BHS Contents

4Selling BHS

Finding a buyer

52.Sir Philip Green has claimed that he first started to seriously consider selling BHS in 2014.138 Regarding reports of attempts to sell BHS dating back to 2006, Sir Philip said there may have been casual conversations but “no serious proper dialogue […] about making a disposal.”139

53.There were many reasons why BHS was not an appealing prospect for a new purchaser: the company had been loss making for a number of years, and suffered from a poor market position, expensive lease arrangements, and substantial pension obligations. Since 2013, BHS accounts have made clear that the company was only a going concern on the basis that Taveta had undertaken to provide continuing financial support.140 Sir Philip Green faced a considerable challenge in finding a credible buyer for a business that was consistently losing money and had a pension scheme with a large and growing deficit.

Paul Sutton

54.Sustained efforts to sell the company commenced in April 2013 when Robin Saunders introduced Sir Philip to Paul Sutton. Ms Saunders had worked on financing Green’s takeover of BHS in 2000 and, as a shareholder until 2009, subsequently benefited from the dividends that were paid out.

55.In late June 2013, Ms Saunders found out that there were “significant issues to be addressed” with regards to Mr Sutton’s background — i.e. his now widely known history of bankruptcy and previous fraud conviction.141 Ms Saunders said that at that time Sir Philip Green had contacted her and made clear that a deal with Mr Sutton “was not going to happen”142 because of his concerns about Mr Sutton’s reputation.143 Ms Saunders said that whenever they spoke after June 2013, Sir Philip would remind her that he was no longer in contact with Paul Sutton.144

56.Contrary to what he told Ms Saunders, Sir Philip or his team continued to work with Paul Sutton until Spring 2014, during which time he developed a business plan to purchase BHS called ‘Project Albion’.145 Paul Budge, Sir Philip’s Finance Director, told us that attempts to do a deal with Mr Sutton ended in March 2014.146 Contradicting this, we have seen copies of emails showing that Sir Philip’s office arranged a meeting with Paul Sutton for 13 May.147 It was only after it emerged that Paul Sutton was using Sir Philip’s name “as a reference in Monaco” that Sir Philip appears to have decided the risk to his reputation of continuing to discuss a deal was too great.148 Mr Budge was asked to investigate Paul Sutton and Sir Philip subsequently decided to terminate contact; Mr Budge told us that this had happened on 13 May 2014, the same date they were due to meet.149 The person who arranged the meeting on behalf of Mr Sutton was Dominic Chappell, who described the meeting in an email at the time as “conformation [sic] on the BHS deal with SPG”.150

Dominic Chappell

57.Dominic Chappell started working with Paul Sutton in around January 2014151—initially as his driver then, later, as an associate in structuring the deal to purchase BHS.152 The discrediting of Paul Sutton enabled Dominic Chappell to take the reins of the deal; as Mr Sutton “stepped back” from BHS, “Dominic stepped forward”.153 Paul Budge confirmed that he met with Mr Chappell and Peter Graf (the man Mr Sutton had proposed as BHS’s new CEO) on 16 July 2014.154 By Autumn 2014, Mr Chappell was presenting his plan to purchase BHS as a done deal, advising River Rock and others that he would be acquiring BHS for £1 both debt free and pension free.155

58.In reality, Dominic Chappell had scarcely, if any, more credibility than Paul Sutton as a suitable buyer for BHS. Mr Chappell had a record of bankruptcy, of which Sir Philip was aware,156 and neither retail experience nor any experience of running a similar-sized company. It has subsequently been reported that Mr Chappell was forced out of a previous venture in the oil business “after taking around €400,000 (£315,000) from the company for his personal use”.157 It is amazing that his association with a convicted fraudster and previous bankruptcy did not lead to more thorough scrutiny of his credibility, not least when it became known that he had been misrepresenting the deal to his own advisers, as was made clear to Goldman Sachs in December 2014.158 Other examples of exaggeration, if not misrepresentation, included:

Darren Topp, BHS’s CEO, became concerned about Mr Chappell within weeks of him purchasing the company, as did Michael Hitchcock, whom Mr Topp had recruited due to his level of concern about RAL’s management. Yet despite engaging with Mr Chappell for over six months in developing a deal, Paul Budge and, later, Sir Philip himself apparently found Mr Chappell credible.

