You just said you didn't? A. All right. I'm sorry. MR JUSTICE LEECH: And then you forwarded it to Mr Parladorio? A. Yes. So this is what I thought I was saying when I said: this is me doing something about it. I forwarded it to Mr Parladorio and we had a conversation about it. And within very short order this disappeared, which is why it became the internal joke that Mr Hitchcock referred to. MR CURL: Could I have the top of that page, please. And page {C/698.1/1}, please. So what you're doing there, Mr Chandler, is instead of actually doing something about it, you were simply forwarding it on to Mr Parladorio, aren't you? A. Yes. Q. Mr Parladorio is not a director of any BHS entity, is he? A. No. Q. So, yet again, you are deferring to Mr Parladorio, despite Mr Parladorio being a director only of RAL, aren't you? A. No, I was using Mr Parladorio for the very important purpose of dealing with things that were related to Mr Chappell. Q. Did you not think that dealing with things related to Mr Chappell was front and centre of your duties as a director of the companies? A. Well, again, I think this raises an important point of difference between your case and the reality. Dealing with Mr Chappell was a factor in all of the things that I was considering at the time. I don't think it was necessarily front and centre. And I'm not sure it needed to be front and centre at all relevant times. He -- he -- we didn't -- we weren't relying on him particularly in an executive function to do very much. There was -- the things that we'll talk about later today are things that happened along the way; but there was so much else going on and so many other people who were important and whose interests I had regard to. And I really don't think it's a valid criticism for you to suggest that me forwarding this on to Mr Parladorio and concomitantly having a conversation with him to say: Eddie, what's this all about? Is an abrogation of my duty at all. I think it's a perfectly sensible way for me to behave. Q. A more sensible way to behave would have been to have dealt with Mr Chappell directly, wouldn't it? A. I -- I disagree. Q. Given the considerable conflict of interest, by this stage, between the companies and RAL, Mr Parladorio was one of the last people in the world you should have been deferring to, wasn't he? A. No, because Mr Parladorio, as far as I was concerned, was also, like me, someone who -- who was keen to ensure that things were done properly. Q. Ah. Well, let's look at this e-mail. It says: "The Bank of China point (7 million charge over that cash) does not seem to go away". Pausing there. That suggests that Mr Parladorio has known about it for some time, doesn't it? A. Yes. Q. As had you? A. Well, no, I found out about it two days before this.”

604.

It is unnecessary for me to decide whether Mr Parladorio had known for some time that Mr Chappell had lied to Sir Philip Green and whether he was himself a party to that deception. But even if he had known for some time about the deception, I accept Mr Chandler’s evidence that he only discovered it himself two days before and when it became clear that RAL (or BHSGL itself) could not provide security over a deposit of £7 million at the Bank of China. I am satisfied, therefore, that Mr Chandler did not know that the negotiations with the Bank of China were a fantasy when they were first brought to his attention.

(2)

Mr Henningson

(i)

Farallon

605.

In his amended written responses Mr Henningson told the Insolvency Service that the Farallon facility was not obtained for undisclosed reasons but that he was aware that it did not obtain investment committee approval. Mr Henningson did not state when he first became aware of this and he did not address the Farallon facility at all in either of his witness statements. The inference which I draw is that the negotiations with Farallon had been terminated by 17 March 2015 when Mr Roberts told Mr Chandler that the facility was no longer needed and negotiations with HSBC for Noah II had begun. This is consistent with the evidence which Mr Chappell gave to the Select Committee which was that Sir Philip Green replaced the Farallon Facility with Noah II. Accordingly, I find that Mr Henningson knew by 17 March 2015 that negotiations with Farallon had been unsuccessful.

(ii)

Noah II

606.

On 19 March 2015 Ms Grant of Olswang sent Mr Henningson a summary of the terms of Noah II and a draft of the facility agreement. The minutes of a board meeting of BHSGL on 24 March 2015 record that Mr Henningson was present and that Mr Chappell, Mr Chandler and he resolved to enter into Noah II and the other loan documentation associated with the loan. I find, therefore, that Mr Henningson knew and understood the terms of Noah II and that it only provided £25 million of new money. Mr Henningson did not sign the Arcadia Security Agreement and I was not taken to any minutes of a meeting at which he approved or authorised it. But I am satisfied that Mr Henningson knew that the consent of Arcadia was required to draw on the facility because he was told so by Mr Roberts in an email dated 20 March 2015.

