Joanna Clark: Expect more high street casualties as struggling retailers turn to insolvency

Joanna Clark is Legal Director, Litigation & Regulatory, DLA Piper
Joanna Clark is Legal Director, Litigation & Regulatory, DLA Piper
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Lately, it seems that a day doesn’t go by without another gloomy forecast about the retail sector. At the moment, anticipated price hikes are making the headlines, with Brexit, higher inflation, an unstable pound and business rates all being cited as contributing factors. Consumer confidence is another regular theme. The Scottish Retail Consortium recently called on the Scottish Government to rule out any changes to Scottish income tax rates as a way of bolstering consumer confidence in the face of flat wages, rising household bills and the consequent shrink in discretionary spending power.

The retail sector has certainly been one of the busiest for the insolvency profession in recent years. Over the last decade, numerous household names have entered formal insolvency processes, leaving units empty on high streets and in retail parks – and it’s a trend that looks set to continue. Many retailers have turned to insolvency as a way of trimming lease portfolios and re-shaping their businesses. Both Company Voluntary Arrangements (CVAs) and “Pre-pack” Administrations are now regularly used to restructure retail businesses in this way. Despite the popularity of these tools in the sector, they are, understandably, far less popular with commercial landlords faced with empty units and significant levels of written-off debt. Over the last few years, such landlords have had to become familiar with the complex legal issues that tenant insolvency presents as they seek to mitigate losses.

Landlords are not the only stakeholders affected by retail insolvencies. Suppliers of goods and services are also exposed. Whilst contract measures such as retention of title coupled with close financial management can assist with moderating risk, many small-scale suppliers lack the bargaining strength to make effective use of such strategies and may themselves topple as a result.

Retail insolvencies will also affect the workforce, with staff redundancies inevitably following store closures, and customers can find themselves out of pocket too. Deposits and gift cards will usually constitute “unsecured claims” against an insolvent retailer.

In many cases, such claims will be effectively worthless, and the insolvent company will be legally entitled to refuse to return the deposit or honour the gift card. Instead the customer will be invited to file a claim in case there is any cash left for unsecured creditors once “priority” claims have been met. However, an element of discretion may be employed in some cases, particularly where the insolvent business is being sold to a new owner and there is a need to protect the brand.

Will we see more retail insolvency in the coming years? It seems inevitable. The British Retail Consortium reports that there are already 40,000 fewer shops now than in 2006 and predicts this trend will continue with up to 900,000 fewer retail jobs by 2025. On a more positive note, the BRC predicts those jobs that remain will be “more productive and higher earning” with a greater need for creative and analytical roles given the rise in online sales.

Looking to the future, these are the changes that retailers are having to grapple with. Consumer habits have changed dramatically over the last decade and continue to evolve in step with technology. The Office of National Statistics’ figures for August show that online sales in August accounted for 16.4 per cent of all retail sales, a 15.6 per cent increase in the last 12 months alone. These transformative cultural changes to our shopping habits are forcing retailers to consider the fitness for purpose of their existing business models.

More business restructuring is inevitable and in some cases, this will undoubtedly involve the use of insolvency tools

Joanna Clark is Legal Director, Litigation & Regulatory, DLA Piper