59.Contrary to Mr Budge’s assertion that Mr Chappell “started from a clean sheet of paper”,162 it is clear that he was the continuity candidate. While Chappell did have his own board and advisers, including Grant Thornton and Olswang, his bid was clearly built on the groundwork developed with Paul Sutton. Eddie Parladorio, who had advised Sutton, was a member of Mr Chappell’s team, Peter Graf had previously featured in Paul Sutton’s bid for BHS, Vail Williams continued to provide property advice, LEK continued to be erroneously cited as consultants, and Mr Chappell built his business plan on data previously provided to Paul Sutton by Paul Budge.163 In an exchange with Anthony Gutman of Goldman Sachs, Mr Budge said Paul Sutton had been “part of their [RAL’s] team”.164

60.Sir Philip was vague as to when he became aware of the link between Paul Sutton and Dominic Chappell. However, an email from Paul Budge to Goldman Sachs dated 12 December 2014, indicated that “SPG [Sir Philip Green]/The BHS Board [were] concerned also that Paul Sutton still involved.”165 Such was the extent of Arcadia’s concerns that Mr Chappell asked Mr Sutton to sign an affidavit confirming that he was not involved. This was produced in December 2014 and signed in February 2015.

61.Sir Philip rejected Paul Sutton, his first choice of buyer, seemingly finally cutting off ties when faced with the prospect of his name being publicly associated with that of a convicted fraudster. Such was his determination to sell the business as a going concern, Sir Philip was prepared to sell to Dominic Chappell, Sutton’s erstwhile driver and junior business associate. Chappell had no retail experience and Sir Philip knew him to have been previously bankrupt.

62.It is implausible for Paul Budge to claim that Dominic Chappell began with a blank sheet of paper. Mr Budge himself acknowledged that Chappell and Sutton were originally part of the same team. Chappell had picked up Sutton’s plans with the full knowledge of Arcadia board members.

The role of advisers

63.Large numbers of advisers were involved at various stages of the deal acting for Sir Philip Green and Dominic Chappell. Some were engaged formally, some informally, and some existed on paper alone. Many of those closely involved claim to have drawn comfort from the presence of others. For River Rock, who stood down from the deal on realising they had been misled by Mr Chappell, the presence of Linklaters and Goldman Sachs had given comfort.166 Linklaters appear to have taken comfort from Olswang.167 Taveta and Sir Philip Green argue that the presence of Olswang and Grant Thornton helped give Dominic Chappell credibility.168

64.Advisory firms are legally required to carry out ‘know your client’ checks on new clients to confirm their identity and provide protection against money laundering and terrorist financing. The only constraint beyond the legally required checks is the risk that a company is willing to take that its reputation may be tarnished by association with a particular client or deal. In the case of BHS, it appears that advisory firms either did not consider the reputational risk or demonstrated a remarkable level of ‘group-think’ in relying solely on each other’s presence. An example of the cursory nature of checks can be seen in the ‘know your client’ discussion that took place between Linklaters and Olswang on 10 March, the day before the transaction took place (see Box 1, below).

Box 1: Transcript of handwritten note from Linklaters “KYC” (Know Your Client) call with Olswang, 10 March 2015

Page 1

KYC Call with David Roberts @ Olswang

on 10/3/15

Usual external agents

Bell Pottinger

Original he obtained River Rock as financial advisers –worked with GS


-business failure with Lehman

-they got a stat declaration from him

Director who borrowed from Anglo Irish to fund a Marina in Bournemouth

Anglo unlawfully triggered a swap (£:€) + triggered insolvency + put Co into insolvency

Page 2

He got legal advice not to fight

+ didn’t have wherewithal to



He was asked to give ev in

crim trial against 3 people

at Anglo Irish who are now in



He was forthcoming.

Last 4/5 years –he’s busy doing oil + gas turnarounds in Spain

Page 3

Exposure to oil terminals in Spain

3 year [window]1 when investments

mature (time)

Paul Sutton negotiating with SPG

asked Dom to help.

He now decided to take on



N/t to suggest fraud or bad faith

Olswangs grilled him hard. He has

been v. open

Sat down for week + did [some] Digging

Page 4

Honest guy + entrepreneur

Fault –eternal optimist

Has surrounded himself with long term

friends with good back grounds

-known him for 20 years. Good

business people

This is effectively an MBO

Run off with cash? –wouldn’t

be involved

Family man. Stable

Source: Linklaters

65.Advisers ultimately did not need to concern themselves with the material consequences of the deal, provided that their advice was accurate and their terms of engagement fulfilled. As one witness put it: “Businessmen do not employ deal lawyers to vet the business acumen of their counterparties.”169

66.Expert advisers are an important part of business transactions. They should, however, be there to advise, not to provide an expensive badge of legitimacy to people who would otherwise be bereft of credibility. The presence of reputable advisers does not absolve the client from exercising judgement. Equally, their engagement cannot be taken as a guarantee of the business acumen of their clients. It is disingenuous of Sir Philip Green to cite Dominic Chappell’s employment of Olswang and Grant Thornton as evidence of his credibility as a prospective owner of BHS.

