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

Preliminary Matters [1]

Procedural Matters [18]

Background [31]

Project Harvey [56]

Day One: 11 March 2015 [108]

12 March 2015 to 17 April 2015 [130]

18 April 2015 to 26 June 2015 [173]

27 June 2015 to 7 September 2015 [238]

8 September 2015 to 23 December 2015 [265]

14 January 2016 to 25 April 2016 [326]

Subsequent Events [424]

Witnesses of Fact [433]

Expert Witnesses [454]

Wrongful Trading [461]

Misfeasance [519]

Completion [573]

Day One: The Realistic Financial Position [687]

The 17 April Board Meeting [701]

6 May 2015: The Second LOC Facility [741]

26 June 2015: Ace II [746]

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

26 August 2015: Atherstone [828]

8 September 2015: The Grovepoint Facility [833]

Functions [854]

The Knowledge Condition [866]

The Trading Misfeasance Claim [953]

Preliminary Matters

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.

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.

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.

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”.

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.

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.

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.

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.

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.

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]:

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”).

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”).

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:

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).

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:

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.

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.

Procedural Matters

Mr Chappell

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).

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.

Mr Henningson

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.

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.

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).

Pleading Points

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.

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.

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:

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.

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.

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.

The Carlwood Payment

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):

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.

Background

The BHS Group

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.

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.

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).

The Pension Schemes

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.

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.

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.

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.

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”).

Project Thor

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:

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.

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:

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.

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.

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.

Project Albion

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.

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):

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:

RAL

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.

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.

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:

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.

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:

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:

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):

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.

Project Harvey

Early Negotiations

“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).

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:

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:

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”).

The Points of Principle

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.

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:

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”.

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:

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.

ACE: Heads of Terms

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.

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.

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.

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:

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.

Due Diligence

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.

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:

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:

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):

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.

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:

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:

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:

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.

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.

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:

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”):

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:

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:

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:

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.

Trade Credit Insurance

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.

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.

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:

The Pensions Position

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.

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:

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:

A New Deal

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.

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”.

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.

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):

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:

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:

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).

Hurt Money

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.

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:

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:

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:

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.

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:

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:

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:

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.

Day One: 11 March 2015

Appointment of Directors

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.

The SPA

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):

The Side Letter

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 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.

Completion

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.

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:

The Security Agreement

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.

North West House

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.

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).

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.

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 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:

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.

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.

The ACE Loan Note I

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.

ACE I

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.

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.

Proceeds of Sale

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.

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:

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:

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).

Mr Henningson’s SMS Messages

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.

12 March 2015 to 17 April 2015

Noah I

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.

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.

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.

Mr Bourne

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”:

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:

Marylebone House

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:

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.

The MSA

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.

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:

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.

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.

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:

13 to 25 March: Board Meetings

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.

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:

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:

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:

Noah II

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:

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.

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.

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”):

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.”

The S.72 Notice

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:

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.

The Second GT Engagement Letter

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:

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:

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:

The GT weekly cashflow updates

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:

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.

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).

9 April 2015: BHSGL Board Meeting

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”:

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:

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”:

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.

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.

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).

£521,976: Payment to Swiss Rock

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.”

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:

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.

The 17 April Board Meeting

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.

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:

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):

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:

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).

18 April to 26 June 2015

The LOC Facilities

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.

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.

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.

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”.

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.

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.

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):

The Deed of Amendment and Variation

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:

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:

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:

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:

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.

The Pensions Regulator

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:

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:

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:

North West House: sale to WELPUT

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:

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:

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:

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.

Bank of China

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:

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:

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.

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.

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:

The Atherstone Plan

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.

The Third and Fourth GT Engagement Letters

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].

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:

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:

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:

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:

Farallon

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.

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:

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:

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:

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:

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.

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.

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.

The Carlwood Payment

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.

The 17 June cashflow update

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:

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.

ACE II

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.

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”):

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:

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”.

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:

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:

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:

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.

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:

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.

The Loan Agreement

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.

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:

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:

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”.

The Loan Agreement

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.

The Framework Agreement

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:

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.

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:

The arrangement fee

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.

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.

