On 17 May this year, the tale of Retail Acquisitions Limited (RAL), the company that bought BHS for £1, took a decided turn for the worse.

The High Court handed down its reasons for winding the company up and putting it into liquidation. The decision was based on an “unsatisfied demand for the sum of £5,981,871.65 arising from a loan” made to RAL by BHS in December 2015.

The joint administrators of BHS—which is largely in administration, though some of the companies that make up the group are in liquidation, like RAL—were the creditors calling for RAL’s liquidation. Inability to pay debts is one reason for insolvency, the first that the court decided on, but RAL managed to meet the second test, as well, since the court also decided that RAL is ‘balance sheet insolvent’ pursuant to the Insolvency Act 1986. Balance sheet insolvency means that the company’s assets are less than its liabilities. Dominic Chappell, its owner and the only director left at RAL prior to insolvency, is reportedly appealing the court’s decision, claiming that a substantial part of the debt is not due to be paid until 2019.

The dealings outlined in the ruling are as arcane as anything we have already seen uncovered in the investigations into the collapse of once proud and profitable retailer, BHS. As has been noted, RAL paid the previous owner of BHS, Sir Philip Green, £1 to buy BHS in 2015. Just over a year later, BHS went into administration. Its collapse resulted in the loss of 11,000 jobs and left a £571 million pension deficit. In its report on BHS, the Business, Innovations and Skills Committee described Chappell, a former chauffeur of a fraudster, Paul Sutton, who was an earlier potential buyer for BHS, as a “wholly unsuitable chancer” who “effectively had his hands in the till.”


Liquidation: Also known as winding up. An insolvency procedure under which the assets of a company are realised and distributed to creditors by the liquidator, in the order provided for in the Insolvency Act 1986 and the Insolvency Rules 1986 (SI 1986/1925). There are two modes of liquidation: compulsory liquidation following a court order, and voluntary liquidation instigated voluntarily by the members of the company. Unlike other insolvency procedures (such as administration and administrative receivership), liquidation always results in the dissolution of the company.
Administration: A procedure under the Insolvency Act 1986 in which a company may be reorganised or its assets realised under the protection of a statutory moratorium. The company is put into administration and an administrator appointed. At the end of the administration, the business has generally either survived and the company been rescued or the business and the company's assets have been sold by the administrator and the administration ended in a liquidation or dissolution. A company may be put into administration by court order or by an out-of-court procedure available to the company itself, its directors or the holder of a qualifying floating charge.
Insolvency (corporate): A company or partnership is insolvent if it has insufficient assets with which to discharge its debts and liabilities, which is essentially a question of fact rather than one of law. Different tests to determine insolvency apply, depending on the context in which the expression is used. When referring to a state of insolvency, the Insolvency Act 1986 uses the phrase "unable to pay its debts."
Estoppel: The principle that precludes a person from asserting something contrary to what is implied by a previous action or statement of that person or by a previous pertinent judicial determination.
—Paul Hodgson

RAL’s purchase of BHS was supposed to inject cash into the ailing company, but the only cash injected was the loan that is now due, a loan that came from a different part of the BHS group. In return, Chappell was supposed to provide management services to BHS under an agreement that paid him quarterly fees. He was also a director of BHS. Initially, RAL’s lawyer claimed that the fees from the management services agreement were an “offset” of the due loan payments, but the court found that not only did Chappell not provide any management services in exchange for the fees at any time, but also that he was invoicing a BHS group entity called Lowland Homes, a ‘dormant’ subsidiary of BHS, for those fees. Since this entity was not the one to which RAL owed the debt, there could be no set-off of the debt repayment against the management fees, the court decided.

While loan payments had been set off against management fees before BHS entered administration, the loan agreement, in fact, specifically forbad such an arrangement. The judge said: “No argument has been advanced on the basis that an estoppel [see definitions box for meaning] by convention or representation arose as a result of the pre-administration dealings.”  Thus, the court determined that RAL was in default on the loan.

Now for the assets. These allegedly consisted of proceeds from the sale of a London property called Marylebone House and the following: “[A] Chaplake asset [which] is a 43.24% stake in a Portuguese development company that has land to develop. Mr. Chappell exchanged the secured debt of £1.5m (set out in the October 2015 balance sheet) for the interest in Chaplake. The evidence is that the £1.5m secured debt was secured against his parents’ home, and his father held the Portuguese development company interest.” As can be seen, this is a tangled web of assets, that Chappell claimed was worth more than £10 million.