Due diligence by Olswang and Grant Thornton

67.Olswang and Grant Thornton started working on the deal with RAL in November 2014. They commenced detailed due diligence on BHS on 16 February 2015, following the signing of the Points of Principle for the sale.170 Both advisers were rewarded handsomely for this work: their terms of engagement suggest that they earned fees totalling around £1.75 million in relation to the deal alone. Both received significantly higher fees because the deal went ahead than if it had been aborted. In Grant Thornton’s case the fee was four times higher for a successful transaction—well above normal rates.171 Sir Philip told us that Grant Thornton and Olswang together earned total fees from BHS/RAL of at least £8 million.172 We wrote to Grant Thornton and Olswang asking them to clarify the total fees they received but they refused to say.173

68.Advisers were doubly dependent on a successful transaction because RAL did not have the resources to pay them otherwise. It is clear from email exchanges between Grant Thornton and Olswang that both were preoccupied with how their fees would be paid following the completion of the transaction.174 This concern was addressed by Sir Philip, who apparently suggested that their RAL’s advisers’ fees might be paid via a loan from BHS or through profit from the (aborted) sale of Marylebone House.175 The two main advisers to the transaction denied being in contact with Sir Philip’s team about their fees before the transaction. It is apparent, however, that Sir Philip found a way to ensure that advisers’ fees did not act as a barrier to the transaction proceeding.

69.While we have only had partial access to documentation, what we have seen suggests that the due diligence exercise was detailed and rigorous. Considering the risk of insolvency, Olswang went so far as “urging the [RAL] directors not to transact until they have maximum commercial comfort” regarding the intended £120m loan facility from Farallon Capital.176 Though, in the last days before the transaction, Sir Philip Green and RAL arranged alternative financing.177 Olswang also highlighted issues around concessions agreements with Arcadia stores and noted that while Sir Philip Green may have made “representations” that he would continue to support the business, “there is no legal obligation on him to do so.”178

70.On the crucial issue of the pension schemes, Olswang noted that “most of the material pension warranties have been deleted” from the Sale Purchase Agreement, “further increasing the risk to [RAL] in this matter.” Olswang concluded that “we are not able to give the directors any material assurance or comfort that Project Thor can be implemented.”179

71.Grant Thornton did not present their findings in such stark terms. Its due diligence report was more muted in tone but, nonetheless, highlighted significant risks, including potential cash-flow issues that could rapidly lead to insolvency. On the pension schemes, Grant Thornton noted that delivering Project Thor would be “challenging to agree from a regulatory perspective” but that, without it, the viability of BHS was in question.180 That risk rested solely with the buyer. Grant Thornton’s final report was dated 11 March, the day that the RAL Board approved the deal and the day after it was approved by Taveta.

72.Neither Grant Thornton nor Olswang can be blamed for the decision by RAL to go ahead with the purchase. That said, while Olswang flagged up clearly the weaknesses of BHS as a business and the risks associated with acquisition, Grant Thornton deployed a large team for a short period and, based on the documentation we have seen, produced a report which could have more clearly explained the level of risk associated with the acquisition and offered firmer observations.

73.Grant Thornton and Olswang were increasingly aware of RAL’s manifold weaknesses as purchasers of BHS. They were nonetheless content to take generous fees and lend both their names and their reputations to the deal.

Goldman Sachs

74.Sir Philip and his various businesses have had a long-standing relationship with Goldman Sachs, dating back to 2004 when they advised on his failed bid for Marks and Spencer. This relationship appears to have been based on a large number of informal interactions and offers of assistance that did not generate revenue (around 25 in a 12 year period), punctuated by a few lucrative transactions.181 Services provided include private wealth management for the Green family (from which Goldman Sachs have earned significant fees), informal assistance on various business acquisitions and property transactions, and advice on BHS pension schemes’ investment strategy.

75.Advising, or as Goldman Sachs preferred to describe it, providing “preliminary observations”,182 to Sir Philip Green on the BHS transaction was another instance of Goldman Sachs providing free services. Their involvement in this manner had two key consequences:

76.With the benefit of hindsight, Michael Sherwood, Goldman Sachs’s vice-chair, concluded that “I wish that we had more clearly documented our role in writing.”191 When pushed on specific improvements he intended to make, he was less clear: “We will look again at the frequency with which we review clients, but we have a very robust programme that we talk to our regulator about all the time and are convinced that it works.”192

77.Goldman Sachs provided free advice to Sir Philip on the transaction, having turned down the opportunity to be formally engaged. In doing so, they hoped to maintain a longstanding and lucrative relationship with a wealthy client. Goldman Sachs told us that their role was limited to providing some “preliminary observations” on the proposals. It is clear that their subsequent involvement went considerably beyond that. They enabled their prestigious name to be cited as that of “gatekeeper” to the transaction. This added lustre to an otherwise questionable process. Lack of clarity about their role evidently caused confusion for some parties to the transaction. Goldman Sachs should have been either “in” or “out” of the deal, and demonstrably so. As it was, they had authority without accountability.

