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	England and Wales High Court (Chancery Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> BHS Group Ltd v Retail Acquisitions Ltd [2017] EWHC 1057 (Ch) (05 May 2017) URL: http://www.bailii.org/ew/cases/EWHC/Ch/2017/1057.html Cite as: [2017] EWHC 1057 (Ch)

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IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT

		Royal Courts of Justice, Rolls Building Fetter Lane, London, EC4A 1NL
		05/05/2017

Mr Registrar Briggs:

Introduction

1. This is a petition for the winding up of Retail Acquisitions Ltd ("RAL") presented to the court on 7 September 2016. The petition was presented by BHS Group Limited (the "Company" or I shall refer to the individual company within the Group) acting by its administrators Philip Duffy and Benjamin Wiles of Duff and Phelps Ltd who were appointed by the directors of the Company on 25 April 2016. The petition as presented was based on an unsatisfied demand for the sum of £5,981,871.65 arising from a loan advanced by the Company in December 2015 (the "Loan"). The joint administrators claimed that RAL was unable to pay its debts as they fell due, pursuant to sections 122(1)(f) and 123 (1)(e) of the Insolvency Act 1986. The petition was amended by an order of the court dated 23 February 2017 to include a claim that RAL is balance sheet insolvent pursuant to section 123(2) of the Insolvency Act 1986.

Background in brief

2. Mr Duffy has provided two witness statements in support of the petition. He explains RAL was incorporated on 20 November 2014 as a special purpose vehicle to acquire the shares in the Company. It acquired the shares on 11 March 2015 for £1. The sole director of RAL is Dominic Chappell. He also controlled Swiss Rock Ltd which entered liquidation on 1 September 2016. The accounts of RAL dated 31 October 2015 disclose that Swiss Rock owed RAL £315,000 but due to the liquidation it will only be entitled to a dividend.
3. On incorporation RAL had no assets. It incurred liabilities to purchase and fund the Company. The liabilities came from two undisputed sources. The first was the Loan from the Company for £6,177,000. The second a loan from Arcadia Group Limited of £3.5m. The evidence of Mr Duffy is that shortly after the Company was acquired by RAL, there was a transfer of the money from the Company to RAL to enable it to pay various fees and other liabilities said to have been incurred by RAL in the acquisition of the Company, which included paying £2.8 million to its directors or commercial parties controlled by those directors. The transfer of money was recorded on an intercompany account between RAL and the Company which gave rise to a substantial debt due from RAL. Part of this debt became the Loan which is dated on its face December 2015, but all the parties agree it was executed on 3 March 2016. This was the day before BHS Limited (the main trading company within the BHS Group) sent out proposals to its creditors for a company voluntary arrangement. In his witness statement, Dominic Chappell qualifies the contention that RAL had no other sources of income and identifies the existence of the Management Services Agreement ("MSA"). However, the MSA did not come into existence until after the acquisition of the Company. I will turn to the detail of the MSA below.
4. Mr Parfitt for RAL submits that although the £100,000 instalment became due under the Loan on 31 August 2016 it has been paid by way of a set-off of liabilities due under the MSA. Ms den Beston, for the joint administrators, argues that the Loan prohibits set-off and there has been no variation of the Loan agreement. Mr Parfitt submits, that no winding up order should be made as there is a bona fide dispute on substantial grounds as to whether the set-off can be applied. Mr Parfitt further submits that when undertaking the exercise of valuing the assets of RAL at their present value and determining whether the amount of its liabilities (including contingent and prospective liabilities) is greater, the court should find that the balance sheet is positive and no winding up order should be made. Ms den Beston argues that such an analysis will result in a finding that RAL is insolvent on a balance sheet basis.

Two agreements

5. The MSA is expressed to be between "Those Companies listed in Schedule 2….(the "Target Group"). The schedule lists BHS Group Limited; BHS Limited; Davenbush Limited; BHS Properties Limited; Lowland Homes Limited; BHS Services Limited; Carmen Properties Limited and BHS (Jersey) Limited. BHS Limited and BHS (Jersey) Limited are now in liquidation, the rest (save for Carmen Properties Limited) are in administration. The recitals state that RAL acquired direct and indirect control of the Target Group on 11 March 2015, and following that acquisition agreed to provide certain management services to the Target Group. RAL "has continued to provide such services and the parties have agreed to amend and restate this Agreement having taken third-party advice and reached agreement in relation to the agreed fees (which was the subject of an agreement in or about July 2015) ….".
6. Clause 2 of the Agreement sets out the provision of services, clause 3 additional services, including the provision of fundraising services, and clause 4 the fees. The fees provision provides that in consideration for the services or for additional services RAL shall prepare and deliver an invoice to the relevant Target Group member who was the recipient of such services for the Agreed Fees or, where relevant, the additional services. It continues (where relevant):