607.

Nevertheless, and as with Mr Chandler, I am not satisfied that Mr Henningson knew and understood that Noah II was not a proper facility because of the first QFC which BHSL had granted to Arcadia in the Arcadia Security Agreement. If the minutes of the relevant BHSL board meeting on 24 March 2015 are correct (and they were not challenged by any of the parties), then it is probable that Mr Henningson was also present when Mr Roberts gave the advice upon which Mr Chandler relied himself.

(iii)

Bank of China

608.

Mr Henningson did not mention any negotiations with the Bank of China in Henningson 1 or in his written responses to the Insolvency Service. Nor did he suggest that he was told by Mr Chappell that he was negotiating with the Bank of China for a £1 million overdraft or a £120 million draw down facility or that he believed Mr Chappell when he said this at the 17 April Board Meeting. But in case there is any doubt, I find that Mr Henningson did not believe Mr Chappell when he said this at the 17 April Board Meeting. I make findings in relation to Mr Henningson’s knowledge about the application of the proceeds of sale of North West House in section VII. But in summary I find that Mr Henningson knew that Mr Chappell intended to use £5 million of the proceeds of sale to pay the transaction costs and £2 million to pay ACE and that he turned a blind eye to the payments which Mr Chappell then instructed Olswang to make.

609.

But in any event, I also find that Mr Henningson knew by 19 May 2015 (at the latest) that Mr Chappell had lied to Sir Philip Green about having deposited £7 million at the Bank of China. On that date Mr Topp forwarded to him an email which Mr Budge had copied to him on the previous day. This email made it clear that Sir Philip Green had insisted on taking “a charge over the £7m in the Bank of China” and that Mr Chappell had undertaken to sort out a Bank of China facility for £70 million by 11 June 2015. Mr Henningson knew that there were no funds in the Bank of China and (I also infer) no ongoing negotiations for a working capital facility.

610.

In conclusion, therefore, I find that on or before 17 April 2015 both Mr Chandler and Mr Henningson knew that negotiations with Farallon had been unsuccessful and that no working capital facility had been arranged with Farallon or anyone else apart from the Tranche B facility of £25 million under Noah II. I also find that they knew that Sir Philip Green had arranged this facility on behalf of Arcadia and that Arcadia’s consent was required to the drawdown of that facility. Finally, I find that neither of them appreciated that Noah II was not a proper working capital facility and that Arcadia was in a position to limit its use severely.

“j.

a restructuring of the BHS Group, to include a restructuring of the Schemes as envisaged under Project Thor or something similar, was required”

(1)

Mr Chandler

611.

Mr Chandler accepted in cross-examination that on appointment he took GT’s advice into account and that the pensions issues were the kind of issues which he considered in the coming days. He also accepted that a restructuring of the Schemes such as Project Thor or something similar was required. On the basis of the following evidence in cross-examination I find that the Joint Liquidators have proved their case on this point:

“Q. And you were relying on the GT advice, weren't you? A. Well, I was taking the GT advice into -- into account; and these kind of issues would then be things that we would explore over the coming period. Q. Could I have page {C/359/9}, please. It says there, under "Pensions -- future risks", third bullet point: "Without Project Thor or a similar exercise it would appear that the scheme size and funding needs present a real threat to the viability of the business." So you knew that before you were appointed, didn't you? A. Yes. Q. And then the final bullet point on that page: "As things stand the Buyer should assume it is acquiring a business that is struggling to fund a pension scheme with a funding deficit of circa 300 million (subject to imminent review at upcoming triennial valuation) and a buyout deficit in excess of 500 million and which is under the close scrutiny of the Pensions Regulator". So GT are saying there it is really Project Thor style solution or nothing, aren't they? A. Yes.”

(2)

Mr Henningson

612.

I have found that Mr Henningson read the GT Report and I am satisfied that he read and understood slide 9 and the future risks associated with the Schemes. I find that the Joint Liquidators have made out their case on this issue against Mr Henningson.

“k.

to obtain clearance from the Regulator for a restructuring of the kind identified at Paragraph (j) above, it was necessary to show that, absent such a restructuring, insolvency was inevitable”

613.

Mr Chandler accepted in cross-examination that an RAA was premised on the basis that insolvency was inevitable in the absence of such an agreement. Moreover, in the “Project Harvey – Pension Risk Matrix” which formed part of Appendix 9 to the Olswang Report, Olswang stated in terms that both the Trustees and the Pensions Regulator would need to be sure that insolvency was inevitable to agree to Project Thor. I have found that both Mr Chandler and Mr Henningson read the report and I find that the Joint Liquidators have proved their case on this point against them both.