78.Sir Philip Green claimed that the Goldman Sachs “process” was designed to ensure Mr Chappell was suitable to take control of BHS. Sir Philip said “we one million percent would not have done business with him” if Goldman Sachs had said not to.193 It says much about his relationship with them that he should seek to place great weight on their word without there being any written documentation setting out his expectations of the bank. Furthermore, Goldman Sachs have been unequivocal in making clear that Sir Philip “did not ask us to make judgments or provide recommendations” and that this would not have been possible given the nature of their role.194 Yet Sir Philip went ahead.

79.While Goldman Sachs did not give an unambiguous “no” to the deal—which, as Sir Philip would have known, it was not their place to do—they did express concerns about the transaction, noting that “there were risks attached to the proposal in light of the lack of retail experience, the bankruptcy and the highly preliminary nature of the proposals and so on and so forth”.195

80.Sir Philip and Paul Budge cannot pass responsibility for going ahead with the deal to Goldman Sachs. Arcadia failed to follow up adequately concerns expressed about Mr Chappell or the deal. It was also their responsibility to account for the limitations of the unpaid advice provided. Sir Philip maintained that he would not have gone ahead with the deal without their approval. He knows full well that Goldman Sachs were in no position to give such approval and they did not give it.

81.While Goldman Sachs were not responsible for recommending that the transaction proceed, or otherwise, their involvement was protracted. On 25 May, we wrote to Goldman Sachs requesting a record of their contact with Arcadia over the five month period for which they provided informal assistance on BHS. On 1 June, Anthony Gutman, who advised Sir Philip on the transaction provided a log detailing 95 emails, meetings and phone calls.196

82.On 27 June 2015, Goldman Sachs belatedly notified us “for completeness” that their Vice Chairman, Michael Sherwood, had spoken with Sir Philip about provision of a £40 million loan to support the deal as it approached completion.197 Although this business opportunity was not pursued, both this and the log indicate that Goldman Sachs were involved for a prolonged period.

83.We regret that Goldman Sachs underplayed to us the nature and extent of their role in the sale of BHS. More serious was the last minute “discovery”—the day before appearing before us for the second time—that they had been asked by Sir Philip to provide a £40m loan to BHS under RAL to facilitate the sale transaction. We note the apology of Mr Sherwood for this highly regrettable oversight and agree with his conclusion that they should have maintained better documentation of their involvement in the deal.


84.BHS Group’s 2012–13 and 2013–14 Annual report and accounts made clear that the company was a ‘going concern’ on the basis of financial support provided by the wider Taveta Group. This alone meant that it could trade without threat of liquidation for at least the next 12 months.198 The 2013–14 Annual report and accounts were signed off on 6 March 2015, just days before the sale of BHS to RAL and while the key substance of the deal was still being negotiated. This is also notable because the accounts were normally signed off in May of each year. The accounts were audited by PricewaterhouseCoopers (PwC), who have a long-standing relationship with Sir Philip Green and have provided auditing services to Taveta for over a decade. Since 2008, the same PwC partner, Steve Denison, has been responsible for auditing the accounts of Taveta and its subsidiaries.199

85.Despite being aware that BHS was due to be sold imminently and, in such a situation would lose the ongoing support from Taveta, PwC did not dispute BHS’s Directors’ assessment that the business remained a going concern. While Mr Denison told us that PwC recognised that BHS would potentially lose the ongoing support of Taveta if it was sold, they also considered “to what extent would such a deal bring additional cash, assets and resources to BHS to allow it to continue to trade in the future”.200

86.Given that Grant Thornton’s own due diligence of BHS had identified a number of significant risks to BHS meeting its cash flow requirements, we were surprised that PwC did not more deeply question whether BHS was genuinely being sold as a going concern. In light of this, we welcome the Financial Reporting Council (FRC) investigation into the conduct of PwC with regards to its audit of BHS’s accounts in the year ending August 2014, and continue to urge them to conclude this as swiftly as possible and to include PwC’s work in previous years and on the accounts of other Taveta Group companies. We sincerely hope that the FRC can report significantly quicker than the “two years” in which they currently “aim” to conclude their investigations.201