Unfortunately, the judge determined that Chappell had already received the profits from the sale of the property as this was the money that RAL allegedly ‘injected’ into BHS, the original loan. The property remains owned by Taveta Investments (No. 2) Limited, one of the many offshore companies run by Sir Green’s wife, Lady Green.

As for the Chaplake investment: “There is no evidence that RAL has ownership of the shares in the Portuguese company; there is no professional valuation; proper costings, production of a valuation of the present value without the benefit of planning, evidence of planning advice, costs of obtaining planning, the potential outcome or outcomes in respect of any development potential from a qualified practitioner, and a failure to produce a development analysis including time scales.” In an attempt to be generous, the judge gave the investment a value of £1.5 million, equivalent to the loan it was exchanged for, on the basis that: “[Chappell] was more likely than not to have been motivated by fairness and not avarice at his parents’ expense.”

But that’s not all. As Tim Symes, a partner at law firm DMH Stallard, said: “The activity of this company (as reflected at Companies House) is opaque at best, and with some seven board resignations in the space of a year, it perhaps wasn’t a happy ship.” In fact, some directors resigned multiple times, and none lasted very long. Stephen Bourne and Mark Tasker were appointed on 5 December 2014, but stayed only until 11 March 2015. Lennart Henningson was appointed, for the first time, in March 2015, as was Keith Smith. Smith only lasted until June of that year. Two further directors, Edward Parladorio and Aidan Treacy were appointed in December 2015, then Henningson was terminated, for the first time, in February 2016. Parladorio and Treacy were terminated in May 2016. Henningson was reappointed on 21 April 2016 only to be terminated again a month later.

And then there are the accounts. Said Symes: “Retail Acquisitions started up in November 2014, and in its short life filed just one set of accounts, for the period from that start date until just a month later. Unsurprisingly then, those accounts tell us nothing about the company’s activities, and the subsequent extension of the accounting period followed by a failure to file any more accounts has (until now) kept its activities away from prying eyes.” According to documents at Companies House, the accounting period was ‘extended’ to 31 March 2016, and subsequently ‘shortened’ to end on 30 December 2014, a month after RAL came into existence.

This opacity regarding its accounts is likely to be short lasting now that RAL is in liquidation. Said Symes: “When a company goes into liquidation, the official receiver becomes the default liquidator and he or she then usually calls a creditors meeting to allow creditors to vote for an insolvency practitioner to become the liquidator. If BHS is RAL’s largest creditor and they are owed more than the other creditors put together, they can vote in their choice of private liquidator who will then call on the directors to, among other things, give up the books and records (if the official receiver has not already secured them). Directors are duty-bound to do so. This books and records disclosure is usually useful in placing directors on the hook for claims against them, but unfortunately these accounts often disappear into the ether, or arrive incomplete. However, there is also a requirement under the Companies Act,” continued Symes, “to keep proper books and records and if this hasn’t been done then directors are on the hook for noncompliance with that.”

But, according to Symes, an official liquidation provides further benefits. “Not just the management accounts, but e-mails and other documents stored on servers, for example, would all be ‘available,’ subject to Chappell cooperating.”

Even without cooperation, obtaining useful files is still possible. “The company’s solicitor before the liquidation retains his duties to the company after liquidation,” Symes added. “This means that the liquidator can ask the solicitor to provide the files and the solicitor must comply. Indeed, this is often one of the first steps that I’m instructed to take in these situations.”

In answering a question about whether this strengthens the Business, Energy and Industrial Strategy (BEIS) committee’s call for additional powers to be given to the Financial Reporting Council (FRC) to bring directors to book for their misdeeds, Symes said: “Broadly speaking, yes, I think this gives them more traction. I think that any further publicity about alleged director wrongdoing, especially where it appears that someone is getting away with it, gives added impetus to giving the FRC additional authority.”

“These kinds of cases are all grist to the mill for authorities to extend regulations. Additional powers are also a typical government response to these extreme examples,” continued Symes. “It is not the case with BHS, but often, albeit entirely legally, a company goes into administration one day and a new company is running its business the next, free of the old creditors. This can be particularly problematic in the retail sector, where landlords of property that has been rented by retail companies can find themselves at no notice with an insolvent tenant.”

There seems little doubt that someone should be on the hook for this particular sequence of events.