“l.

in the premises at Paragraphs (j) and (k) above, in recognising that a restructuring similar to Project Thor should be pursued, the Respondents necessarily recognised or ought to have recognised that, absent such a restructuring, insolvent liquidation or administration was inevitable”

(1)

Mr Chandler

614.

This allegation is the converse of the paragraph 102(l). It appears to be the Joint Liquidators’ case that as a matter of logic Mr Chandler and Mr Henningson either knew or ought to have known that insolvency was inevitable if they knew that a restructuring was necessary but was not possible or could not take place. This is because the Pensions Regulator would only have consented to an RAA if insolvency was inevitable. Mr Chandler did not accept this logic when it was put to him:

“This is titled, "HIGH LEVEL SUMMARY OF PROJECT THOR RISKS". Project Thor was the regulated apportionment agreement that had been put together under Taveta ownership in 2014, wasn't it? A. Yes. Q. And a regulated apportionment agreement is premised on the basis that insolvency is inevitable without such a regulated apportionment agreement. You knew that, didn't you? A. Yes. Q. Arrangement. And so you knew that such an RAA was essential, didn't you? A. Well, I knew that a solution to the pensions was required. Q. And it had to be an RAA for otherwise insolvency was inevitable, wasn't it? A. Well, no, there were other options, I suppose, which would have involved a much bigger cheque from Sir Philip Green. But I realised that the most likely outcome would be an RAA.”

615.

I accept Mr Chandler’s evidence. The question whether Mr Chandler either knew or should have known that there was no real prospect of the BHS Group avoiding insolvent liquidation because of the pension deficit was not simply a matter of logic but depended on whether Sir Philip Green was prepared to provide the necessary contribution to reach agreement with the Trustees and clearance from the Pensions Regulator. It also follows that the question whether Mr Chandler had the requisite knowledge on his appointment depends on whether he believed that Sir Philip Green did intend to fund any settlement. Mr Curl also put this to Mr Chandler:

“Q. And, as a matter of logic, if Sir Philip Green had been minded to fund a pensions solution, he would have done so rather than taking steps to distance himself from the BHS Group, wouldn't he? A. I don't agree with that. Q. Rather than paying RAL to take the BHS Group away. A. I think it's difficult to put oneself in Sir Philip Green's shoes and to work out exactly what his plan for BHS was and had been over the previous 15 years. I understood that he was under significant pressure from his American investors to divest himself of his other UK businesses. I also understood that he saw merit in his no longer being involved in BHS, for the reasons that we've spoken about in relation to the -- the rent concessions, for example. Q. Was that the view you took around 18 March 2015? A. Well, I can't -- I can't be certain when I -- I formed those views, but over the course of a period of time. Q. Could I have, please, bundle J -- A. I hadn't finished. Also that he didn't want, at that stage, to pay 80 million, but that he gave representations to all and sundry that the solution would be -- would involve him paying a large amount of money. Q. You said there representations to all and sundry. He didn't make any representations to you, did he? A. No. I hadn't met him. Q. No. You didn't meet him properly until you had the meeting to put the companies into administration; is that right? A. No, it was the day after that we decided to go to administration. The 18 April is the date you're referring to which is when he refused to subordinate his floating charge. That's when I first met him. I had met him for one conversation, you know, "Hello, how are you?" In the early week I think -- early weeks, but, yes. Q. To be clear, 18 April is a reference to 18 April 2016, isn't it? A. Yes. Q. Yes. So 13 months after day 1? A. Yes. Q. Just while we're on those representations. You -- given the weight you say you attach to the representations made to all and sundry, but not you, did it ever occur to you to try to speak to Sir Philip Green to fortify the representations? A. No, I didn't need to, because I -- I was able to get those from Darren.”

616.

Again, I accept Mr Chandler’s evidence that on his appointment he relied on the assurances given by Sir Philip Green to Mr Chappell and Mr Topp that he would support BHSL in finding a pensions solution. I make that finding even though Mr Chandler did not meet Sir Philip Green until a year later or receive those assurances personally.

(2)

Mr Henningson

617.

