As the retail industry continues to undergo significant changes, businesses in the sector face new challenges.
A tough labour market, increasing operational costs, high interest rates despite the recent drop, and a cost-of-living crisis impacting consumer behaviour all mean that margins are squeezed. As a result, many retailers are having to evaluate their business model to ensure that they remain fit for purpose But, there are a plethora of restructuring options that can transform a business without causing too much disruption to both shareholders and staff.
Pre-pack administrations
Administration is an attractive option for businesses facing a cash flow crisis and creditor action, providing breathing space to propose a rescue plan and perhaps securing additional funding, but creditors often demand a high price for supporting the distressed business. A pre-pack is the pre-arranged sale of the business and assets of the distressed company completed at the point of the administrator’s appointment.The success of any administration is often reliant on there being a viable purchaser available – as we have seen with Wilko.
Rather than risking the total disintegration of a brand through a costly administration process – as seen with the disappearance of high street brands including the Arcadia Group (Topshop, Miss Selfridge and Dorothy Perkins), Woolworths and Toys R Us – these arrangements usually ensure a smooth transition period from one owner to another, preserving shareholder value at the same time.
Unsurprisingly, pre-packs are often unpopular with creditors, who are commonly excluded from the process, particularly in circumstances where the purchaser is connected to the original management and/or ownership team.
With regulatory tightening of connected party pre-pack sales, the process continues to have the huge advantage of achieving a smooth transition of the business and assets to a buyer that (on the surface) allows for ‘business as usual’, with employees also automatically transferring to the new business.
Examples of successful pre-pack administration sales include HMV and Monsoon Accessorize. One downside to consider is that pre-pack administrations can cause negative publicity for the business going forward and of course come with a change of ownership structure – but it is ultimately better than the business disappearing all together.
Recent case study
Howard Kennedy recently advised retail brand, MUJI Europe Holdings (MEH) on a strategic restructuring initiative aimed at optimising its European business operations following changes in ownership and shareholding structure. Under the guidance of Howard Kennedy’s Restructuring and Insolvency team, led by partners Vernon Dennis and Paul Glassberg, MEH successfully entered into a pre-pack administration sale. This process transferred its business, including 10 European subsidiary entities, to a newly formed holding company wholly owned by Muji Japan. The successful completion of this restructuring ensured continuity for all stakeholders, including customers, employees, and business partners, while preserving the integrity of MUJI’s European presence. Howard Kennedy’s expertise in strategic planning and legal execution was instrumental in navigating this complex process, positioning MUJI for enhanced growth opportunities in the European market.
Company Voluntary Arrangement (CVA)
Another option available is a Company Voluntary Arrangement (CVA), which preserves the company and not just its business – a move welcomed by shareholders. It works by allowing a company to continue trading having reached an agreement with creditors to restructure its debts and repayment obligations.
It was a popular option during the pandemic, with various trading restrictions placed on retail and hospitality businesses during lockdowns, with CVAs allowed these businesses to exit underperforming stores and restructure rent obligations. The attraction for creditors is that it offers a better long-term return than a pre-pack administration.
There are negatives to consider, of course. There has been criticism that CVA proposals are often used in a way which is unfairly prejudicial to rights of landlords, their rights being compromised while ordinary supplier creditors remain unaffected. Judicial challenges (such as in Debenhams and New Look) have established a body of case law on this issue, and with careful navigation the compromise of leasehold liabilities is possible. Another potential obstacle is the return of HMRC secondary preferential status.Tax debts are often disproportionately large in comparison to trade debt and as part of HMRC approval they will need to be paid in priority to other unsecured debts. As a result, proposals which seek to compromise tax liabilities more significantly are more difficult to craft and have made the CVA rarer.
Part 26A Restructuring Plan
The final option to consider is the newly introduced 2020 Part 26A Restructuring Plan, similar to the US Chapter 11 and EU driven moves to promote company rescue. RPs are an amalgam of a Company Act Part 26 Scheme of Arrangement and a CVA and allow for a company to propose a rescue plan to various classes of creditors and/or its members that is then sanctioned by the court.
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