"Where such services were provided for the benefit of multiple Target Group members, the cost of the relevant services and thus the quantum of each relevant invoice shall be allocated fairly amongst the members, such allocation to be determined by [RAL] and the Target Group members, at all times acting in good faith. The Agreed Fees shall be calculated in accordance with the terms of schedule 3 and shall be payable on each quarter day quarterly in advance on each court today …….. Upon receipt of the relevant invoice….. Each recipient Target Group member shall be responsible for paying its relevant invoice. Should a different Target Group member pay an invoice or invoices on behalf of another recipient Target Group member, a relevant intercompany balance shall arise between such members."

7. Clause 5 concerns payments and clause 6 deals with termination. It provides:

"This Agreement shall commence on the date of this Agreement and shall continue until terminated pursuant to clauses 6.2 or 6.3"

8. Clauses 6.2 permits the parties to terminate the agreement on six months notice and 6.3:

"The Company (on behalf of itself or any other member of the Target Group) or [RAL], as the case may be, shall be entitled to immediately terminate this Agreement on written notice and require payment of any amounts due under this Agreement….. in the event that the relevant Target Group member or [RAL] as the case may be…… becomes insolvent or unable to pay its debts (as defined in section 123 of the Insolvency Act 1986), proposes a voluntary arrangement, has a receiver, administrator or manager appointed over the whole or any part of its business or assets, suffers the presentation of any petition………..

9. Clause 7 concerns confidentiality, clause 8 liability for breach of contract, tort or statutory duty, and there is an entire agreement, governing law and force majeure clause. Clause 14 provides:

"No modification, variation or amendment to this Agreement shall be effective unless such modification, variation or amendment is in writing and has been signed by or on behalf of both Parties."

10. The Loan instrument (which is in the form of a letter but signed by all the relevant parties) states:

"By this letter, the company acknowledges receipt of a loan from the lender which remains outstanding as at the date of this letter, the terms and conditions of which are set out below…"

11. The Loan sum is stated as being repayable in full on 31 December 2020. In the period between the date of the letter and 31 December 2020 £2 million was payable in 20 equal instalments on quarter days. By clause 2 of the loan instrument the whole sum became due if there was a failure to pay any sum, clause 4 provided for a default interest rate. By clause 7:

"[RAL] will make all payments under this agreement free and clear of any withholding or deduction, save as may be required by law. If [RAL] is required to make any such withholding or deduction, [RAL] shall pay such additional amounts so that [the Company] receives and retains a new amount equal to the full amount had no such withholding or deduction been made."

12. The loan instrument expresses the Loan to be unsecured, clause 10 restricts assignments and clause 14 provides that there should be no modification or variation unless it is in writing and signed by and on behalf of the parties, and:

"Unless expressly so agreed, no modification or variation of this agreement shall constitute or be construed as a general waiver of any provisions of this agreement, nor shall it affect any rights, obligations or liabilities under this agreement which have already accrued up to date of such modification or waiver, and the rights and obligations of the parties under this agreement shall remain in full force and effect, except and only to the extent that they are so modified or varied."

13. The instrument (letter) includes clauses concerning remedies, waiver, applicable law, and a jurisdiction clause.
14. As foreshadowed, the Company petitioned to wind up RAL on the basis that it did not meet the quarterly repayment on 31 August 2016 of £100,000 due under the Loan. According to figures produced by Mr Ring (then a partner in the firm of Lawrence Stephens acting for RAL) £147.76 was owed to RAL by the Company after 31 May 2016. The consequence of the failure to meet the quarterly repayment was to accelerate the sums, so that the balance of £5,977,000 fell due.

