Linklaters has quizzed Olswang on a "breach of covenants" on the sale of retailer BHS after it took money destined to be used in running the business as payment for its work on the deal.

In a letter to Olswang, Linklaters sought clarification from the firm on what had happened to £7m from the sale of one of BHS's properties in 2015, soon after the business was sold by Linklaters' client, Arcadia Group, to Olswang's client, Retail Acquisitions Limited (RAL).

The magic circle firm said that at the time Dominic Chappell, director of RAL, had told it the "missing" £7m had been deposited at the Bank of China to secure loan facilities for BHS, when it had in fact been used to pay fees.

In the letter, dated 21 June, Linklaters said: "In breach of the covenants in clause 6.2 of the BHS sale agreement and at [Olswang corporate partner David] Roberts' specific request, £7m of the sale proceeds of North West House had in fact been used to pay Olswang's (as well as others') fees."

It added: "Please explain whether Olswang accepts that Mr Roberts was aware throughout that this meant there was no £7m deposit with the Bank of China."

The letter was copied to the Business Innovation and Skills Select Committee, which is investigating the sale and collapse of BHS and published the correspondence.

During a select committee hearing last month, Sir Phillip Green, chair of Arcadia Group, accused Olswang of holding the £7m in its client account in a "blatant breach of the covenants" of the sale of BHS.

He said the covenants of the sale had guaranteed that proceeds from the sale of some of its properties would be used to fund BHS but that instead, £7m from one of the sales had been divided between Olswang (which took £1.2m), Grant Thornton, Chappell and others.

Green said that, at the time, he had been told this money was being used to secure banking facilities and that he only found out when the business entered administration that it had not been used for this.

BHS collapsed into administration on 25 April, putting 11,000 jobs at risk and leaving a £500m hole in its pension scheme. With the administrators unable to find a buyer, the company was put into liquidation in May.

Olswang did not respond to request for comment.