Mr Henningson also placed reliance on the assurances which Mr Chappell told him he had received from Sir Philip Green. He also gave evidence in Henningson 1 that he met Sir Philip Green on two occasions before Day One and that Sir Philip made it very clear that he would support the BHS Group after completion and that he had a significant commercial interest to do so. Although I attribute very little weight to Mr Henningson’s witness statements, I am prepared to accept this evidence because it is consistent with Mr Chandler’s evidence (which I accept).

“m.

the Regulator had powers of the kind summarised at Paragraphs 58 to 64 above”

618.

I have set out the principal powers of the Pensions Regulator above. Those powers were set out in the Points of Claim and although Mr Chandler and Mr Henningson did not admit the accuracy of those paragraphs in the Points of Defence, I am satisfied that they contained an accurate summary. Moreover, I am also satisfied that Mr Chandler and Mr Henningson were aware of those powers and understood how the Pensions Regulator might exercise them in practice because they were set out extensively and explained in Appendices 2 and 3 to the Pensions Appendix of the Olswang Report.

“n.

to complete Project Thor or a similar restructuring was likely to require a significant lump sum, which could be well in excess of the £80 million estimated by Olswang”

619.

Olswang also stated in terms that the actual amount which would be required to restructure the Schemes “could be well in excess of the £80 million estimate”. Mr Curl put this passage to Mr Chandler and he accepted that he was being warned that it would be extremely expensive even to put forward a proposal. I am satisfied that when they read the Olswang Report, both Mr Chandler and Mr Henningson understood that it might require well in excess of £80 million to restructure the Schemes.

“o.

neither RAL nor the BHS Group had £80 million available for the purpose identified at Paragraph (n) above”

(1)

Mr Chandler

620.

Mr Chandler admitted in the Points of Defence that he knew that neither RAL nor the BHS Group had £80 million available and averred that his understanding was that the compromise with the Trustees was likely to involve Sir Philip Green, the Taveta Group and Arcadia making a significant contribution. I accept this admission.

(2)

Mr Henningson

621.

Mr Henningson denied that he knew this (or, indeed, that he had any of the knowledge pleaded in paragraph 102). I have found that Mr Henningson knew that the BHS Group had no available working capital facility apart from Noah II. The minutes of the 17 April Board Meeting record that Ms Morgan spoke to GT’s weekly cashflow forecast. The revised headroom forecast showed that the BHS Group did not have £80 million available for any purpose even after all the anticipated property sales and drawing down Noah II in full. I find that the Liquidators’ case on this issue is made out against Mr Henningson.

“p.

the funding deficits in the Schemes had increased since the 2012 Triennial Valuation, notwithstanding the Annual Contribution of £10 million being paid in the meantime”

(1)

Mr Chandler

622.

Mr Chandler admitted in his Points of Defence that he knew on or shortly before 18 March 2015 that it was likely that the pension deficit had increased since the 2012 Triennial Valuation but he denied that he was aware that Deficit Repair Contributions of £10 million had been paid in the meantime. However, he then accepted that on 13 March 2015 he made a handwritten note in his notebook confirming that the BHS Group had budgeted to pay an annual contribution of £10 million:

“Q. Could I have, please, bundle {J/3/5}. This is from your notebook on 13 March 2015, five days before your formal appointment. A. Okay. Q. And this seems to be a meeting that you attended, Mr Chappell attended and Mr Smith attended. A. They're the only three people, are they, in the meeting? Q. Could we have page {J/3/3}, please. A. Okay. Thank you. Q. So the names at the top there. A. Hmm, hmm. Q. Can we have {J/3/5} again, please. Thank you. Could you blow up the lower half of the page, please. Thank you. So at point 8 it says: "Pension: SPG -- 5 million. RAL -- 5 million (budgeted in)". That's a reference to the deficit repair contributions, isn't it, or DRCs? A. I think so, yes. Q. And it says there: "If BHS goes bust takes Arcadia with us". Do you see that? A. Yes. Q. So from day 1 you are running this on a policy of mutually assured destruction? A. No, that's not what that means. Q. You're playing a game of chicken with Sir Philip Green? A. No. Q. You're playing a game of chicken with the Regulator? A. I think that's an entirely unfair way -- unfair way to characterise what we reasonably thought was likely to happen. Q. Could I have the next page, please. {J/3/6}. So the top line there, you've written: "Project Thor -- never going to happen". Do you see that? A. Right. Q. So that's what you reasonably thought was likely to happen at that time, wasn't it? A. Well, I'm talking about Project Thor was never going to happen. I don't think that means it's never going to happen in the future.”

