138.When RAL purchased BHS it agreed to implement a business plan put together by BHS’s management and Sir Philip Green’s finance team. This plan aimed to revitalise the long-struggling business. BHS’s management claimed that the plan was achievable and realistic—a claim repeated unequivocally by Sir Philip Green.
139.The business plan was the evolution of work that had commenced while BHS was still owned by Sir Philip Green. Prior to the company’s sale BHS’s management had stabilised the losses the company was making but had been unable to reduce them. One of the key factors that was constraining the turnaround of BHS was that it held leases for a number of loss-making stores at uncompetitive rates. Sir Philip’s high-profile wealth acted as a barrier to convincing landlords that BHS could not afford the rents. “Stepping away from Arcadia” was intended by BHS management to provide an opportunity to address these leases by making clear that the company was no longer financially supported by Sir Philip.
140.The business plan’s aim was to return BHS to profitability over two years. This ambition relied on the company achieving £26.7m of property related savings, through closing loss-making stores and other rent reductions, and achieving £23.9 million of improvements through trade initiatives. Despite his lack of retail experience, Dominic Chappell did not commission advice on the deliverability of the BHS turnaround plan from consultants with specific retail expertise prior to purchasing the company, but chose to rely on the judgement of the existing BHS management team. That said, Grant Thornton did provide high-level observations in which they noted “potential contradictions” between delivering different retail initiatives, highlighted the need for “clarity on the financial implications” of the plan and noted that work on consumer expectations was already “dated”.
Figure 5: The building blocks of the BHS business plan inherited by RAL (annotated by Paul Budge)
141.Delivering the £23.9 million of trade initiatives was primarily predicated on a 1 per cent like-for-like growth in sales, 1 per cent improvement in margins from retail improvements, cost savings, and a roll-out of food stores. The plan identified £8.4 million of further initiatives to improve profitability related to concessions, websites and low-cost store modifications. However, following the acquisition of BHS, like for like sales reduced by 0.2 per cent (1.2 percentage points below forecast), placing additional pressure on an already distressed company that was struggling to raise enough working capital.
142.Likewise, BHS and RAL’s performance on the property related savings was disappointing. Grant Thornton had originally indicated that RAL would need to dispose of its Oxford Street store by September to inject cash into the company, but this disposal was not made until April 2016. Furthermore, the plans to renegotiate rents—critical to the viability of the business—were pursued slowly. Rent reductions were not agreed until March 2016 following the implementation of a Company Voluntary Arrangement (CVA), which was too late to save the company. The CVA reduced BHS’s rent bill by around £30 million, significantly above that originally forecast in the business plan, and had first been proposed by BHS management in August 2015. Had it been delivered sooner than it was, it would have left BHS in a stronger financial position.
143.The business plan developed by the BHS management team and approved by the Arcadia board contained over-optimistic assumptions on future sales and margins. The plans for renegotiating rents and disposing of properties in order to support ongoing losses were not delivered fast enough, given that BHS was a company clearly in distress.
144.A CVA would have precipitated the pension schemes entering a PPF assessment period. One of the conditions of the sale was that RAL would use “reasonable endeavours” to seek a Project Thor-style restructuring of the pension schemes. There was no doubt at that stage that resolution of BHS’s pension problem was fundamental to the medium-term survival of the company. Discussions over the restructuring, developed by Grant Thornton and known as Project Vera, began in earnest in November 2015. Notes of a meeting between Chris Martin, Darren Topp and Michael Hitchcock make it clear that, by that stage, the short-term survival of the company was under threat:
145.On 21 January 2016 Chris Martin asked Sir Philip if he would join a round table meeting with the trustees and TPR to discuss a potential contribution of £120 million. He indicated he would not unless he was given assurances that TPR’s moral hazard investigation would be discontinued as a result. Though the only alternative was insolvency, no settlement was reached. On 17 February, Neville Kahn relayed to Chris Martin the message that Sir Philip was unwilling to meet the lump sum cost of a Project Vera settlement. The failure of BHS to agree a restructuring of the pension fund under RAL precipitated the collapse of BHS. Such a restructuring would have required a substantial contribution from Sir Philip Green, one he was not prepared to make while TPR’s moral hazard investigation of his companies continued.