Privilege and confidentiality

87.Advisers citing issues of legal privilege and client confidentiality acted as a bar to us gathering information. We appreciate that Sir Philip Green opted to waive privilege with regards to his own advisers. Dominic Chappell did not do so. Grant Thornton and Olswang in particular adopted a very wide interpretation of confidentiality, which included:

88.Erskine May makes clear that: “A witness is bound to answer all questions which the committee sees fit to put” regardless of issues of confidentiality or privilege.202 We recognise the duty of confidentiality advisers have to their clients and, in particular, the principle of legal professional privilege. In exceptional matters of clear public interest, however, there is a strong case for those concerns to be over-ridden by duties to provide information to Parliament. It is a matter of regret that, in spite of our requests, Dominic Chappell chose not to release his advisers from their formal obligations. This denied them the opportunity to explain fully their actions. Equally, we regret that Olswang and Grant Thornton sheltered behind these duties when their interests—and that of the public—would have been better served by full and frank disclosure to legitimate parliamentary scrutiny. We, and the public, would have had a better understanding of the motives of their client in proceeding with this rushed transaction.

Other ‘advisers’ cited by Dominic Chappell

89.In addition to the advisers who actually had a role in the sale of BHS, a number of individuals and companies were also cited by Dominic Chappell as part of his “team”. These include LEK Consulting LLP, and experienced retail figures: Alan Jacobs and Kevin Lyon, who Mr Chappell proposed would become BHS’s Chief Executive and non-executive Chairman respectively. Correspondence with all three of these indicates that Mr Chappell significantly over-inflated their roles, if any, in providing advice. LEK had informal meetings with Mr Chappell to explore business opportunities but these were never progressed,203 and Alan Jacobs and Kevin Lyon have both confirmed that they explicitly refused the roles offered by Mr Chappell.204 Mr Lyon made this clear to Ian Grabiner, the Chief Executive of Arcadia and a Taveta Director, when they spoke on 10 March, the day that Taveta approved the transaction.205

The deal

RAL’s proposed sources of finance

90.From an early stage, RAL’s proposal came with a substantial commitment to fund BHS. On 12 December 2014, Dominic Chappell talked his plans through with Anthony Gutman of Goldman Sachs. RAL would provide £120 million of working capital and £35 million of equity.206 These sums featured prominently in subsequent discussions around the deal and also in our evidence. Paul Budge told us that RAL “had ability proof that they had £120 million of working capital”,207 which “meant that their intentions were serious in that they wanted to run the business as a going concern”.208 Chris Harris said Chappell “had managed to put £35 million in a bank within about three days […] which showed credibility”.209 The importance of financial capability in assessing RAL’s credibility chimed with Sir Philip Green’s instructions to Anthony Gutman for his first meeting with Dominic Chappell; “proof of finance” was his “key concern”.210

91.RAL’s proposed source of working capital was Farallon Capital, a US based asset management firm. On 5 February 2015, Farallon issued a non-binding term-sheet to RAL setting out the terms of a possible loan.211 Nicolas Giauque, of Farallon, described the term sheet as a “very early stage expression of interest” designed to establish “joint understanding” between the two parties.212 Mr Giauque estimated that around one in five deals that reached this stage progressed to completion. In his business, he explained, “you have to kiss a lot of frogs”.213

92.The term sheet describes a “£120 million term loan facility”, secured on BHS property. However, those funds were to be provided in three separate tranches of £40 million, each subject to the full repayment of the previous £40 million. It was, in effect, an outline of a rolling £40 million loan.214

93.This facility was also subject to a series of conditions. These included:

Stephen Bourne, a former director of RAL, told us that “no one reading those letters from Farallon would believe that finance was available […] the conditions could not be met”.216 Goldman Sachs advised Taveta that the Farallon proposal was subject to due diligence and documentation.217

94.Sir Philip Green originally set proof of finance as the key test of Dominic Chappell’s credibility in purchasing BHS. Mr Chappell did not, however, have access to the working capital for BHS to be a sustainable business. The proposed £120 million from Farallon was in fact three consecutive £40 million loans, each available only upon repayment of the last. It was also a far from firm offer subject to many conditions, not least TPR approval of a restructuring of the pension fund. This was all very clear from the documentation. Given the importance Taveta placed on this funding in assessing Mr Chappell, it is simply not credible that Paul Budge neither knew these simple facts nor took steps to establish them.