Set off

15. The parties agree that when construing the Loan instrument having regard to what the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties, in the situation in which they were at the time, RAL is not permitted to set-off any sums against the sums falling due. They also agree that on a proper construction the Loan instrument provides for there to be no variation without agreement of the parties and such agreement must be reduced to writing. Further there is no argument as to the meaning of the waiver provision which operates to preserve all the rights under the instrument to the date of a valid modification or variation. Mr Parfitt submits that the terms of the set off clause contained in the Loan instrument should be "ignored". He argues that the evidence does not reflect the operation of the no set-off clause within the Loan instrument. He refers the court to the evidence of Mr Treacy who states that there was a netting off at all times between the quarterly payments due under the Loan and sums due from the Company to RAL pursuant to the MSA. He argues that the practice was so extensive that the court should treat the no set-off clause in the Loan instrument as of no effect.
16. Mr Treacy was the Chief Financial Officer of RAL from 2 November 2015 to 24 May 2016 and opposes the winding up petition. He says that prior to his appointment there was no clarity in relation to the financial affairs of RAL. After his appointment he set about a reconciliation of the intercompany position and "throughout the period March 2015 to March 2016 payments made by the parties were set-off against the intercompany debt". His evidence is that when the Loan instrument was drafted by solicitors no instructions were given to include an anti set-off provision. Due to the fact that monies would flow both ways (in one document this is described as "flowback", but it means no more than set-off); Mr Treacy says it was "envisaged" that the sums would be capable of set-off, like the working of the intercompany account:

"Notwithstanding clause 7 of the Loan Agreement it was discussed, clearly understood and agreed by both Mr Topp and Mr Chandler as well as RAL appointees to the BHS Board that the fixed management charge paid to RAL would be invoiced quarterly in advance and would cover the quarterly loan repayment to BHS and that payment of and the Loan Agreement would be by way of set-off. All 2016/2017 budgets shared with BHS from 16 February 2016 onwards reflect the proposed set-off of £100,000 quarterly loan repayment being deducted from the quarterly management charge due leaving a net amount payable to RAL."

17. The budgets (including cash-flow forecasts prepared by RAL) exhibited do disclose an intention to set off on an inter-company account basis. In an email dated 3 March 2016 Mr Treacy wrote to BHS head of treasury attaching a schedule of management service invoices and said: "The cash flow forecast should include loan repayments of £100K per quarter – March, June, September, December." The day before he had written to the board of directors of the Company in respect of certain invoices and explained that they would be "submitted and payments due thereunder, exclusive of VAT, will be either paid by the Target Group and then repaid (as to 100% by RAL to Target Group members pursuant to outstanding loans from Target Group to RAL) or by way of set-off in relation thereto." The evidence of Mr Treacy is that there had been discussions on several occasions in the week commencing 25 April 2016 (when theCcompany entered administration), and that RAL would continue to provide services notwithstanding the administration of the Company. His understanding is that as at May 2016 all the quarterly payments had been set-off and therefore no sums were owing to the Company in respect of the Loan. Mr Duffy for the administrators says no services were provided to the Company after it entered administration.
18. There is no evidence (other than the "envisaged" right of set off) that there had been a mutual mistake capable of raising an argument of rectification. No argument for rectification has been advanced, but even if there was such evidence, there would be difficulties in pursuing rectification after the Company entered administration. The Loan instrument was professionally drawn and signed by the parties. No argument has been advanced on the basis that an estoppel by convention or representation arose as a result of the pre-administration dealings.
19. The method by which RAL may have been relieved from the effect of the set-off provision was to seek a variation before the Company entered administration. There is no evidence of a variation and no document has been produced showing compliance with clause 8 of the instrument. In my judgment, the Loan agreement represents, from an objective stand point, the intentions of the parties. I am not aware of any legal principle (and have not been taken to any such principle) that permits a breach or anticipated breach of contract simpliciter, to alter the meaning or change the terms of a contract. The Loan instrument has not been set aside for fraud, mistake, misrepresentation, undue influence or duress. I find that the contractual provisions, entered into by the parties, are binding and whatever the position was prior to March 2016 the August instalment was due without set off.
20. Mr Parfitt submits that if he is wrong on his submission that the Court can ignore the anti set-off clause contained in the Loan instrument there exists a genuine and serous cross-claim in respect of the MSA which exceeds the amount of the instalments due: R&S Fire and Security Services Limited v Fire Defence Plc [2013] EWHC 4222 (Ch). As in R&S it is common ground that, if a debt on which a winding-up petition is based is genuinely disputed on substantial grounds, the petition will generally be dismissed or struck out. A petition can also be struck out if the company has a genuine and serious cross-claim of an amount in excess of such (if any) of the petition debt as is otherwise undisputed. Mr Parfitt cites Re Bayoil SA [1999] 1 All ER 374. In R&S the Court found that the petition debt was properly due but, there was sufficient evidence to support a cross-claim which gave rise to a substantial dispute, and as a result the petition was dismissed.
21. Unlike the Court in R&S I do not find that there is a cross-claim that can give rise to a substantial dispute. The terms of the Loan instrument provide that the obligations of the parties are non-transferable and non-assignable. The MSA provides that the fees shall be calculated in accordance with schedule 3 and invoiced to the relevant Target Group member. The obligations of the relevant Target Group member are set out in clause 4.3 "upon receipt of a relevant invoice under clause 4.1 each recipient Target Group member shall be responsible for paying its relevant invoice. Should a different Target Group member pay an invoice or invoices on behalf of another recipient Target Group member, a relevant intercompany balance shall arise between such members."
22. It has not been seriously argued that the sums due under the MSA should not be invoiced to any other company within the "Target Group" other than the one that received the relevant services. The paying party was intended to be the party receiving the invoice. The invoices relied upon by RAL were sent to and received by a Target Group member known as Lowland Homes Limited ("Lowland Homes"). I infer that the parties acted in accordance with their obligations and rights, and as a result of the invoices being sent to Lowland Homes, no relevant services were provided to the Company and/or that no sums were due from the Company but were due from Lowland Homes.
23. The general rule is that mutuality is required. Derham on the Laws of Set Off explains:

"In the absence of an agency or trust relationship which brings about mutuality in equity or, alternatively, before bankruptcy or liquidation, of a set off agreement between the parties, A's right to sue B may not be set off against A's indebtedness to C. This applies in circumstances where B and C are related companies and also where C is a director of company B or is the beneficial owner of company B……..For both the insolvency set-off section and the statutes of set-off there must be mutuality. Mutuality does not require that the claims should arise at the same time nor that there should be any connection between them. It is irrelevant, moreover, that the claims may be of a different nature. As the High Court of Australia observed in Gye v McIntyre the word "mutual" conveys the notion of reciprocity rather than that of correspondence."

24. The claims are different (loan and services rendered arising under different instruments) and there is no mutuality. The lack of mutuality does not arise from the fact that the claims are generated from different contractual agreements and obligations but because the parties are different. It has not been argued that the Loan instrument is capable of rendering (using the example above) C (here the Company) liable for B's (here Lowland Homes) debt to A (here RAL). The instrument expressly makes the recipient of the relevant invoice the liable party. There was probably a reason why RAL and the Company agreed to structure their arrangements in this way.
25. The evidence of Mr Duffy is revealing:

"prior to September 2015 invoices in relation to services provided by RAL were raised to BHS, from September 2015 all invoices raised by RAL were addressed to Lowland, a dormant subsidiary of the Company. The only exception to this was invoice number 5 which was addressed to BHS Properties Limited out of the proceeds of sale….it appears that Lowland was invoiced because, under the terms of a financing arrangement entered into by the Company on 11 September 2015 with Grovepoint Credit Funding 2 Limited, the Company and BHS were prohibited from paying any management, advisory or other fee to RAL"

26. I conclude from this unchallenged evidence that the Company was not intended to be indebted to RAL for any services as it would breach the Grovepoint credit facility. Mr Chappell's evidence on the issue is that the structure was "artificial". Whether he is right or not, this is the structure that appears to have been created for deliberate reasons. Lowland Limited is the liable party and not the petitioner; there can be no set-off.

Cash-flow Insolvency

27. In Bucci v Carman (Liquidator of Casa Estates (UK) Limited) [2014] EWCA 383 the Court of Appeal heard a second appeal concerning an undervalue transaction. The leading judgment was provided by Lewison L.J. I quote the useful passage which summarises the test under consideration:

"In my judgment the following points emerge from the decision of the Supreme Court in Eurosail (and in particular the judgment of Lord Walker):

i) The tests of insolvency in s 123(1)(e) and 123 (2) were not intended to make a significant change in the law as it existed before the Insolvency Act 1986: para 37.

ii) The cash-flow test looks to the future as well as to the present: para 25. The future in question is the reasonably near future; and what is the reasonably near future will depend on all the circumstances, especially the nature of the company's business: para 37. The test is flexible and fact-sensitive: para 34.

iii) The cash-flow test and the balance sheet test stand side by side: para 35. The balance sheet test, especially when applied to contingent and prospective liabilities is not a mechanical test: para 30. The express reference to assets and liabilities is a practical recognition that once the court has to move beyond the reasonably near future any attempt to apply a cash-flow test will become completely speculative and a comparison of present assets with present and future liabilities (discounted for contingencies and deferment) becomes the only sensible test: para 37.

iv) But it is very far from an exact test: para 37. Whether the balance sheet test is satisfied depends on the available evidence as to the circumstances of the particular case: para 38. It requires the court to make a judgment whether it has been established that, looking at the company's assets and making proper allowance for its prospective and contingent liabilities, it cannot reasonably be expected to meet those liabilities. If so, it will be deemed insolvent even though it is currently able to pay its debts as they fall due: para 42.

