2018 has been a difficult year for retailers: East, Maplin, New Look, Carpetright, Carphone Warehouse, Poundworld, Mothercare, Toys ‘R’ Us, House of Fraser, and Homebase have all stumbled to varying degrees.
For House of Fraser, Mike Ashley (via his SportsDirect group) arrived as a ‘white knight’, using an administration pre-pack to purchase its business and assets and declaring his intention to make House of Fraser the “Harrods of the High Street”. This has not gone entirely to plan. This is due in part, it seems, to suppliers and other counterparties asserting their rights robustly and refusing to be pushed around. House of Fraser’s warehouse operator, XPO, temporarily downed tools, leading to online orders being cancelled unceremoniously. Jigsaw and Karen Millen, among others, removed stock, all citing significant payment arrears which the purchasing entity was unwilling to discharge.
So, what are the challenges retailers are facing and how are administration pre-packs contributing to this?
The pre-pack process
An administration pre-pack is an insolvency process where the sale of a business and its assets is negotiated prior to an administrator being appointed but completed simultaneously with that appointment taking effect. In an administration pre-pack a purchaser will ‘cherry-pick’ the bits it wants, leaving behind the less desirable parts of a business and its liabilities. To the outside world, this might appear seamless. The business continues to trade without any interruption in service or change to its outward appearance, and its employees transfer to the purchaser.
In reality, the ownership (and the employees’ employer) have changed, and debts, liabilities and contractual relationships have been left behind. The purchaser starts with a clean slate. This presents suppliers with an opportunity to rebase their trading relationship, or, where the purchaser does not meet acceptable brand or reputational standards, to cease trading with them entirely.
Implications for suppliers
For suppliers, dealing with a pre-pack will create two workstreams. Firstly, unwinding the trading position with the vendor/administrator, including claiming for any payment arrears, and repossessing stock (where possible and/or desirable). Secondly, shaping a new trading relationship with the purchaser, including deciding whether it wishes to trade with that new counterparty, on what basis, and then agreeing new terms and conditions.
In reality, there will be some overlap in these workstreams. The purchaser is likely to have taken possession of the supplier’s stock. It might, as a commercial (rather than a legal) matter, undertake to discharge some or all of the arrears as a condition of doing future business with them. Whether the purchaser will do this will depend on how essential it deems the supplies to be to the future of the business.
Conversely, if a supplier is heavily reliant on a retailer as a sales channel it might make the purchaser more bullish, gambling that they will not withdraw stock or decline a future trading relationship.
What should a supplier do?
The approach will usually be determined by the supplier’s commercial outlook and contractual position, and in particular whether it has retained title to its stock (and on what terms).
Working on administrations over many years, we are frequently surprised to discover the lack of clarity on the contractual position. Many suppliers do not have signed terms and conditions in place, which can leave the purchaser in a position where it is able to argue that its own (much more purchaser-friendly) terms and conditions apply. We would encourage all suppliers to audit their contractual position with each of their retail counterparties, even when that position appears to be healthy.
Douglas Hawthorn is a partner at Michelmores LLP, banking, restructuring and insolvency team