95.A further condition of the Farallon funding was RAL providing £35 million of equity financing to BHS. An outline offer to buy the company, emailed by Dominic Chappell to Anthony Gutman on 8 January 2015 despite Goldman Sachs’s professed minimal involvement, included the proposal to “invest £35 million clean, unencumbered equity funds into BHS”. This funding was to come from directors and associates of RAL.218 This commitment was gradually watered down. Successive drafts of the Points of Principle document that set out the heads of terms for the sale saw it relegated to “provisional equity funding” and then “provisional funding”.219 The final version, signed by Sir Philip and Mr Chappell on 16 February 2016, required RAL to demonstrate that it had “£35 million of provisional funding at Olswang on shore to acquire Marylebone House”.220

96.Marylebone House was used as the head office of BHS. It was owned, however, by Wilton Equity Ltd, a Green family company registered in the British Virgin Islands. Dominic Chappell agreed to purchase Marylebone House for £35 million. In a further deal, he would immediately on-sell it to Allied Commercial Exporters Ltd (ACE) for £45 million.221 As part of the terms of that arrangement, ACE placed £35 million in an Olswang escrow bank account on 4 February. Those funds, which were in effect a down-payment by ACE for the purchase, were “held to the strict order of ACE’s solicitors”.222 It was not RAL’s money, and it was not intended to be injected into BHS on acquisition.223

97.Marylebone House was not in the event sold as planned because an offer of £52 million had been received.224 The property was eventually sold to Arcadia in July 2015 for £53 million, a transaction we consider in Chapter 5. Taveta told us that figure represented the true market value of the property.225 Dominic Chappell succeeded only in arranging to on-sell Marylebone House at below market value.

98.The original terms of the deal were that RAL would provide £35 million of equity to BHS. It was also a condition that RAL would secure working capital from Farallon. Paul Budge and Chris Harris both repeatedly told us that the ability to source £35 million at short notice gave Dominic Chappell credibility as a purchaser. That figure was, however, attained through Allied Commercial Exporters (ACE) placing funds in an Olswang escrow account. This was in effect a down-payment by ACE to purchase a property owned by the Green family. The money was held to the order of ACE. This in no way demonstrated Dominic Chappell’s credibility as a purchaser of BHS. At best it demonstrated his capability as a would-be estate agent. We do not find it credible that businesspeople of the experience of Paul Budge and Chris Harris were not aware of this distinction.

Alternative sources of finance

99.The £35 million of equity that would have been required to meet Farallon’s conditions of providing working capital was never found. Stephen Bourne told us that Dominic Chappell was “frantically looking for it”, but there was “no sign” that it was “ever likely to appear”. He concluded that there was “no finance to do the deal”.226

100.Instead, Sir Philip secured some working capital for RAL himself. The “day one” post-sale balance sheet for BHS provided to the Taveta board on 25 March 2015 included net cash of £25 million from an HSBC facility. This was arranged by Sir Philip on more favourable terms than RAL would have been able to secure.227 The loan was guaranteed by Arcadia, which took a fixed and floating charge over BHS assets.228

101.By initially offering Marylebone House to RAL for £35 million on the understanding it would be immediately on-sold for £45 million, Sir Philip sought to compensate for RAL’s failure to provide adequate equity finance to the deal. £8.5 million of the proceeds were to be invested in BHS.229 In the event, Marylebone House was not sold to finance the deal. Instead, a Framework Agreement was agreed on 26 June 2015, whereby BHS received a £3.5 million interest free loan from Arcadia and RAL received £6.5 million in cash. These funds were intended to pay down the HSBC loan.230 Both the original proposal and its replacement were arranged by Sir Philip.

102.RAL failed to provide working capital and they failed to provide equity. £25 million of working capital was arranged by Sir Philip Green and guaranteed by Arcadia. Sir Philip first arranged equity by offering Marylebone House for £35 million on the understanding it would be immediately resold for £45 million. When he decided not to proceed with this deal, he found £10 million from elsewhere. Sir Philip attempted to make good RAL’s financial inadequacies to facilitate the sale. He was both sides of the deal.

103.The “day one” balance sheet also included £5 million of equity. Eddie Parladorio told us that until very shortly before the sale he and other RAL directors understood this would be provided personally by Dominic Chappell. This became a personal loan and then a loan to RAL.231 The funding was arranged by Dominic Chappell on 10 March 2015, the day before the sale. It was a two month loan from ACE, secured against BHS’s Atherstone distribution centre, specifically for the purchase of BHS. Arcadia told us that they were not aware that the funds were raised in this fashion.232 The total redemption on the loan was to be £6 million, with £2 million due on 18 March, a week after the sale, and the remainder due on 11 May. These were extraordinary terms, especially for a secured loan. In the event, only £1 million was repaid on 18 March. A variation to the terms of agreement was agreed, resulting in additional costs to BHS of £1.15 million. The loan was finally repaid on the sale of Atherstone in August 2015.233 It was the first in a series of loans on punitive terms arranged with ACE and others, as outlined in paragraph 148.234

104.The £5 million supposed equity that was provided by RAL as part of the deal was a hurried short term loan on extraordinary terms secured on BHS property. RAL in no way passed Sir Philip’s test of proof of finance. They came to BHS with a pound.