146.Failure to address BHS’s expensive leases, coupled with disappointing trading figures, meant that RAL needed to raise additional working capital to fund BHS. There were two ways in which RAL sought to raise funds, firstly through property sales, and secondly through attracting external finance.
147.Beyond the sale of the Oxford Street store in April 2016, and other disposals that had been arranged prior to RAL’s acquisition of BHS, RAL sold properties to the value of approximately £40 million. However, with the exception of £8.4 million that went in to BHS as new capital following the sale of BHS’s Atherstone distribution centre, the rest of the proceeds from sales went to paying down secured debts and did not release new funds in to BHS.
148.In the absence of other funding, RAL took out a number of loans at extremely high interest rates—both to fund its purchase of BHS and to then fund the ongoing working-capital needs of the company. Some lenders made significant amounts of money from these arrangements with limited risk, given that they were secured against valuable BHS properties (see Box 3, below).
(1) A £5m loan from ACE taken out by RAL on 10 March 2015, immediately prior to the purchase of BHS. This loan was secured against a BHS property — Atherstone. £2m was due to be repaid a week after the sale, and the remaining £6m within two months. These terms were varied and ultimately £7.2m was repaid for this and associated loans (see para 102).319
(2) A three month £25m loan facility for BHS from ACE in June 2015. Total repayment of £31m made in September 2015.320
(3) A £62m 12-month secured loan with Grovepoint in September 2015. Total amount repayable would have been £73m. This loan was arranged to replace the £25m ACE loan on a more competitive basis.
(4) A 60-day £9.4m secured loan with Gordon Brothers arranged at the end of February 2016 with an implied APR of 38 per cent.
149.As outlined by Michael Hitchcock, who was effectively BHS’s Chief Financial Officer from July 2015 to March 2016, RAL took £6 million of fees in total for arranging loans and property transactions, despite the fact that BHS was desperately short of capital and borrowing at punitive rates.
150.The inability of Mr Chappell and his team to inject long term capital into the business was highlighted by their securing a series of high cost short term loans as a means to solve growing cash flow problems, further weakening the financial position of BHS. Even when arranging loans for their struggling company on extraordinary terms they could not resist taking a substantial cut for themselves.
151.We have already established that RAL brought none of their own money to BHS. They were, however, content to remove significant sums from the company. Not only did they take fees from BHS for the property sales and loans they arranged on behalf of BHS, they also financially weakened the company by taking loans out of BHS at a time when it could ill-afford to tie-up capital. These included a £7 million loan taken out on the day that RAL purchased the company, which was used to pay advisers and RAL board members for the transaction fees, plus further salary costs and management fees post transaction. In total, Mr Hitchcock estimated that RAL took a total of £11 million in fees from BHS in the 13 months prior to administration, and an additional £12 million in loans, of which only £6m was repaid. At the time that BHS went into administration, the inter-company balance sheet demonstrated that RAL still owed BHS approximately £6 million.
152.RAL also incurred fees of £0.3 million on behalf of BHS (paid to Grant Thornton) in developing a plan (“Project Herald”) to separate the profitable elements of BHS—its digital and international operations—out of the BHS Group and directly in to RAL ownership through forming a new company, BHS Global. In addition, the plan envisaged RAL setting up a new company “BHS Services”, which would provide services to BHS via a services agreement—in return for fees.
Box 4: Fees payable from BHS Group to Retail Acquisitions Limited for Management Services
In addition to salaries taken by RAL Directors from BHS, an (unsigned) Management Services Agreement shared by Dominic Chappell outlined the following fee arrangements:
(1) A 25 per cent uplift on the cost of delivering a wide range of services during the first year of ownership, followed by delivery of services to an agreed budget thereafter.324
(2) 2 per cent of total funds available from each financing agreement arranged by RAL.
(3) 10 per cent of transaction proceeds for properties where proceeds were at least 25 per cent above the fair market value of the relevant property, with special arrangements for fees in relation to the sale of Atherstone and Oxford Street.