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:

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 June quarter rent payments

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.

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.

Mr Hitchcock

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:

The July 2015 Turnaround Plan

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:

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:

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.

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.

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.”

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:

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.

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.

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.

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.

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.

The new financing round

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.

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:

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.

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:

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:

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.”

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!!”

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).

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:

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):

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).

Atherstone

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.

£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.

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.

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).

The Grovepoint Facility

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”:

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:

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:

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:

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.

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.

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:

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:

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.

The ACE Loan Note III

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.

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.

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.

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.

The Hudson Facility

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 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.

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.

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.

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:

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.

Grovepoint brokerage fees

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”:

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.

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:

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”:

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.

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:

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.

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.

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.

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:

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 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.

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.

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.

Project Vera

“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:

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:

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.

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.

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.

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:

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”.

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):

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:

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.

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:

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.

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:

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.

Darlington

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.

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):

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.

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.”

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.

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.

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.

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:

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.

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.

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.

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:

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:

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.

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”.

Project Pipe

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:

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:

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:

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.

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.

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:

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:

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:

Gordon Brothers

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.

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”).

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.

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).

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”.

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:

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.

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:

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:

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:

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:

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.”

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”.

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:

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.

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:

The Pensions Deficit Offer

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:

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:

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”.

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 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”:

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:

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.

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.

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:

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:

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.

The Amended MSA

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.

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).

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.

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:

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:

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.

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.

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.

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.

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:

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.

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.

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:

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.

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:

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”.

The Deed of Rectification

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:

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.

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:

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”.

Management Information

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):

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.

The CVA Proposal

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:

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.

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.

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:

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:

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.

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.

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:

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:

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:

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:

The Oxford Street sale

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.

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:

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:

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):

The Creditors Meeting

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.

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.

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:

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.

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:

The proceeds of the Oxford Street sale

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.

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 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:

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.

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”.

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:

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.

Administration

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:

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):

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”.

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.

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):

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.

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:

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.

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:

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:

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.

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):

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 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.

The Pensions Settlement

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.

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:

Disciplinary Action

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.

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:

RAL: winding up

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.

Other Settlements

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.

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).

The S75 Debt

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.

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.

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.

Mr Martin

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.

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).

Mr Wright

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.

Mr Bourne

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.

Mr Sherwood

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).

Mr Chandler

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.

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).

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.

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.

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.

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.

Mr Topp

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.

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.

Mr Henningson

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.

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.

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.

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:

The Minutes

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.

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.

Accountancy Evidence

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.

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:

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.

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.

Pensions Evidence

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.

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.

Property Evidence

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.

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:

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:

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”.

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:

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.

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:

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]:

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]:

“No reasonable prospect that the company would avoid going into insolvent liquidation or entering insolvent administration”

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.

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]:

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]:

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]:

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:

“At some time before the commencement of the winding up of the company”

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.

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]):

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.

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.

The Notional Director

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”.

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.

Delegation

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).

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]:

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:

Professional Advice

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]:

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].

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.

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].

The S.214(3) Defence

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.

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]:

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]:

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).

Causation

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.

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]:

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:

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):

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.

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.

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]:

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]:

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]:

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]:

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 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 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]:

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:

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.

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]:

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]:

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.

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.

Discretion

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:

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]:

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.

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]:

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.

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 30^th ed (2021) summarise the principles which the Court will apply at 4—018 (footnotes removed):

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]:

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.

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.

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:

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.

Duty to act within powers

Section 171 of the CA 2006 (“S.171”) is headed “Duty to act within powers” and it provides as follows:

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).

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]:

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]:

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).

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]:

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.

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]:

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]:

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:

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.

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:

Duty to promote the success of the company

Section 172 (“S.172”) is headed “Duty to promote the success of the company” and it provides as follows:

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]):

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):

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):

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).

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.

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]:

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]:

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]:

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]:

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].

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]:

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]:

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]:

Duty to exercise independent judgment

Section 173 (“S.173”) is headed “Duty to exercise independent judgment” and it provides as follows:

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.

Duty to exercise reasonable care, skill and diligence

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:

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:

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]:

Duty to avoid conflicts of interest

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:

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].