623.

I am satisfied that by the date of his appointment Mr Chandler was fully aware that the BHS Group was making Deficit Repair Contributions of £10 million per year and that RAL was budgeted to fund £5 million of those contributions. I am also satisfied that he knew that the BHS Group had already been making the contributions for some time. Slide 35 of the GT Report also stated that a deficit repair plan had been agreed as at 31 March 2012 for the payment of £10 million pounds per year for 22 years and 8 months.

(2)

Mr Henningson

624.

I am satisfied that Mr Henningson read slides 31 to 36 of the GT Report. I find that he knew that BHSL had been making Deficit Repair Contributions since 2012 and that the estimated deficit for both Schemes was between £287 million and £527 million as at 31 December 2014 depending on the basis of funding. I am satisfied that he knew that the deficit was likely to have increased since 2012 because GT advised that a new valuation was expected to “deliver a larger deficit than at the 2012 valuation”.

“q.

the 2015 Triennial Valuation, on which work would have to commence within weeks, was inevitably going to lead to a demand for an increase in the Annual Contribution to a level that would be unaffordable”

“r.

the BHS Group could not afford any increase in Annual Contribution”

(1)

Mr Chandler

625.

Mr Martin’s note of the meeting on 19 February 2015 recorded that he told Mr Clare, Mr Chappell and Mr Parladorio that the Triennial Valuation would produce Deficit Reduction Contributions which would be unaffordable and he confirmed this in cross-examination. He also gave evidence that on 4 March 2015 Sir Philip Green told the Pensions Regulator and him that a new investor would raise £120 million of new debt, that once the Pensions Regulator had left, Mr Chappell joined the meeting and that both he and Mr Clare explained in no uncertain terms that the Deficit Reduction Contributions would have to increase to a figure of in the region of at least £20 million per year. Finally, Mr Martin also gave evidence that on 18 March 2015 the Trustees told Mr Chappell, Mr Tasker and Mr Smith, Olswang and GT that the Deficit Repair Contributions were going to increase to £20 million to £25 million:

“We, as Trustees, spent most of the meeting setting out the framework for the DRCs which we explained were going to increase to £20-25 million. It was no coincidence that we kept raising that number as we wanted to make sure that the new directors clearly understood the scale by which the DRCs were going to increase, and that they were going to have to run this continuously and seriously loss-making business with provision for significantly increased DRCs. We also explained to those present at the meeting that a wider pensions restructuring was required which needed to be adequately funded, but it was clear that Grant Thornton and those members of its client in the room all considered that the BHS Group did not have the cash to fund a restructuring (which the Trustees were also aware of from the analysis that KPMG and Deloitte had carried out for Thor previously), and neither did RAL.”

626.

Mr Martin confirmed this evidence in cross-examination. Mr Lightman put to him a note of a meeting on 9 November 2015 in which Mr Topp had noted that revised Deficit Repair Contributions were unaffordable and that unless there was a successful refinancing the BHS Group would run out of cash and become insolvent by March 2016. Mr Martin agreed that this is what Mr Topp had said although there was some debate whether Mr Martin understood him to be talking about the short, medium or long-term.

627.

I accept Mr Martin’s evidence in relation to these three meetings and I find that on each occasion Mr Martin or the Trustees told those present that the Triennial Valuation would produce Deficit Repair Contributions which would be unaffordable by the BHS Group. Mr Lightman did not challenge this evidence. Indeed, he relied on it in support of his case that the Trustees would not have insisted on an increase in contributions or taken action which would have put the BHS Group into liquidation.

628.

Neither Mr Chandler nor Mr Henningson was present at any of the three meetings about which Mr Martin gave evidence. In his Points of Defence, however, Mr Chandler admitted that he knew that it was likely that there would be an increase in Deficit Repair Contributions but that they would not be likely to come into effect for around 15 months after the 31 March 2015. Mr Curl did not challenge Mr Chandler’s admission in cross-examination and I accept it.

629.

Moreover, Mr Chandler’s evidence is also consistent with the expert evidence. Mr Scott and Mr Squires were agreed that a larger deficit by the date of the Triennial Valuation would have inevitably caused higher contributions over the lifetime of a recovery plan (all things being equal). They were also agreed that it was not inevitable that a larger deficit would have caused short term contributions to increase because the existing contributions would have continued pending either regulatory intervention or the turnaround or restructuring or insolvency of the employer. Finally, it is consistent with the minutes of the meeting of the Trustees on 15 May 2015 (above) which Mr Martin also confirmed in evidence.

