BHS Group Ltd v Retail Acquisitions Ltd

A contractual anti-set-off clause remains effective unless validly varied in accordance with the contract. A history of netting payments, or an anticipated breach, does not alter the objective meaning of a professionally drafted agreement.

For insolvency purposes, the cash-flow test considers the reasonably near future and is fact-sensitive. An endemic shortage of working capital may establish insolvency even where immediate payment difficulties are not temporary. Under the balance-sheet test, the court must value present assets on the available evidence and make proper allowance for contingent and prospective liabilities. Speculative or inadequately evidenced claims may have little or no value.

BHS Group Limited, acting through its administrators, petitioned to wind up Retail Acquisitions Limited on the grounds that it was unable to pay its debts under sections 122(1)(f) and 123(1)(e) of the Insolvency Act 1986. The petition was amended to rely also on section 123(2).

The petition debt arose from a loan. Retail Acquisitions contended that sums allegedly due under a management services agreement could be set off against the loan repayments and that it was balance-sheet solvent. The central issues were whether the contractual anti-set-off provision had been varied, whether there was a genuine and substantial cross-claim, and whether the company was cash-flow or balance-sheet insolvent.

1. Set-off and variation. The loan agreement prohibited set-off and required any variation to be in writing and signed by the parties. The parties’ prior dealings, budgets and alleged understanding did not amount to a variation. There was no evidence of rectification or estoppel. A breach, or anticipated breach, of contract does not change the meaning or terms of the contract. The August 2016 instalment was therefore due without set-off.
2. Cross-claim. A petition may generally be dismissed where the petition debt is genuinely disputed on substantial grounds, or where the company has a genuine and serious cross-claim exceeding the undisputed petition debt. That principle did not assist Retail Acquisitions. The management services invoices were addressed to Lowland Homes Limited, not BHS Group Limited. Mutuality was therefore absent, and the alleged claim could not be set off against the loan debt.
3. Cash-flow insolvency. The cash-flow test looks to the present and the reasonably near future. Retail Acquisitions had no present income stream, no working capital and no temporary liquidity explanation. It was unable to pay the petition debt or subsequent quarterly payments and was cash-flow insolvent.
4. Balance-sheet insolvency. The court applied the principles concerning present assets and contingent and prospective liabilities under section 123(2) of the Insolvency Act 1986. Prospective liabilities could not simply be added at face value, but could not be ignored. The alleged management-services asset had no value for this purpose. The Taveta claim was disputed, uncertain and inadequately evidenced and was assigned a nominal value of £1. The Chaplake investment was accepted as an asset but valued at £1.5 million, reflecting the best available evidence.
5. The petitioner discharged the burden of proving insolvency. Retail Acquisitions was cash-flow and balance-sheet insolvent. The usual winding-up order was made.