Just over a year - and countless column inches - since Administrators were appointed to BHS, the High Court of England and Wales has issued its decision in the case of BHS Group Limited (in Administration) v Retail Acquisitions Limited (full decision here: Decision).

This case concerned an application by the Administrators of BHS Group Limited (BHS) to wind up Retail Acquisitions Limited (RAL), its sole shareholder (and the vehicle used to acquire the BHS group), on the basis of RAL's failure to pay sums due by it to BHS under an inter-company loan agreement. This case contains a helpful discussion of the operation of set-off as between sums owed and owing (as argued by RAL) but, as the decision turned explicitly on the terms of the intercompany loan agreement and associated documentation, also serves as a useful reminder of the importance of having in place debt documentation that accurately reflects the commercial arrangements between debtor and creditor.


  • RAL acquired, for £1, all shares in BHS on 11 March 2015.
  • Immediately prior to the acquisition, RAL had no assets and no source of income. The liabilities it incurred in purchasing the shares were partially funded by way of a loan from BHS for £6,177,000, provided shortly after the acquisition itself. Initially, the transfer and liability were recorded only by way of accounting records.
  • Part of this debt was then subsequently documented by way of a loan agreement, signed in March 2016.
  • In addition to the loan agreement, both RAL and BHS were party to a Management Services Agreement (MSA), under which RAL agreed to provide certain services to BHS and other companies in the wider BHS group. Under the MSA, fees were to be charged by RAL for those services.
  • Under the loan agreement, an instalment of £100,000 fell due for payment on 31 August 2016. RAL did not make payment of this instalment on the due date for payment. RAL argued that its liability for that instalment had been met by way of set-off of sums due to it under the MSA.
  • The Administrators of BHS argued that no such set-off was possible under the terms of the loan agreement, which had not been varied.


The Court considered the terms of the loan agreement and the terms of the MSA in detail.

Within the MSA, the recipient of the services was liable for the relevant fee(s). There was no obligation in the MSA on each group company to be liable for fees due by each other group company - in the event that a group company erroneously paid fees for which it wasn't liable, an intercompany liability would arise between those companies.

The loan agreement did not contain any express set-off clause. However, it did provide that all payments were to be made "free and clear of any withholding or deduction, save as may be required by law". The loan agreement also provided that there was to be no modification or variation of the loan agreement unless it was in writing and signed by and on behalf of the parties.

The Court held that the documentation was clear, and that RAL was not permitted to set off sums due to it by BHS as against the instalment due and payable on 31 August 2016. The Court noted that, in any event, invoices raised by RAL under the MSA were addressed to another group company and not to BHS, and there wasaccordingly nocross claim to be set off against sums due under the loan agreement, were that competent.

Fit for purpose?

RAL's key argument was that the terms of set-off clause should be "ignored" as being inconsistent with the parties' practice, which was so extensive as to render the "no set-off" clause in the loan agreement of no effect. Counsel for RAL led evidence from RAL's former Chief Financial Offer that the practice from March 2015 to May 2016 was that payments between BHS and RAL were set off against each other. In evidence it was also asserted that no instructions were given to the solicitors acting for RAL to include a "no set-off" clause; that it was always envisaged that the sums would be capable of set off; and that all budgets and cash flow forecasts prepared by RAL assumed that sums were set off.

However - importantly - no evidence was led that the "no set-off" clause included in the loan agreement did not represent the intention of the parties, and no application was made to the Court for rectification of the loan agreement, or that contractual term. The Court pointed out that the loan agreement had been "professionally drawn" and signed by the parties, and commented that it did appear, from an objective standpoint, to represent the intention of the parties.

Making regular alterations

The case is a useful reminder of the importance of having in place accurate debt documentation between debtor and creditor. The key lessons, from a finance perspective, are:

  1. the necessity for all parties to put in place debt documentation which accurately reflects the commercial reality. It is essential that a loan agreement, or other debt document, reflects the requirements and circumstances of all parties as at Day 1, as well as (as far as possible) addressing known future changes in both. Clear and open communication with professional advisers is crucial in this regard.
  2. the necessity for all parties to maintain that debt documentation to ensure that it continues to reflect the commercial reality as that changes over its life.

Here, it is essential that the key debt document or documents are treated as 'living documents' and are reviewed regularly - rather than being tucked away in a drawer or safe. The aim of that regular review is to highlight where practice has moved on from Day 1 and to then trigger consideration of whether and how to update the document(s) to reflect new circumstances and/or practice as it has evolved. The review is able to be undertaken by the parties themselves, or any one of them. However, as here, where the documentation requires formal, written amendment, solicitors should be engaged to ensure that the necessary updates are documented clearly and appropriately.

Brodies' top-ranked banking & finance team is perfectly placed to discuss any aspect of your existing or anticipated funding arrangements, offering expert, commercially-minded advice and support throughout discussions and negotiations - whatever stage those may be at. If you wish to discuss any element of your financing requirements, including existing debt documentation and related-party transactions, please get in touch with your usual Brodies contact.