Learning from the collapse of BHS

Following publication of the Work and Pensions and Business, Innovation and Skills Committees’ report on the collapse of British Home Stores, Ian Defty, insolvency practitioner at DDJ Insolvency Limited, considers what lessons can be learnt.

What were the main failings that the committee highlighted?

The committee has been scathing over the ‘directors, advisers and hangers-on’ of BHS. They raised concerns over the sale of BHS, the lack of oversight or challenge over decisions made, and the lack of checks made regarding the sale and the incentivising of advisers. The committee goes on to specifically identify failings in the dealing of property leases, the general underperformance of BHS and the ‘lavish’ rewards the directors took. The committee expressed support for the forthcoming, or ongoing, investigations by the Financial Reporting Council, the Pensions Regulator (TPR), the Insolvency Service and the Serious Fraud Office.

What are the lessons for future restructurings or sales of distressed businesses?

Over recent years we have seen our high streets and out of town shopping malls change dramatically with the loss of retail stores such as Woolworths, C&A, MFI and now BHS. There are fewer of these large concerns in the UK than ever before, but as such there are fewer companies that are around for restructuring and/or sale. Every time there is a ‘large’ failure, restructuring or distressed sale, lessons are learnt for lenders, landlords, institutional creditors and others. While it was a shock that another brand company failed, a well-trained and supported process will have fallen into place using lessons learnt from earlier failures. Current companies need to look carefully at their corporate governance, the role of the non-executive director needs to increase to question directors’ appointments and the decision-making process in large and unusual transactions.

Do you think there will be changes to the laws on directors' duties, given the criticisms of Sir Philip Green's actions?

No. Those in and around the business community have been debating for many years on introducing education for company directors—at present there is no education of any kind. Successive governments have steered away from bringing in such education or training due to the perceived additional costs to new companies and therefore the perceived stifling of enterprise. Do I personally think that company directors should have to receive some kind of training? Yes, I do.

Do you think law firms will come under greater scrutiny for the role they play in a restructuring given the 'badge of legitimacy' the committee considered they provided in the BHS sale?

I do think that law firms will come under greater scrutiny. It is the nature of business that advice is key and all those who operate under the corporate banner will continue, and rightly so, to seek legal advice on whether the actions they are taking are correct and proper. Whether that be a simple sale contract to specific detailed advice on whether a company should continue to trade when it may seem to be hopelessly insolvent. Potentially that advice may be wrong but, as a client, one seeks advice often to legitimise a course of action. That is not a criticism—it is important to have experienced legally trained teams to consider questions that perhaps a director isn’t qualified to. However, it does mean that when there is a perception that the advice given was wrong then questions must be asked of the firm giving the advice.

Is it likely that the TPR will now use its moral hazard powers to obtain payment from Sir Philip Green into the pension scheme?

I think that that is indeed the case. We have seen the TPR become more and more powerful over recent years and while it is necessary to have controls over staff pensions, in any insolvency there will always be other creditors who suffer. Unfortunately, under this government it is the general body of creditors’ wishes and desires that have been reduced, to the benefit of others. As with the Farepak collapse in 2006 there were, and continue to be, clamours to secure customer deposits and a moral argument continues to be brought over that. In my opinion, there needs to be a fair playing field and at present moral indignation appears too high on the government’s radar.

Do you think we will start to see more 'trial' by MP committee post a company's failing prior to any insolvency service investigation?

Hopefully not, and I hope that the government, the public and the press realise that there is a proper place for investigations into matters where there is an insolvent appointment and that is by the duly appointed officeholder. In the case of BHS, the directors and other relevant parties and their solicitors have been given the opportunity to rehearse their explanations before the committee which, while I accept it remains to be seen, may cause difficulties to the insolvency officeholders who are requiring information under statute to try and increase the pot of money to return to creditors, consider company director disqualifications and prosecutions. The purpose of inquiries and investigations in insolvency appointments is to gather information for the benefit of creditors, not to point score before a television audience.

With almost 30 years’ experience in insolvency, as well as undertaking general appointments as bankruptcy trustee, administrator and liquidator, Ian Defty has for the last 13 years run a team specialising in fraud, investigation and asset recovery. He is routinely involved in complex litigation as a liquidator, or as an office holder, to recover funds misappropriated by bankrupts, directors, advisers or other fraudulent individuals. His expertise extends to the recovery of assets both locally and abroad. Ian regularly provides comment and writes articles for the business press on insolvency related matters.

Interviewed by Kate Beaumont.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

Further Reading

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The Pensions Regulator and its power to issue a contribution notice and financial support direction

Evidence gathering—the preservation of information by an insolvency office-holder

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First published on LexisPSL Restructuring and Insolvency

 

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