A Russian-owned British auction house that has been the target of calls for a boycott has lost tens of millions of pounds in recent years and has been left in a parlous financial position, records show.
Phillips is heavily reliant on guarantees provided by two founders of a Russian luxury retail group and has seen its debts mount up.
Auditors said the ability of the Russians to provide support could not be guaranteed and a “material uncertainty” may cast “significant doubt” on the business’s ability to continue.
The accounts for the year to the end of December 2021 were lodged with Companies House in March, leaving the firm subject to a penalty as a result of being late.
They reveal that its ultimate parent company was switched to one registered in the secretive tax haven of the British Virgin Islands nine days before Russian tanks rolled into Ukraine.
Phillips, which is one of Britain’s major auction houses and has offices in cities around the world, is owned by Leonid Fridlyand and Leonid Strunin, the founders of Mercury Group, the largest luxury retailer in Russia. The men, who are resident in Monaco and Cyprus respectively, are not subject to western sanctions.
Some £95.9m is owed to their companies in the next 12 months, with another £57.8m owed to the Russians in the longer term. This is offset to some extent by Phillips having £7m in the bank and being owed £59.8m by the Russians’ companies.
However, auditors express doubts over the ongoing status of the company due to its excess of liabilities over assets to the tune of more than £90m, as well as the two Russians’ ability to continue to finance the losses. Their group acquired a majority stake in Phillips in 2008, completing the acquisition in 2012.
Figures including the Turner prize-winning artist Anish Kapoor have called for Phillips to be boycotted. “Phillips is as good a target as Chelsea football club,” Kapoor said, referring to the football team formerly owned by Roman Abramovich, after the Russian billionaire’s assets were frozen by the British government.
Matthew Girling, the former CEO of Bonhams, a competing auction house, also said Phillips should be boycotted over its Russian links.
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Other issues in relation to Phillips accounts are unusual. Its accounts for the year up to December 2020 were signed off in July 2022 – also late. Phillips said at that time that the auditors, Grant Thornton, would be proposed for reappointment, but another firm, Buzzacott, audited the latest accounts for the year up to December 2021.
Buzzacott qualified its audit in relation to the issue of imputed interest on intra-group loans. This is where such loans are received or granted on an interest-free basis, and a company benefits or loses respectively from the amount of foregone interest. Phillips chose to breach an accounting standard known as FRS102, requiring companies to calculate the benefit or cost of this foregone interest and to include it in their profit and loss account.
The latest Phillips accounts make no mention of the impact of sanctions on the Russian economy and those with assets in Russia. However, under “risks and uncertainties” it lists “the group’s exposure to the Russia/Ukraine conflict”.
It also lists “continued access to funds from the group’s ultimate controlling party”, along with risks around money laundering, source of funds, exposure to forgeries and associated reputational risks.
Phillips said last year that it did not fear financial hardship as a result of the war in Ukraine, and it has tried to distance itself from the conflict. Its chief executive, Stephen Brooks, issued an statement four days after the invasion that called for “an immediate cessation of all hostilities”. While welcomed by some, that statement was challenged by others who asked for Strunin and Fridlyand to make their position known.
A Phillips spokesperson told the Guardian this week that its owners acquired the company in 2012 and had made significant investments in the development and transformation of the company, which they said was progressing as planned and was reflected in the accounts.
“Developing the company into a major auction house requires significant capital investment and the objective is that the success of the company will repay the investment in due course. The owners remain committed to this project. Phillips forms a comparatively small part of the owners’ considerable retail business,” the spokesperson said.
“We confirm that Phillips is fully compliant with all anti-money-laundering obligations and have in place rigorous checks which mirror the state-of-the-art AML and KYC [know your customer] systems operated by banks and lawyers. In common with other auction houses, Phillips is regulated by HMRC in relation to anti-money-laundering measures. These measures are extremely thorough and subject to audit by HMRC.”