(2)

Mr Henningson

630.

The minutes of the BHSGL board meeting on 25 March 2015 record that Mr Chappell reported that the meetings with both the Trustees and the Pensions Regulator had been difficult. The minutes do not record that Mr Chappell told the meeting what the Trustees had said to him. But I can see no reason why Mr Chappell would not have reported to Mr Henningson what was said at those meetings. I find, therefore, on a balance of probabilities that following the meeting on 4 March 2015 Mr Chappell told Mr Henningson that the Trustees had said that the Deficit Repair Contributions would have to increase to a level which would be unaffordable and that following the meeting on 18 March 2015 Mr Chappell had told him that the Trustees had said that DRCs would have to increase to £20 million or £25 million (unless a pensions solution was reached in the meantime).

“s.

the Trustees regarded the acquisition by RAL as materially detrimental within the meaning of the regulatory regime and were seeking mitigation with the involvement of the Regulator”

631.

Mr Martin gave evidence in his witness statement that the Trustees and their advisers were concerned that the separation of the BHS Group from Arcadia and Taveta would be materially detrimental to the Schemes and that they sought written assurances from RAL that it had sufficient working capital lined up to support the business. By email dated 6 March 2015 Deloitte provided a formal response stating as follows:

“Offer to the Pension Scheme

Management has confirmed the principles of the offer to the pension scheme are as follows;

● £15m provided over 3 years committed by a Guarantee from Arcadia Group Limited

● £15m provided over 3 years from the purchaser

● A floating charge over the stock in the business capped at £20m.

● £80m of the current Arcadia Group limited intercompany loan balance to be assigned to the pension scheme.

The details in relation to the above are to be finalised over the coming days and are therefore subject to change/clarification.”

632.

Mr Martin set this email out in his written responses to the Select Committee and he stated that the Trustees understood it to be an offer of mitigation for the detriment to the sponsoring employer’s covenant (although it was never made clear to the Trustees precisely what the mitigation was in respect of or what was being sought in return). He also stated that the Trustees chased in the lead up to the sale but only received formal confirmation from Linklaters that the support package was limited to £40 million and £15 million of contribution support. Again, this email was not in evidence but the gist of it was set out in an email dated 23 March 2015 from Mr Kahn of KPMG to Mr Martin.

633.

It is clear from Mr Martin’s evidence and from his written responses to the Select Committee that the mitigation support which RAL was prepared to offer fluctuated considerably in the run up to the acquisition. However, the Olswang Report stated in terms that the Trustees regarded the proposed acquisition by RAL as materially detrimental and were seeking mitigation with the involvement of the Pensions Regulator. Olswang also reported that they understood the package to be a £15 million cash contribution from both the seller and the buyer together with a floating charge for £25 million (together with the annual contributions of £10 million): see Appendix 9, §2.3.

634.

I am satisfied that both Mr Chandler and Mr Henningson read and understood this paragraph which did not require any technical knowledge. Moreover, Mr Roberts repeated this statement in terms at the RAL board meeting on 11 March 2015 at which Mr Henningson was present. I am satisfied, therefore, that Mr Chandler and Mr Henningson knew that the Trustees regarded the proposed acquisition as materially detrimental and were either seeking or expecting RAL to provide a financial package to mitigate against the loss of support of Arcadia and Taveta and the kind of package which the Trustees had been led to expect that they might receive.

“t.

the Trustees had reacted negatively to the proposed acquisition of the BHS Group by RAL”

635.

Appendix 9, §2.5 stated that the acquisition appeared to have been viewed negatively by the Trustees. Again, I am satisfied that both Mr Chandler and Mr Henningson read and understood this paragraph. Moreover, Mr Roberts told Mr Henningson this in terms at the RAL board meeting on 11 March 2015. I am satisfied therefore that they either knew or ought to have known that the Trustees had reacted negatively to the acquisition.

“u.

post-transaction secured debt would lead to a weakening of the employer pension covenant to the Schemes of relevance to the regulatory regime”

(1)

Mr Chandler

636.