BHS’s financial position at the time of acquisition

105.In total, the “day one” BHS balance sheet presented to the Taveta board showed £94 million in cash and facilities available for BHS. This figure was just above the estimated peak to trough working capital requirement of £90 million identified as necessary by both Sir Philip and Gillian Hague, his Group Financial Controller.235 As already outlined, it included £25 million in cash from an HSBC loan facility secured by Arcadia, £8.5 million from the sale of Marylebone House and £5 million in supposed equity that transpired to be a high interest loan. The same balance sheet, with the exception that the borrowing facility was originally intended to be provided by Goldman Sachs rather than HSBC, was prepared by Paul Budge and signed by both Dominic Chappell and Sir Philip Green on 11 March 2015 in agreeing the deal. It is shown in Figure 3 below.

Figure 3: BHS balance sheet agreed as part of sale

106.Further items on this balance sheet gave us concern:

BHS would also have to find £5 million to contribute to the pension fund, which had previously been financed by the wider Taveta group.

107.The Taveta board was presented, two weeks after the event, with a rosy picture of the sale: the pension scheme was secure and BHS, unencumbered by substantial debt, was left with a healthy “day one” balance sheet of £94 million. The reality was very different. The balance sheet included cash for immediate liabilities, property deals that took many months to materialise, funds that went to RAL never to return and equity that was a loan on punitive terms. It was patently obvious that there was simply not enough cash in BHS to give it a realistic chance of medium term survival.

Proceeding with an unsuitable buyer

108.Sir Philip Green initially appears to have set three conditions for RAL to meet to demonstrate their credibility as a prospective buyer of BHS. However, ultimately he sold the company to Dominic Chappell without any of these having been met:

Table 3: Conditions for sale of BHS set by Sir Philip Green

Initial condition of sale

Position when sale completed

That they inject their own equity in to the company.238

RAL provided no equity to the deal. £5 million came via a loan from ACE secured against a property owned by BHS. Further equity was subsequently provided by Sir Philip Green in lieu of the funds from the planned sale of Marylebone House.239

That they provide a credible retail ‘front-man’.240

RAL had no credible retail front-man. On 10 March, prior to Taveta approving the sale, Ian Grabiner telephoned Kevin Lyon (who RAL had proposed as non-executive Chairman), who confirmed that he was not interested in the role.241

That they have sufficient working-capital to keep the business afloat on an ongoing basis.242

RAL failed to meet the terms of borrowing £120m from Farallon; the only working-capital available to RAL was provided or arranged by Sir Philip Green.243

109.In order to progress the sale of BHS, Sir Philip Green endorsed a management turnaround plan that he claimed should have saved the company;244 he also agreed to write off the majority of the inter-company debt between BHS and Arcadia, while retaining a £40 million secured loan and guaranteeing a £25 million facility with BHS. Sir Philip also made oral commitments to back the BHS pension scheme. He told us:

“We always agreed and knew we would make a contribution towards the pension scheme. When the business was sold that was always understood.”245

110.At the point of sale, however, Sir Philip’s commitment was limited to paying in £5 million per year for up to three years.246 The RAL board appear to have relied on oral representations from Sir Philip that he would continue to support the business, including by “participat[ing] in any pension deficit solution that is proposed.”247 RAL also took comfort from what they understood to be reassurances from Sir Philip that he would secure adequate trade credit insurance for BHS.248 RAL took him at his word; Eddie Parladorio wrote:

“Sir Philip Green emphasised on more than one occasion in meetings that I and others attended that his word was his bond. Sir Philip is a very high net worth, high profile businessman, knighted for services to retail, and it was not unreasonable to accept the assurances and oral commitments of such a man.”249

Table 4: Expectations for purchase of BHS set by Dominic Chappell

Initial expectation of purchase

Position when sale completed

BHS would be sold with the pension liability resolved.

Sir Philip Green committed to contribute a maximum of £15m over three years, including in the event that a Project Thor-style solution was implemented.

BHS would come debt free.