Source: BHS/RAL Management Services Agreement
153.Dominic Chappell received a total of £2.6 million in salary and fees relating to BHS. Chappell’s family also benefited from a £1.5 million interest-free loan, secured against his father’s house, none of which has been repaid. In total, he has received £4.1 million. We were also told that he still owes £75,000 of a £150,000 short-term personal loan from ACE which was due in February 2016.
154.There was also a series of extraordinary one-off transactions between RAL and BHS:
155.Not only are these transactions indicative of directors being more interested in their own financial wellbeing than that of the company they had purchased, they also demonstrate an outrageous lack of good corporate stewardship. This was reinforced by the fact that, as the CEO of BHS put it, “the majority of the Board was conflicted,” being comprised of friends and family, including Keith Smith, Dominic Chappell’s uncle and chair of the board. Although Mr Chappell has not provided details of the membership of BHS/RAL’s Remuneration Committee to this inquiry, it has been reported that his uncle also chaired this supposedly ‘independent’ panel.
156.It is notable that two of the directors who had facilitated Mr Chappell in purchasing BHS stepped down the day the transaction completed, Mark Tasker and Stephen Bourne. Mark Tasker explained that he had stepped down because he had seen his role as limited to advising on the acquisition and that he could not commit the necessary time to continuing due to his management responsibilities at his law firm, Bates Wells Braithwaite. Much of the detail of the deal remained to be concluded. Stephen Bourne explained that he was uncomfortable continuing in the role because he either didn’t know the remaining board members that Mr Chappell was appointing, or “didn’t think were appropriate for the board” because they were primarily friends and family. Despite their own contribution in putting BHS on the path to failure, Mr Bourne and Mr Tasker were paid around £400,000 each, including “success fees” for their role in facilitating the transaction.
157.It is clear from the advice that RAL received prior to the acquisition of BHS that they were taking on a company that was at high risk of insolvency. In light of this, directors had a duty primarily to the creditors of BHS rather than to its shareholders. While it is not for us to judge whether this duty was breached, ultimately BHS’s creditors were badly let down by the RAL board. We are certain that the Insolvency Service will want to look closely at the loans and fees removed from the company as well as questionable decisions, such as the £2.6 million purchase of the Darlington store arranged at a time when cash-flows were under significant duress.
158.RAL Board members exploited BHS for their personal gain and Dominic Chappell was the worst culprit. Their plans included removing the profitable assets from BHS and placing them directly in RAL ownership, and requiring BHS to use central services, such as property advice, provided by RAL. The suspicions of BHS managers that RAL were more intent on taking money from the business than investing in it were well founded, as evidenced by the £11 million charged by RAL to BHS in the form of salaries and fees.
159.The directors of RAL exhibited scant commitment to the successful implementation of BHS management’s business plan. Two directors, Stephen Bourne and Mark Tasker, jumped ship on the day that RAL acquired the business with personal financial rewards that it would take many BHS employees decades to earn. The others, Eddie Parladorio, Lennart Henningson, Keith Smith and Aidan Treacy, continued to profit handsomely from their positions without fulfilling their requisite responsibilities.
160.RAL had feeble corporate governance. The presence of Chappell family members on the RAL board, and the overlapping membership with the BHS board, did nothing to clarify relationships and address evident tensions between the managements of the two companies. Mr Chappell’s ultimately unsuccessful attempt to siphon off £1.5 million to another company in Sweden owned by a long standing friend and fellow RAL director was the most egregious example of individual greed and, initially at least, corporate governance failure.
161.The sale of BHS to RAL did not mark the end of Sir Philip Green’s involvement in the company. Due to the level of integration prior to the transaction, Arcadia continued to provide services including IT (including web platform), Logistics & Supply Chain, HR, Finance, Treasury, Property Management & Maintenance, Procurement, and Legal Facilities. There was also in excess of £100 million in retail revenues taken by BHS for the Arcadia concessions that operated in the BHS stores, and Taveta retained a £40 million fixed and floating charge secured against BHS assets.
162.While in their normal course these would lead to daily operational contact between Arcadia and BHS, Sir Philip Green himself also remained closely in contact with the new management. Dominic Chappell claims they spoke every two to three days and met regularly, and BHS’s Property Director, Mark Sherwood, told us that he received several calls from Sir Philip but didn’t return them because he didn’t want to be “quizzed”. He said that Sir Philip, however, “was not very happy about that”.