[28] In the course of his judgment in Eurosail Lord Walker approved what he described as the "perceptive judgment" of Briggs J in Re Cheyne Finance plc (No 2) [2007] EWHC 2402 (Ch), [2008] 2 All ER 987, [2008] Bus LR 1562. Two of the points that Briggs J made bear on our case:

i) Cash-flow solvency or insolvency is not to be ascertained by a blinkered focus on debts due at the relevant date. Such an approach will in some cases fail to see that a momentary inability to pay is only the result of temporary illiquidity. In other cases, it will fail to see that an endemic shortage of working capital means that a company is on any commercial view insolvent, even though it may continue to pay its debts for the next few days, weeks, or even months: para 51.

ii) Even if a company is not cash-flow insolvent, the alternative balance-sheet test will afford a petitioner for winding up a convenient alternative means of proof of a deemed insolvency: para 57."

28. Applying these principles RAL has no present income stream from which to pay the debt due to the Company. The financial position of RAL cannot be described as suffering from a momentary inability to pay as the result of temporary illiquidity. It cannot pay the petition debt and there is no working capital available to meet other quarterly payments due after 31 August 2016. To use the words of the higher courts there is an "endemic shortage of working capital". I find that RAL is cash-flow insolvent as it is unable to pay its debts as they fall due. One consequence of this finding is that a debt of £3.5m in favour of Arcadia Limited, triggered as a result of the presentation of the petition, is extant.

Balance Sheet Insolvency

29. Having found that RAL is cash flow insolvent it is not strictly necessary to make a finding that the assets of RAL are less than its liabilities (including contingent and prospective liabilities). In his evidence Mr Treacy takes the view that RAL is balance sheet solvent as it has the following assets (I set them out as expressed in his first witness statement, although they have changed since that time):
30. 1. An investment in Todex (a US listed subsidiary);
31. 2. A secured loan of £1.5m; and
32. 3. Proceeds of sale from Marylebone House due from Sir Philip Green/Taveta Investments Limited ("Taveta").
33. He says:

"My belief was that the value of the three assets noted above exceeded the RAL liabilities, principally a loan to BHS Group and loan to Arcadia. Although I am no longer a director of RAL, from the operation of the business, I believe that the underlying financial position has not changed."

34. Three balance sheets have been produced. The first is dated as at 31 October 2015. That balance sheet showed a positive balance of £583,186. The assets listed were a property loan of £1.5m, a loan to Swiss Rock (now in liquidation) of £315,000, cash in the bank of £241,349 and sums held in a "VAT Control Account". This is usually an accounting method used to reflect the net balance due from, or payable to the Revenue. The liabilities included a loan from BHS of £400,000, amounts owed to BHS (current account) of £2,345,564 and a director's loan of £10,000. Long term liabilities included the Loan and a sum said to be owed to Tina Green of £3,500,000. I assume this later debt is the sum owed to Arcadia Limited.
35. After the presentation of the petition a new balance sheet was produced dated 31 January 2017. It looked quite different from the 31 October 2015 balance sheet. The assets include an investment in Chaplake Investments SA ("Chaplake"), sums due from the Company and an amount due from Taveta. Mr Parfitt submits that the vast number of liabilities are non-current liabilities owed to the Company pursuant to the Loan and to Arcadia (£9.2m). As a result of my finding above these sums are current liabilities. In respect of the investments Mr Parfitt says that the investments in Chaplake and Taveta amount to £10.1m and that the value of these assets is based on a net present value.
36. The Taveta claim arises from an agreement with another company within the control of Sir Philip Green. The agreement (in basic terms) between the parties is said to be (by Mr Chappell) that RAL would be paid part of the profits arising from a sale of a property known as Marylebone House. Newly admitted evidence from Mr Chappell gives the Taveta claim a net present value of £5.525m. The Chaplake asset 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. The net present value of the Chaplake investment, according to Mr Chappell, is £5.083m.
37. The recently admitted evidence includes a third balance sheet dated 31 March 2017. The Chaplake investment and Taveta claim are said to have the same value as entered on the January 2017 balance sheet. Amounts due from the Company are said to be £1,824,221. The notes to the balance sheet form an important part of RAL's argument that its assets are greater than its liabilities, as the notes set out to justify, in particular, the values attributed to the Chaplake investment and Taveta claim. I shall deal with these below.
38. Section 123(2) of the Insolvency Act 1986 provides that:

"A company is also deemed unable to pay its debts if it is proved to the satisfaction of the court that the value of the company's assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities"

39. I have already set out Lewison L.J.'s summary of the Supreme Court's decision in BNY Corporate Trustee Services Limited above. Those principles and that summary are applicable when considering the value of the assets of RAL. A useful analysis of the approach taken to the section is found in the same case but at first instance. The Chancellor explained in BNY Corporate Trustee Services Limited v Eurosail UK [2011] 1 WLR 1200 at 1212:

"First, the assets to be valued are the present assets of the company. There is no question of taking into account any contingent or prospective assets. Thus the conclusion of the Court of Appeal in Byblos Bank SAL v Al-Khudhairy [1987]  BCLC  232 is as applicable to section 123(2) as it is to section 123(1)(e). The subsection provides no guidance as to the basis of that valuation. As the assets in question are those of the company presumably they are to be assessed at their value to the company but whether on a going concern or break-up basis is unclear. That problem does not arise in this case due to the nature of the issuer's business and its assets. What does arise is the question whether the claims of the issuer in the liquidation of Lehman Brothers are present assets and if so their value. In my view they are clearly existing assets notwithstanding that they have not been admitted. Their present value may be more debatable but the evidence suggests that unadmitted claims are being traded on a secondary market at 35% to 37% of their face value (subject to recourse requirements to the seller). I can see no reason why they should not be included in the assets of the issuer at that value. Second, the requirement "to take account of contingent and prospective liabilities" cannot require such liabilities to be aggregated at their face value with debts presently due. Such inclusion would be commercially illogical; an obligation to pay £100 today has a higher present value than an obligation to pay £100 in five years. Had the simple aggregation of present and prospective liabilities been intended the subsection would have provided that the amount of its liabilities "include its contingent and prospective liabilities". Given that simple aggregation of present and prospective liabilities is not required then the conversion of prospective liabilities denominated in some currency other than sterling into sterling at the present spot rate is not required either. Third, subject to the foregoing, the subsection is silent as to what "taking into account" a prospective liability involves. On the one hand a prospective liability cannot simply be added at its face value to the present liabilities of the company; on the other it cannot be ignored. In my view, the content of "taking account of" must be recognised in the context of the overall question posed by the subsection, namely whether the company is to be deemed to be insolvent because the amount of its liabilities exceeds the value of its assets. This will involve consideration of the relevant facts of the case, including when the prospective liability falls due, whether it is payable in sterling or some other currency, what assets will be available to meet it and what if any provision is made for the allocation of losses in relation to those assets."

40. The higher courts did not find fault with the Chancellors' reasoning or analysis. In respect of the assets of RAL, the first question for the court is whether the purported assets are present assets, and if so their value. In Rococo Developments Limited [2017] Ch 1, the Court of Appeal found that the asset in question was not known at the relevant time, and therefore not a present asset.
41. The query raised by the Chancellor as to whether the assets in question are to be assessed on a going concern or break-up basis is relevant to the claim against the Company for £1,824,221. RAL claims the whole sum arising from the MSA on the basis of set-off. I have found that RAL is not entitled to set-off sums claimed under the MSA against the Loan. There is no asset. If set-off in the matter can be categorised as a present asset, its value is speculative at best. The Company is insolvent, not trading and in administration. The value of the claim is further reduced by the contention by the joint administrators that RAL has provided no services. Mr Duffy says "There can be no basis upon which RAL can purport to levy charges against the Company for services that have not been provided either to it or at all". This further challenges whether, or not the claimed set-off is an asset at all. It is not possible to determine the dispute at this hearing, nor do I need to. Taking account of these difficulties it would be illogical to attribute the full value entered in the 2017 balance sheets. If I am wrong about my finding that the claimed set off is not an asset, then due to the dispute of fact (no work done), and the administration of the Company and other BHS companies (and liquidation in respect of BHS (Jersey)), any ascribed value is hope value.
42. In Eurosail the Supreme Court explained that the Court is required to make a judgment as to whether balance sheet insolvency has been established, and that judgment is to be undertaken having regard to the available evidence and circumstances of the case. The value attributed to the asset by RAL has been successfully challenged by the Company; I find the value given in the draft balance sheet to be unsustainable. Having regard to the available evidence I find this asset has no value for the reasons I have given.
43. The note to the March 2017 accounts explains the basis of the Taveta investment claim in the following terms:

"Amounts due from Taveta Investments (No 2) Limited /Sir Philip Green arise in relation to the sale of Marylebone House and other collateral contracts as at the date of the acquisition of BHS Group Limited from Taveta Investments (No 2) Limited. The amount due in respect of the sale of Marylebone House is £14.5m of which £8.5m has been entered in the accounts of the company. This debt is disputed by the debtor. The company has obtained professional advice that the value of the claim for balance sheet purposes should be 65% of £8.5m, with a lesser success rate for the additional £6m claim. The company has chosen not to attribute a value to the additional claim which relates to a profit share agreement on the sale of Marylebone House. The claims under the other collateral contracts include a claim for the destruction of share value of £10m, being separate agreements in relation to both share subscriptions and other associated costs. The company has chosen not to attribute a value to this additional claim for balance sheet purposes. Therefore the balance sheet value attributed to amounts owed by Taveta Investments (No 2) Limited/Sir Philip Green/Arcadia Group Limited is £5.525m".

44. The professional advice mentioned in the notes to the accounts comes in the form of a letter addressed to the board of directors of RAL from solicitors, Bark & Co dated 27 April 2017. That letter reveals that there was a discussion between Mr Chappell and Giles Bark – Jones following which he was content to state that he is "prepared" to enter into a conditional fee arrangement with RAL to pursue the claim.
45. As Ms den Beston argues, it is not clear what instructions were given to Bark & Co. I have seen no other advice. On the other hand, I have seen a letter from Linklaters acting for Taveta and a detailed letter from Linklaters acting for Arcadia Group Limited concerning the claim. Insofar as it is possible to form a view of the competing arguments, the detailed reference to the purchase documentation entered into between RAL and the Company provides a firmer platform than the letter provided by Bark & Co. I remind myself that it is incumbent on the Court to place a value on present assets. Where there is a dispute the evidence has to be weighed and the Court has to do the best it can. I make clear that I make no conclusions as to viability of the claim but the following reasoning taken from the Linklater letters is persuasive (when put against the reasoning (if any) provided by RAL) for the purposes of valuing this asset:

"On 16 February 2015 a non-binding points of principle document was signed by Sir Philip Green on behalf of Arcadia and Dominic Chappell on behalf of RAL, which set out non-binding heads of terms from the sale of Taveta Investments (No 2) Limited's shareholding in [the Company] to RAL. The points of principle was signed as a precursor to RAL being given access to carry out due diligence on BHS and negotiation of a binding sale and purchase agreement and envisaged that RAL would provide £10 million of capital into BHSGL on completion ……"

46. Pausing there, it is not in dispute that there was a failure to inject £10 million of capital but the sale and purchase agreement went ahead in any event. The letter continues:

"No reference is made in the SPA to a sale of Marylebone House or for the distribution of the proceeds of sale of Marylebone House to be made available to [the Company], RAL or any other entity……. Also on 11 March 2015 and contemporaneous with the execution of the SPA a handwritten statement was signed by Sir Philip Green and Dominic Chappell to record their commercial discussions as to the cash position of BHS following [the sale] including the additional £5 million of capital that RAL was unable to inject on completion of the [sale]. In this regard, the handwritten statement refers to £8.5 million being provided on the sale of Marylebone House for the benefit of BHS, such sum being equal to the aggregate of RAL's outstanding capital injection obligation of £5 million…… The hand written statement was no more than a non-binding, illustrative document to set out the cash position of BHS following the [sale]. It was not intended to create additional legally binding obligations between any of the parties to the [SPA] and, as such it has no legal effect."

