In January the Determinations Panel of the Pensions Regulator published its determination notice concerning the issue of contribution notices to Dominic Chappell under its moral hazard powers in connection with the sale of BHS.

Background

The proceedings against Mr Chappell stemmed from the sale by Sir Philip Green of BHS Limited to Retail Acquisitions Limited (RAL).  Mr Chappell was a director and 90% shareholder in RAL.  BHS went into administration just over a year after the sale to RAL, triggering a PPF assessment period for its pension schemes, which had significant deficits. In January 2018, the Regulator's Determinations Panel ruled that two contribution notices totalling almost £10 million should be issued against Mr Chappell.

Party to an act test

The Panel concluded that the sale itself detrimentally affected in a material way the likelihood of accrued scheme benefits being received.  As the largest shareholder in RAL and the driving force behind the purchase, Mr Chappell was a party to that act.  The sale and subsequent acts also comprised a series of acts and failures to act to which Mr Chappell had been a party.  The subsequent acts/failures to act included:

• the appointment of inexperienced management to the BHS board;
• the adoption by the board of a speculative and risky "turnaround" plan;
• the late and minimal attempts to pursue a pension restructuring; and
• the extraction of monies directly and indirectly from BHS for the benefit of Mr Chappell, his family, associates and advisers, without reasonable basis.

Material detriment test

The Panel were satisfied that the "material detriment" test was satisfied on the basis that the sale resulted in less money being recoverable for the schemes in the subsequent liquidation that would have been available if BHS had entered insolvency at the time of the sale.  However the material detriment test could also be satisfied on the basis of other factors. These included the appointment of persons to the boards of BHS and RAL who had insufficient experience and expertise, the failure to raise funding and working capital, and the "extraction of value" from BHS.

The Panel took the view that the question of whether material detriment has been caused should be judged at the time the Panel comes to make its determination.

By the time the case against Mr Chappell came to be considered by the Panel, the Regulator had also taken regulatory action against Sir Philip Green in connection with the BHS sale.  This had led to a settlement with Sir Philip Green involving a payment of over £300 million to provide for the establishment of a new scheme offering benefits higher than those provided by PPF compensation and as close as possible to those promised under the scheme.  The Panel accepted that the results of this separate regulatory action should not be treated as having eliminated "material detriment" as it could not have been the intention of the legislator that the law would operate in this way.

Reasonableness test

The Panel considered whether it was reasonable for Mr Chappell to have acted in the way he did.  It reached the clear view that it was not.  Examples of his behaviour cited in this regard were:

• a reckless approach to the transaction by proceeding without adequate pensions due diligence and agreeing to limited disclosure of pensions information, driven by a desire to complete the purchase "no matter what";
• not properly conducting discussions with the scheme's trustees; and
• placing excessive reliance on Sir Philip Green's assurances that he would arrange a pensions solution.

Amount of the contribution notices

Regarding the amount of the contribution notices, the Panel accepted the Regulator's submissions that these should be based on the amount "extracted" by Mr Chappell from BHS, even though this amount fell significantly short of the estimated detriment to the schemes.  The extractions comprised:

• payments to Mr Chappell or for his family's benefit, including a sum by way of a purported loan;
• payments made to BHS/RAL directors who collectively had not only failed to deliver any value to BHS, but had actually caused significant detriment; and 
• professional fees of over £2 million for advice to RAL as purchaser which were funded by BHS.  The Panel accepted that in an ordinary commercial acquisition of a viable business, acquisition costs may be loaded on to the acquired business as debt on the basis that the purchaser indirectly bears those costs through reduced future profits.  However, the Panel said that in the case of the BHS acquisition, there was never a realistic prospect that the post-sale BHS business would be viable.  The Panel therefore considered it fair to view such costs as value extracted from BHS for the benefit predominantly of Mr Chappell and to the detriment of BHS.

Our thoughts

The circumstances surrounding the acquisition of BHS were unusual, but the reasoning set out in the determination is nevertheless useful as an indication of the approach likely to be taken by the Regulator and the Panel in relation to use by the Regulator of its "moral hazard" powers.