Mr Curl put it to Mr Chandler a number of times that it was impossible for the BHS Group to borrow money on ordinary commercial terms whilst Taveta held a first QFC over the assets of the group and could appoint an administrator. In my judgment, this was a reason by itself why the post-transaction debt structure led to a weakening of BHSL’s covenant to the Schemes and why the debt structure was of direct relevance to the regulatory regime. I am also satisfied that this must have been apparent either on completion or shortly afterwards when the negotiations between RAL and Farallon came to an end and Arcadia arranged Noah II.

637.

On 4 March 2015 Sir Philip Green had told the Pensions Regulator that RAL proposed to raise new debt of £120 million. However, when Mr Curl put this point to Mr Chandler, he admitted that he did not understand its significance:

“Q. So they're saying: make sure you can comply with the terms of the Farallon facility. You know that that Farallon facility required a first priority floating charge over the BHS Group, didn't you? A Do I know now or did I know then? Q. You knew upon your appointment? A. No. Q. You could have found that out, though, couldn't you? A. Yes, but I was relying on other people to do that, because I had other things to do. Q. Who were you relying on? A. Mr Chappell and Mr Morris, I think. Q. Did you know what -- A. Sorry. Sorry. And Olswang. Q. You were relying on Olswang? A. For information about -- for dealing with the Farallon thing that -- they were dealing with that. Q. So you didn't ask to see the draft facility letter at any time then? A. No. Q. Or the draft term sheet? A. No. Q. Did you know what a qualifying floating charge was on 18 March 2015? A. I don't think so. Q. So you didn't know that it's more or less impossible to borrow money on ordinary commercial terms as part of a group refinancing unless you can grant a first ranking qualifying floating charge? A. I don't think I knew that at the time. Q. Would you agree that your lack of knowledge of such a basic point rendered you unsuitable to be Group General Counsel of a business this size? A. No.”

638.

Mr Chandler’s evidence was consistent with his Points of Defence in which he averred that he did not have a full understanding of the implications of the Taveta Group being granted security over the £40 million debt left on the BHS Group’s books or that he could have gleaned a full understanding from the Olswang Report or the GT Report. He also denied that he was aware that this would lead to a weakening of the employer’s covenant or that this was relevant to the regulatory regime.

639.

I accept Mr Chandler’s evidence that he did not appreciate the significance of Taveta having a first QFC over the assets of the BHS Group. However, I find that a reasonable director in the position of Mr Chandler would have done so. The Olswang Report stated in terms that the £40 million inter-company debt was to be secured by fixed and floating charges over securities in the BHS Group and the GT Report stated that GT expected a weakening of the employer’s covenant as a result of the post-transaction secured debt.

(2)

Mr Henningson

640.

Given the statements in both due diligence reports, I would have expected an experienced corporate finance professional like Mr Henningson to appreciate the effect of the secured debt on BHSL’s covenant as the employer under the Schemes. But whether or not he appreciated this fact, I am satisfied that he ought to have done if he had read those reports with care.

“v.

Project Thor had not been agreed and the Respondents had no visibility on what stage had been reached”

(1)

Mr Chandler

641.

In his Points of Defence, Mr Chandler admitted this allegation. However, he also averred that on or shortly before 18 March 2015 his understanding was that Project Thor had been acceptable to the Trustees in principle save in respect of the amount of the mitigation payment. I accept both that this was Mr Chandler’s understanding and that it was accurate. Mr Martin accepted that the Trustees had agreed in principle to Project Thor and signed heads of terms.

(2)

Mr Henningson

642.

The Olswang Report made it clear that Project Thor had not been agreed and that there was uncertainty about what stage of agreement the parties had reached: see Appendix 9, §2.4. Again, I am satisfied that Mr Henningson read and understood this paragraph and that he knew that Project Thor had not been agreed and that the Directors had no visibility on what stage had been reached.

“w.

there was no objective supporting evidence that Project Thor was acceptable to the Regulator or the Trustees in its original form”

(1)

Mr Chandler

643.

In his Points of Defence, Mr Chandler did not admit this allegation but denied that he had the relevant knowledge. However, when the Olswang Report was put to him he accepted that he was being told that it was going to be extremely expensive even to put forward a proposal for Project Thor and that Olswang were completely in the dark about whether the Pensions Regulator or the PPF would consider it. When Mr Curl put his notebook entry for 13 March 2015 to him, Mr Chandler also accepted that he had recorded that Project Thor was never going to happen (although he did not accept that he meant that it might never happen in the future). I find that this allegation is made out and that his note reflected Mr Chandler’s understanding or belief that Project Thor was never going to happen on his appointment as a director of each of the Companies.