Sir Philip had supported BHS for some time via £256m of intercompany loans.250 At time of sale he wrote off over £200m of inter-company debt with Arcadia but retained a £40m loan secured against BHS assets. In addition, Carmen Properties was sold to RAL as part of the deal with debt attached.

Purchase would be for £1.

Dominic Chappell purchased the company for £1. In reality, he paid £1 for a company with significant property assets, cash and facilities guaranteed by Arcadia.251 However, he also took on liabilities that far exceeded these.

111.It had long been intended that the sale would proceed on 9 March.252 It was actually concluded on 11 March after intensive negotiations, on terms very different to those envisaged just a few days earlier. As Eddie Parladorio noted, “alternative methods of generating sufficient cash to finance the turnaround” were identified between 8 March and 11 March 2015.253 This had implications for those parties affected. For example, Sir Philip warned Chris Martin the day after the sale that RAL both “hadn’t got the expected level of debt” and that they “wanted to move straight to compromise”, meaning a Thor-style restructuring of the pension scheme. Sir Philip took credit for driving a deal through, telling Mr Martin that he had “put the ball in the net on his own without 27 advisers”. He offered further assurances that he could help to ensure RAL would honour its responsibilities towards the pension scheme: “I can put the ball in the goal for you”.254

112.Sir Philip set a number of conditions for someone suitable to take over BHS. He rejected Paul Sutton, a fraudster and a bankrupt, but chose Sutton’s junior business associate instead. It was clear that Chappell’s team was woefully short of the requisite experience and expertise, notably lacking the credible senior retailer on whom Sir Philip once insisted. They could offer no equity and had no means of raising funds on a sustainable basis. Ultimately, Dominic Chappell and RAL failed all of Sir Philip’s own tests. They were manifestly unsuitable owners of BHS. It is inconceivable that someone with Sir Philip Green’s experience seriously considered otherwise.

113.Regardless, the deal proceeded and with great haste. Dominic Chappell had failed to honour his pledges but each failure was overcome, in several cases through agreements that were formally enacted long after the event. Promises were made, including on the pension fund, some of which would be very difficult to deliver. RAL placed great faith in Sir Philip’s oral commitments but, no longer bringing any finance to the deal, they had nothing to lose. Sir Philip personally drove the sale through to agreement.

144 Q994. Robin Saunders referred to 2013 both in oral evidence and, when asked to confirm this, did so in her letter of 14 June 2016. Taveta have subsequently suggested that Ms Saunders “is likely remembering a call in 2014” (Taveta Investments comments on oral evidence) but we note that Ms Saunders referred to 2013 on two separate occasions.

149 Q 2958 (Paul Budge)

151 Mr Chappell told us that he started working with Paul Sutton in “early 2014” (Q 1381); LEK informed us that on 10 February 2014, Mr Chappell was in attendance at meetings with Mr Sutton (letter from LEK, 22 June 2016)

154 Q 523 (Paul Budge)

155 Q 1122 (Joseph Dryer)

161 See paragraphs 90–94

163 In an email to Goldman Sachs, Mr Budge noted that Mr Chappell hadn’t done detailed due diligence not withstanding “some conversations when Paul Sutton (who was part of their team) reviewed the property side.” Email from Paul Budge to Anthony Gutman, 9 January 2015.

169 Q 406 (Owen Clay)

175 As above

179 As above

181 Letter from Michael Sherwood, 8 July 2016 (not published due to commercial sensitivity).

182 Q 419 (Anthony Gutman)

183 Email from Dominic Chappell to Paul Budge, 15 December 2014. Mr Budge forwarded this on to Anthony Gutman of Goldman Sachs on 15 December 2014. Goldman Sachs were also described as “gatekeeper“ by River Rock (Q1086), Paul Budge (Q2962) and Eddie Parladorio (Q1275).

187 See Above.

197 Letter from Goldman Sachs, 27 June 2016 which also provided details of an additional discussion that had not previously been shared with the Committees.

202 Parliamentary Practice, 24th Edition, p.823.

219 Draft Points of Principle, provided by Dominic Chappell

220 Points of Principle, 16 February 2015

227 Notes to Taveta board minutes, 25 March 2015. The loan also included £15 million assigned to paying a mortgage on Jersey properties.

229 Though RAL Directors understood this money would be used to fund their fees.

243See paragraphs 90 to 104, above.

244 Q 2046: “If the path laid down had been followed, [BHS] would not have gone out of business. It would not be in liquidation.”

247 RAL Board Minutes, 11 March 2015

249 As above

251 As above

252 See, for example, Points of Principle (signed 16 February 2015); letter from Sir Philip Green, 13 July 2016

© Parliamentary copyright 2015

22 July 2016