163.In evidence to us, Sir Philip said how he gave Mr Chappell advice when he felt he was “going down a wrong path” and tried to “persuade” Mr Chappell to address BHS’s loss-making rental arrangements earlier. Darren Topp also indicated that both he and members of the RAL board had spoken to Sir Philip throughout 2015 about the BHS pensions issue, and Mr Topp also told Sir Philip that he “ did not believe the business could continue successfully” under Dominic Chappell’s ownership We note that Sir Philip attempted to reassure Chris Martin in October 2015, with reference to Mr Chappell, that “the bloke is doing ok”.
164.Sir Philip Green was also closely involved immediately prior to BHS going in to administration. Despite the eventual completion of the CVA, RAL failed to raise sufficient funds on commercially viable terms to keep BHS running. Not only had the loan facility put in place with Gordon Brothers proved insufficient, but on 7 April Olswang advised that the facility meant that in practice Gordon Brothers had the power to force BHS into administration at any time they chose should they wish to gain control of the company. Furthermore, on 15 April, BHS was issued with a 7-day winding up notice from HMRC in relation to outstanding payments of £2.7 million that the company could not meet.
165.On 18 April, Sir Philip Green invited Philip Duffy, from the administration firm Duff & Phelps, to a meeting at Arcadia’s Office the following day. On arriving, Mr Duffy learned that the meeting was to discuss the future of BHS. In addition to Sir Philip Green, members of the RAL and BHS boards were in attendance, including Dominic Chappell, Darren Topp, Aidan Treacy and Eddie Parladorio. As a floating charge holder, Arcadia were ultimately within their rights to decide who was appointed administrator. Duff & Phelps’s appointment as administrator was subsequently approved by the BHS Board on 21 April at a meeting chaired by Mr Chappell.
166.Following the 21 April board meeting, Dominic Chappell entered in to discussions with Mike Ashley, the owner of Sports Direct, in a last ditch attempt to sell BHS as a going concern. Sir Philip spoke with Mr Ashley over the weekend of 23 and 24 April but a deal was not agreed and BHS entered into administration on Monday 25 April. On 27 April, Sir Philip hosted a meeting at Arcadia’s offices attended by Mike Ashley and the administrator, Philip Duffy, at which Mr Ashley offered £10 million for BHS, but with the pension scheme removed from his responsibility. Sir Philip offered to contribute a further £5 million. However, after further consideration the administrator concluded that the proposed deal was not in the interests of BHS’s creditors.
167.Throughout the period of RAL’s brief ownership of BHS, Sir Philip Green continued to demonstrate an unusually keen interest in a former business, albeit one in which he still had a financial stake. Whether he could simply not bring himself to let it go or because he thought he could direct it successfully from the outside, his continued involvement proved insufficient to save the business.
305 : “If the business plan that was laid down had been followed, it would not have gone out of business. It would not be in liquidation.”
312 , Schedule 8
313 of a meeting with Darren Topp and Michael Hitchcock, 9 November 2015 (recorded in email of 10 November)
314 of a call with Sir Philip Green, 21 January 2016
315 See of 27 June 2016 for a record of pension scheme discussions in 2016
316 of a call with Neville Kahn on 16 February 2016 (recorded in email of 17 February)
324 . In an on 4 July 2016, Mr Chappell described this as a “drip in the ocean”.
325 ; . There were three directors present at the meeting to approve it: Dominic Chappell, Lennart Henningson and Eddie Parladorio. Mr Parladorio told us he voted against the transaction.
328 As Above
330 . We have seen a copy of the ‘’ claim for the CVA submitted by RAL to BHS on 2 March 2016. However, we note that, in correspondence dated 14 July 2016, Eddie Parladorio denied knowledge of this.
333 (Stephen Bourne)
334 . Eddie Parladorio, who remained on the board, was similarly paid £460,000.
338 Mark Sherwood)
339 (Sir Philip Green)
340, (Darren Topp)
341 , 7 October 2015 (in email of 11 October)
22 July 2016