47. Reference is then made to (i) the handwritten note not being signed (ii) Marylebone House not forming part of the SPA and (iii) the existence of an entire agreement clause in the SPA.
48. I conclude that the claim which is treated as a present asset in the balance sheet is disputed on serious and substantial grounds and whose success must depend on an uncertain future event on evidence that is unsatisfactory. In his witness statement, Mr Duffy points to how Mr Chappell, Mr Bourne, Mr Treacy and Mr Tasker of RAL dealt with the issue when questioned by Parliament's select committee. They each accepted that following the sale of BHS to RAL money was paid to RAL. Mr Chappell says that RAL received £6.5m; Mr Bourne says the sum provided was £8.5m; Mr Treacy said that after the sale to RAL £10m was received from Arcadia; and Mr Tasker said "Marylebone House was intended to be sold as a parallel transaction to Retail Acquisitions. Retail Acquisitions was going to onward sell it. That didn't happen. My understanding is that Sir Philip Green said, "I've had a better offer, and ..I'm going to sell it to whoever that was but I will ensure that you will receive compensation for my withdrawal of that proposal. I think that is where the £8.5million was arrived at".
49. It is not clear the basis upon which the claim will be made and the identity of the parties has been left open (in the letter from Bark & Co). The letter offering funding by CFA fails to set out who will be responsible for costs and disbursements (such as a £10,000 court issue fee) in the course of any litigation. There has been no mention of whether after the event insurance has been obtained. RAL is very likely to be exposed to a security for costs application. According to the notes in the accounts a sum of £8.5m is due in respect of the sale of Marylebone House but Mr Chappell, Mr Bourne, Mr Treacy and Mr Tasker all appear to accept that RAL received monies in lieu of the sale of the property and in the sum of between £8.5m to £10m. In addition to this the first time Linklaters were informed of the claim was shortly before the hearing of this petition. Linklaters responded noting that during the course of the select committee hearing Mr Chappell accepted that a "Framework Agreement dated 26 June 2015" acted as a release of "the alleged non-written contract for the provision of funds in respect of Marylebone House". In these circumstances, I find that reducing the £8.5m purported claim to 65% (the same percentage provided for the chance of success) by relying on the letter produced by Bark & Co fails to provide a proper basis for valuing the claim.
50. In Rococo Developments Limited the parties had the benefit of an expert accountant and insolvency practitioner to guide them on the value of the company's assets. The expert referred to Financial Reporting Standards 12. Lord Justice Lewison found that although FRS 12 did not apply directly to the company, equivalent provisions did. FRS 12 provides that "Where it is not clear whether a present obligation exists, a past event is deemed to give rise to a present obligation if, taking account of all available evidence, it is more likely than not that a present obligation exists at the balance sheet date". Section 123(2) itself bears a similar test: "proved to the satisfaction of the court that the value of the company's assets…" The civil test of proof is employed to make judgments on obligations and values. In my judgment, when reviewing the available evidence before the court, there is sufficient evidence to find, on the balance of probabilities, that this asset does not have the value attributed to it by RAL. There is insufficient evidence to determine its precise value. I have serious doubt whether this chose in action exists. I am unable to determine this doubt on the evidence currently available. On balance of probabilities I find that there is a chose but as Ms den Beston submits, it is uncertain in value, and dependent on many contingencies. I shall attribute a nominal value of £1.
51. Lastly the ascertainable value of the Chaplake investment is insufficiently grounded in evidence. 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. There is no or insufficient evidence as to how RAL (which is insolvent) could fund or assist in funding any such development; and no evidence as to how RAL could purchase more shares (as claimed) in the Portuguese company. Any return to RAL in such circumstances I assess as contingent and uncertain. Again, there is some doubt as to whether the Chaplake Investment is an asset of RAL; but it is not possible to determine its existence on the evidence before the Court.
52. The Supreme Court Eurosail explained that the valuation of assets is not an exact science. In my judgment as the asset was acquired in the recent past, it is open to the Court to attribute the acquisition value this asset. On the balance of probabilities, the asset exists. I am unable to attribute the value given to it by RAL due to a failure to produce the evidence I have set out above. Taking into account the many uncertainties of a positive financial outcome I am required to exercise my judgment and fix upon a value. It may have a value of £1. For the purpose of this hearing, I shall attribute the exchange value RAL was prepared to agree to obtain the asset. The bargain struck exchanged a loan of £1.5m secured against the home of Mr Chappell's parents in or around September 2016. It is the best available evidence of the current value as (i) it is bargain was made in a time frame close to the presentation of the petition (ii) it is not distant in time from the date of this hearing (iii) the director of RAL (Mr Chappell) would have acted in the best interests of RAL to obtain the most advantageous bargain, but (iv) as the investment was owned by one or both of his parents or their businesses, he was more likely than not to have been motivated by fairness and not avarice at his parents' expense.

Conclusion

53. The burden rests with the party asserting insolvency. For the reasons given above the Company has discharged the burden of proof. RAL is cash flow and/or balance sheet insolvent. It is unable to pay its debts as they fall due, and it has been proved to the satisfaction of the court that the value of the RAL's assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities.
54. I shall make the usual winding up order.