Trouble on the High Street

Throughout 2018, we have seen a number of high profile insolvencies on the high street affecting a variety of different companies across the retail sector. In the press, we have seen that several large companies, from supermarkets, to fashion retailers, to discount stores have experienced some form of restructuring or insolvency process throughout last year.

Examples

Some of the more high profile examples are set out below, by reference to their trading names.

House of Fraser

One of perhaps the largest examples is that of House of Fraser, which originally entered into a Company Voluntary Arrangement (“CVA”) with its creditors on 22 June 2018. The CVA was conditional upon additional capital being injected into the group, which at the time, it was anticipated would be provided by a Chinese investor. However, the CVA was controversial, as it proposed closures of 31 out of 59 stores, with significant rent reductions in respect of 10 stores which were to remain open. In Scotland the landlords challenged the CVA on the basis that it caused them unfair prejudice. The main concerns of the landlords were that they had not been properly consulted, the stores were simply closing, and that the value of their claims, by which their votes were calculated, were discounted by 75%. The reason for the reduction in value of the landlords’ claims, is that strictly speaking they are future and ‘unascertained’ liabilities, therefore under rule 15.31(3) of the Insolvency Rules 2016, the landlords should only be entitled to a £1 vote on the proposals. It is however, common in these types of CVAs for landlords to be allowed to vote for more than a nominal vote, at the discretion of the CVA nominee.

Whilst the landlords’ challenge was settled out of court, unfortunately, the investment of capital was withdrawn, and House of Fraser was unable to seek further funding. Subsequently, House of Fraser went into administration on 10 August 2018. At the same time however, Mike Ashley, of Sports Direct, purchased the business and assets of House of Fraser for £90million, which has thus far helped to save jobs and the business itself has continued to trade.

Poundworld

At the other end of the scale, Administrators were appointed over discount store company, Poundworld on 8 June 2018. Poundworld had been struggling throughout 2018, and it was hoped that a CVA could be implemented instead. This was however dependent upon investment from a buyer, which was not forthcoming after the buyer pulled out of negotiations.

Whilst the Administrators attempted to find a buyer of the business as a going concern after their appointment, unfortunately, a buyer could not be found in time, and the Administrators had no choice but to cease trading and close all of the stores.

HMV

On 28 December 2018, it was announced that HMV had gone into administration for the second time in six years. As a result, there are now over 2,200 jobs at risk. HMV had previously entered administration in 2013, when the business and assets were purchased by Hilco Capital. However, the CD and DVD market plunged, resulting in a decline in Christmas sales, and the decision was made to again appoint Administrators over HMV.

As yet, it is unknown whether a further sale is likely, or if the Administrators will have no option but to cease trading and close down the business. However at present, it appears that the stores remain trading whilst the Administrators attempt to find a buyer of the business as a going concern.

Effect upon the supply chain

The struggling high street has had an effect upon various other stakeholders, which in turn has caused, and is likely to lead to, further insolvencies throughout 2019.

One group who are particularly affected are landlords, who in general consider that they are not treated fairly when rescue and restructuring mechanisms, such as CVAs are proposed. We have seen instances where landlords are dependent upon the company trading and paying rent on the lease, so that they in turn are able to remain solvent. The effect of companies being unable to pay the rent has an adverse effect upon the landlords.

Suppliers are also likely to be affected, both as a result of reduced future orders from companies who have entered into an insolvency process, but also as a result of having supplied goods to companies for which payment has not been made. Even if the suppliers are able to exercise valid retention of title clauses, the delay which this causes in the event of any dispute as to title can affect the suppliers’ cash flow.

Finally, individual employees are significantly affected, by the loss of their jobs, together with not receiving full redundancy packages, or even full pay for the full period for which they worked. According to the British Retail Consortium, 93,000 employees lost their jobs during 2018 as a result of companies falling into insolvency processes, with what appears to be more to follow during the course of 2019.

Why is the High Street struggling?

It appears that many high street businesses are caught between a lack of spending by consumers, resulting in decreased revenue, and an increase in costs, which together have combined to drastically reduce profits in the retail sector.

Perhaps one of the main reasons for the decreased revenue is the lack of customers who are able to, or wish to attend shops in person.

This can be for a variety of reasons, one of which is the increase in use of technology, which means that customers are more likely to buy products online instead of physically going to a shop. Furthermore, streaming devices, such as Spotify and Netflix have meant that customers are less likely to purchase DVDs and CDs, which has undoubtedly contributed to the difficulties faced by HMV.

The increase in personal insolvencies and loss of employment over the last year is also likely to be a factor, as consumers’ spending powers decline.

It is thought that the World Cup and the extreme weather conditions during 2018 may also have affected retail trade in 2018, by keeping consumers away from the high street.

Finally, there is also a growing trend for consumers to spend money on experiences, instead of material items, which again affects many businesses on the high street.

Not only is there is fall in trade, but high street business have faced increased overheads over the last few years. Most notably, the cost of rent has increased, with landlords being increasingly unwilling to negotiate downwards. This is partly because some of the larger landlords represent pension and investment funds, and so they are seeking to maximise the return on the investments.

Some of the increased costs such as the increased minimum wage, and the national living wage has also had an effect upon business, particularly in relation to smaller business. Businesses are left with no choice but incur these additional costs to pay their staff.

The weak value of the pound has had an impact upon business which import goods to be sold onto consumers, as their costs have increased. Finally, the increased business rates have added to the cash flow difficulties faced by high street businesses.

It is increasingly difficult for businesses to pass on these additional costs to the consumers, because the retail sector is so competitive. Many people tend to be much more aware of how much they are spending, and are less likely to remain loyal to a business if it is selling items that are more expensive than its competitors.

What can be done?

Whilst many business are struggling on the high street, for many, they are still able to achieve online sales, which helps to support their cash flow.

In addition to this, local authorities are offering support to the retail sector, by buying shopping centres to help encourage redevelopment in town centres. Since 2016, local authorities have purchased several shopping centres, as their value decreases, in order to encourage long term redevelopment and regeneration of town centres. One example of this is Surrey Heath Council, who spent £86million to buy the main shopping centre in Camberley, together with £17.6million on the freehold of the House of Fraser building, shortly before it went into administration.

The government also appears to be keen to support the high street. Following the announcement made in the October 2018 budget, the Future High Streets Fund was launched on Boxing Day 2018. This fund enables the government to providing funding to local authorities of £675million, to help support and regenerate the high street.

What will happen in 2019?

It is likely that 2019 will see further insolvencies on the high street at all levels, as other retailers announce that store closures and restructuring. For many high street businesses, their performance over Christmas is likely to affect their prospects during the first quarter of 2019.

What is also concerning is that the problems in the retail sector may extend beyond the high street, as even on-line retailers, such as Asos appear to be struggling, having issued a profit warning in November.

And finally, Brexit….?

If you have any insolvency related concerns or queries, then do not hesitate to contact any member of our Insolvency team.