Duty not to accept benefits from third parties

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:

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]:

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]:

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:

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.

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):

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.

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).

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.

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]:

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.

Ratification

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.

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]:

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.

Quantum

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.

Section 1157

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:

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):

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).

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.

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.”

Mr Chandler

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.

Mr Henningson

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:

Mr Chandler

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:

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:

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.

Mr Henningson

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.

Mr Chandler

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.

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.

Mr Henningson

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.

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;”

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”

Mr Chandler

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”.

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:

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:

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.

Mr Henningson

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.

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;”

Mr Chandler

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.

Mr Henningson

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.

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;”

Mr Chandler

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.

Mr Henningson

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.

RAL had no retail experience of any kind;”

Mr Chandler

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.

Mr Henningson

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.

BHSL required a working capital facility of at least £120 million”

Mr Chandler

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.

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.

Mr Henningson

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.

negotiations with Farallon had been unsuccessful and no working capital facility had been arranged with Farallon or anyone else”

Mr Chandler

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.

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.

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).

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.

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.

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:

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.

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:

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.

Mr Henningson

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.

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.

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.

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.

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.

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.

a restructuring of the BHS Group, to include a restructuring of the Schemes as envisaged under Project Thor or something similar, was required”

Mr Chandler

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:

Mr Henningson

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.

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”

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.

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”

Mr Chandler

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:

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:

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.

Mr Henningson

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).

the Regulator had powers of the kind summarised at Paragraphs 58 to 64 above”

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.

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”

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.

neither RAL nor the BHS Group had £80 million available for the purpose identified at Paragraph (n) above”

Mr Chandler

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.

Mr Henningson

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.

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”

Mr Chandler

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:

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.

Mr Henningson

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”.

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”

the BHS Group could not afford any increase in Annual Contribution”

Mr Chandler

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:

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.

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.

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.

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.

Mr Henningson

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).

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”

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:

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.

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.

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.

the Trustees had reacted negatively to the proposed acquisition of the BHS Group by RAL”

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.

post-transaction secured debt would lead to a weakening of the employer pension covenant to the Schemes of relevance to the regulatory regime”

Mr Chandler

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.

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:

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.

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.

Mr Henningson

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.

Project Thor had not been agreed and the Respondents had no visibility on what stage had been reached”

Mr Chandler

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.

Mr Henningson

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.

there was no objective supporting evidence that Project Thor was acceptable to the Regulator or the Trustees in its original form”

Mr Chandler

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.

Mr Henningson

Mr Chandler did not record Mr Henningson as being present at the meeting on 13 March 2015 although he did record that the other directors at the time and both Olswang and GT were there. However, the minutes of a BHSGL board meeting record that Mr Henningson joined Mr Chappell to approve RAL’s subscription for a further 20 million shares. It is highly improbable that Mr Chappell or Mr Chandler or one of the other directors would not have brought Mr Henningson up to date and I find on a balance of probabilities that they did so. Accordingly, I find that Mr Henningson was told that the consensus at the meeting was that Project Thor was never going to happen.

none of the detailed advisory work that had been undertaken by Deloitte (who had acted for the Taveta Group in relation to Project Thor) was available to the Respondents, it would be expensive to replicate it, and there was no guarantee that Project Thor would be legally possible”

Mr Chandler

In his Points of Defence, Mr Chandler admitted this allegation apart from the words “there was no guarantee that Project Thor would be legally possible”. Mr Curl did not pursue this question with Mr Chandler in cross-examination and I accept the limited admission which he made. I find that on his appointment Mr Chandler knew that none of the detailed advisory work undertaken by Deloitte was available to the Respondents and that it would be expensive to replicate it but not that there was no guarantee that Project Thor would be legally possible.

Mr Henningson

I am, however, satisfied that Mr Henningson had all the relevant knowledge. Mr Roberts told him at the RAL board meeting on 11 March 2015 that to implement Project Thor would be expensive and time consuming, that the advice which Taveta had received would not be made available and that there was no guarantee that any new advisers would find it legally possible. Moreover, he also told Mr Henningson that “SPG had said himself that this would be breaking new ground.”