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, relying on Company Voluntary Arrangements (CVAs) and/or administrations.
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’.
So far, things have not gone 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, has downed tools, leading to online orders being cancelled unceremoniously. Jigsaw and Karen Millen, among others, have removed stock, all citing significant payment arrears which House of Fraser is unwilling to discharge.
So, what is an administration pre-pack? What should retail suppliers be looking at and thinking about in order to protect their rights in circumstances like these? As a supplier, you may also need to consider employee matters (particularly in concessions), as well as landlord issues. These points fall outside the scope of the present article and are topics on which we would be pleased to support you.
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 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.
As a supplier, you should be aware that dealing with a pre-pack will create two workstreams:
In reality, there will be some overlap in these workstreams. The purchaser is likely to be in possession of your 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 you. Whether the purchaser will do this will depend on how essential it deems your supplies to be to the future of the business.
Conversely, where you are heavily reliant on a retailer as a sales channel, this might make them more bullish towards you, gambling that you will not withdraw stock or decline a future trading relationship.
Your approach will usually be determined by your commercial outlook and contractual position, and in particular whether you have retained title to your 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, and/or the purchaser is able to argue that its own (much more purchaser-friendly) terms and conditions apply. Sometimes, the terms and conditions that do apply are simply not very good. We would encourage all suppliers to audit their contractual position with each of their retail counterparties, even when that position appears to be healthy.
Key points to check following a customer pre-pack:
Separately, you might wish to consider whether your monitoring position is adequate. Do you receive regular financial reporting on retail counterparties, and are you monitoring the press? Are payment defaults (even minor ones) flagged and promptly followed up to minimise exposure? Are you speaking to other suppliers to understand their experiences? What levers can you apply (shortening payment terms, more aggressive stock management etc.) to strengthen your position?
Our Restructuring & Insolvency team has particular expertise in advising on retail matters, acting for both vendors/administrators and purchasers. Even where administration or some other insolvency process is not imminent, we are frequently asked to examine suppliers’ trading terms and practices in order to future-proof them. Prevention is better than cure.
We are already advising a number of suppliers engaged in negotiations with House of Fraser, and this provides us with valuable insights into the approach being adopted by SportsDirect.