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Why has BHS recently fallen into administration? Mark Smith and Nick Moser, partners with Taylor Wessing LLP, examine the causes and effects of BHS’s recent decline.
An investigation into the circumstances of the retail chain BHS’ fall into administration has been ordered by the Department for Business, Innovation and Skills (BIS). Particularly, the investigation will focus on the conduct of present and previous directors of the company.
On 25 April 2016, BHS went into administration, 88 years after it was founded. It marks the biggest fall of a UK retailer since Woolworths in 2008 and places 11,000 jobs and 164 stores at risk in the UK. According to recent press reports, its debts stand at more than £1.3bn, with a pension deficit of between £350m and £571m, depending on the basis of calculation.
The fall of BHS has received national attention and will be the subject of various parliamentary and regulator enquiries.
Sir Philip Green acquired BHS from Storehouse Plc for £200m in 2000. By the end of the second year of his ownership, the pre-tax profits of BHS had increased from £18.5m to £94.8m, and its pension schemes had a surplus (on the company accounting basis) of £17.4m.
The profits continued to be high, at around £100m a year, until 2004, although its pension schemes slipped into significant deficit over this time. The company paid out £414m in dividends over these four years, most of which went to Sir Philip and his immediate family as the ultimate owners of BHS. This meant that company reserves were being paid out in dividends at a time when the pension deficit was beginning to become sizeable—leading to criticism of Sir Philip.
Sir Philip has also been criticised for certain other transactions in relation to BHS, including the sale and lease-back of BHS properties to companies owned by Sir Philip and his family in 2001, with a reported payment of £141m in rent to the companies over eleven years, and around £250m of management charges over five years to 2014.
Steps were taken to manage the pension deficit, but since 2008 it has increased dramatically. A 23-year funding plan was agreed for its main scheme in 2013 with a view to making the scheme fully funded on an ongoing basis by 2036, with £9.5m paid into it in the year to 31 March 2015.
BHS has made a loss in recent years (£69m for the year to August 2014, according to its filed accounts).
In March 2015, BHS was sold to Retail Acquisitions for £1. Critics say it was a mistake to sell the company to a group whose head, former racing driver Dominic Chappell, had no retail experience and had reportedly been declared bankrupt three times.
In March 2016, BHS entered into a company voluntary arrangement (CVA), which had ultimately failed, as explained below.
On 3 March 2016, BHS entered into a CVA, which is a type of business restructuring process that has the aim of allowing a company to continue trading by reducing or compromising debts owed to creditors, with the agreement of 75% of the creditors.
In this case, landlords were reportedly asked to accept reduced rents for certain of BHS’s stores, but with no further contributions being paid into the pension schemes.
The CVA process resulted in the schemes entering ‘assessment periods’ for the Pension Protection Fund (PPF). Assuming a ‘white knight’ is not found, this is the first step on the road to the PPF paying compensation at prescribed levels (less than the full amount of benefits promised by the schemes, with the level of reduction turning on whether, in particular, a member has reached their normal pension age).
The CVA was meant to give the company a second chance but the announcement of its administration in April has revealed that the talks and negotiations with potential buyers and funders have failed.
In principle, TPR can extend liability for making payments to the schemes to persons who are ‘connected’ with or ‘associates’ of BHS. That includes:
It must be reasonable for TPR to do so and there are certain specific conditions and constraints that apply—in particular, the powers that can be used against individuals are more limited than those that can be used against companies.
The tests that need to be satisfied for TPR to use its powers are technical in nature and it will, presumably, be in the process of gathering evidence to assess whether they would be here.
The cost of the administration process will be paid for by BHS, therefore it is the BHS creditors who bear that loss.
As far as pensions is concerned, the compensation provided by the PPF and the relevant activities of TPR are funded by levies on occupational pension schemes.
As for the enquiries being made by Parliament, its activities are funded by the taxpayer. Also, of course, not everyone who loses their job will walk straight into another one—therefore any welfare benefits claimed by former BHS employees will be paid for by the taxpayer
On their appointment as administrators, Duff & Phelps said that the BHS group would continue to trade as normal while the administrators seek to sell it as a going concern.
The administrators owe their duties to the creditors. If there is any suggestion of wrongdoing by the directors and stakeholders of BHS, then the administrators will investigate that.
PSL practical point: The Pensions Act 2004 empowered the then newly-formed TPR with a raft of powers. The most innovative and significant new powers were the moral hazard powers (also known as anti-avoidance powers), which enable TPR to counter attempts designed to avoid responsibility for pension funding obligations and, ultimately, to reduce the exposure to claims on PPF. In certain circumstances, TPR can even look behind corporate structures to apportion pension liabilities to third parties that are connected to, or associated with, a scheme's sponsoring employer.
TPR has only used its moral hazard powers in a small number of cases to date, each of which was heavily fact-dependent, and it has now opened an investigation into whether it would be appropriate to use those powers in the case of BHS. However, as Lesley Titcomb (TPR’s Chief Executive) highlighted in her evidence to the Work and Pensions Committee, it may be some time before TPR reaches a final conclusion as these are complex cases that tend to take quite a long time and are often contested quite vociferously.
An interesting issue that has come to light is the extent to which TPR was kept informed of the sale of BHS to Retail Acquisitions in March 2015 and how this may contribute to TPR’s decision as to whether to use its powers. Under TPR’s statutory ‘notifiable events regime’, it is highly likely that BHS would have had a legal obligation under section 69 of the Pensions Act 2004 to notify TPR of the decision to proceed with the sale. TPR claims that it only learned of the confirmation of the sale to Retail Acquisitions when it was made public (and, by implication, not by BHS when the decision was made). This may be relevant to the TPR’s investigation, since one of the factors that TPR must consider when assessing whether it is reasonable to exercise its powers (in relation to issuing a contribution notice) is whether there was a notifiable event under section 69 of the Pensions Act 2004, and if so, whether the Pensions Regulator was duly notified.
Mark Smith is experienced at advising employers and trustees on the full range of pensions issues, including pensions disputes. He has acted in relation to a wide range of schemes, including those of FTSE 100 companies, public sector bodies and charities. He has also acted as a trustee of various schemes through a trustee company.
Nick Moser is head of Taylor Wessing’s UK restructuring & corporate recovery group. His experience ranges from restructuring, non-contentious insolvency and cross-border fraud to acting for investors in distressed debt.
Interviewed by Kate Beaumont.
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.
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First published on LexisPSL Restructuring and Insolvency
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