The Rise of Insolvency Within the Retail Sector - Key Warning Signs and Potential Solutions

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Vicky Biggs - Legal Director

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The retail sector has recently been at the forefront of insolvency news, with high-profile insolvencies such as Ted Baker and The Body Shop.

These have highlighted the difficult market conditions currently faced by retailers, with statistics indicating a 19% increase in insolvencies within the sector in 2023/24 compared to the previous year.

As many more retail businesses are facing financial difficulty, our Retail Lawyers explore why it is important for business owners and management to pay attention to the key warning signs that their companies may be headed towards insolvency and what potential solutions may be available. 

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Warning signs for insolvency in retail

  1. Cash flow issues. If the business is running low on cash daily and cannot pay debts when they become due, there is a risk that creditors will commence court action to recover what they are owed.  Late payments of debts and/or inability to meet liabilities can be an early indication that a retail business is in financial difficulty. 

  2. High levels of borrowing. If the company is operating at the limit of its overdraft and is having difficulties obtaining additional credit, this can be an indication that its business is in financial difficulty. More recently, retailers have specifically struggled due to higher interest rates escalating their debt burdens, which is not being compensated for by increased sales revenue due to the cost-of-living crisis impacting consumer spending. 

  3. Falling profit margins due to high interest rates and increasing overheads. For a retail business to survive and prosper long-term, it obviously needs strong profit margins. High sales revenue can be a misleading measure of business success if underlying business costs rise and profit margins are squeezed.

  4. Poor financial record-keeping. Maintaining up-to-date accounts are vital to ensuring a business has accurate information on its financial health. Bad financial record-keeping can be a factor in failing to understand when the business is struggling and what can be done to help it.  A notable factor in the downfall of Ted Baker was the discovery of a £58 million hole in its accounts due to stock value miscalculations.

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Warning Signs

Potential solutions for businesses

If a retail business faces any of the challenges set out above, they must seek professional advice as soon as possible to face those difficulties.  Set out below are examples of some of the options a business may wish to consider:  

  1. Prepare up-to-date management accounts to obtain an accurate picture of the company's finances. This includes considering the business' assets and liabilities, stock levels, and cash flow. 
  2. Improving cash flow by renegotiating payment terms with creditors while the business tries to increase revenues. 
  3. Minimising costs by, for example, finding cheaper suppliers or identifying more cost-effective premises from where the business can trade.  With the rise of e-commerce and online shopping, many retail businesses have closed their physical stores and switched entirely to trading online to minimise business overheads. 

  4. Entering into a Company Voluntary Arrangement.  If the accounts suggest the business is already insolvent, it may be possible to agree a Company Voluntary Arrangement with its creditors (also known as a CVA).  A CVA is a process that allows the business to continue to trade whilst repaying its creditors over a fixed period of time, often with an overall reduction of the company's debt being agreed with its creditors.  The company will need to consult with and engage an insolvency practitioner to act as a nominee on the CVA and then, if it is agreed with creditors, to become a supervisor for the CVA to oversee its execution.  An overall 75% majority (by debt value) of the creditors is needed to obtain approval of the CVA, together with a majority of unconnected creditors also needing to be in favour. 
  5. Administration.  It may be possible to restructure a retail company using an administration, a formal process that creates a statutory moratorium to ringfence a company's business and assets from court action and enforcement by creditors whilst the business and assets are marketed for sale to achieve the best possible realisation of value for the benefit of creditors.  The company's directors will need to consult with and engage an insolvency practitioner. In certain circumstances, it may be appropriate to consider a "pre-packaged" sale of the business and assets, where the sale is negotiated and agreed upon with input from a proposed administrator in waiting but before the administrator is formally appointed, with the sale then completing immediately following the appointment of the administrator.  Such a transaction, where achievable, will enable the transfer of the business as a "going concern" without impacting on its ongoing trade where trading the business in administration is simply not viable.  It can lead to the preservation of value in the business and assets as well as safeguarding jobs and preserving trade for suppliers.  A pre-packaged sale could be to the director(s) of the existing company (through a new company set up to acquire the company's business and assets) when additional regulatory requirements have to be met by the purchaser to ensure the best possible value is provided for the business and assets.  Alternatively, the business and assets could be sold to an unconnected third party. 

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If you are a retailer concerned about your financial position and the risk of insolvency, our Retail Solicitors and Insolvency Lawyers are ready to assist with all aspects of insolvency law and restructuring practice.
We also have excellent working relationships with many national, regional and small independent insolvency practitioners who can be called upon to provide their input as and when required.      
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Vicky Biggs's profile picture

Vicky Biggs

Legal Director

Vicky has over 13 years of experience acting as a Dispute Resolution and Insolvency solicitor. Vicky has specialist expertise in contentious insolvency matters, advising insolvency practitioners, directors in relation to both corporate and personal insolvency issues.

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