Hill Dickinson: House of Fraser prepack sale, winners and losers…

By Gavin Jones, licensed insolvency practitioner and partner in the restructuring team at Hill Dickinson LLP solicitors

It is probably fair to say that there has been more press reporting about company voluntary arrangements (CVAs) affecting the High Streets and retail parks of the land in the last six months than there have been in the preceding three decades since the insolvency procedure was introduced in the Insolvency Act 1986. This is not surprising given continuing challenges facing the retail sector as a consequence of weakness in consumer confidence and structural changes affecting the sector.

In the last few days it has been reported that Homebase is proposing a CVA that would involve implementing the closure of 42 stores and the loss of 1500 jobs. This follows hard on the heels of the House of Fraser CVA, a rescue plan which ultimately failed following the intending far eastern investor funder getting cold feet and which resulted in accountants EY being appointed as administrators.

Mike Ashley’s Sports Direct Plc quickly picked up the business and assets from the administration on a prepack sale a few hours later for £90m. On the face of it, some good news in that many more stores are expected to be kept open than was proposed under the CVA. Whilst many jobs will have been saved and staff employment contracts carried over under employment regulations it remains to be seen what future level of restructuring of the business is undertaken as he attempts to build the Harrods of the High Street.

In the context of formal insolvency procedures, there are clearly going to be many losers and whilst administrators appointed over companies have specific statutory duties to consider and act in the interests of all creditors, they also have to give proper priority to the rights of secured and preferential creditors. Following the prepack sale to Sports Direct , EY will send a report to all creditors in the next few weeks and which will outline the administrators’ expectations of the outcomes to creditors, insofar as they are able to do so at this early stage of the administration process. It is however reasonable to assume that the unsecured creditors will receive a small fraction of a return on their claims at best.

Whilst specific suppliers into the stores may have enforceable rights under retention of title contracts for goods supplied, one significant category of creditors in this House of Fraser administration will be the store concession holders. Under typical arrangements under retail store concessions, the store owner will pay the concessionaires their agreed share of the net sales receipts of their products one or two months in arrears. In some cases and if practical, sales receipts that go to fund these payments to concessionaires are paid into and held in a type of trust bank account. Where these arrangements exist, the trust account funds will sit outside of the insolvent company’s assets. In the absence of such trust terms however, the concessionaire will be an ordinary unsecured creditor whose claim, here, is against House of Fraser in administration, and not against the corporate vehicle used by Sports Direct to acquire the business and assets of the stores.

Whilst it is always open to the new owner of the House of Fraser business to pay off these obligations, for example to maintain goodwill and to avert possible disruption to the shop floors, they are under no legal obligation to do so. It is also likely to be the case that neither the concessionaires nor the new owner is under a continuing obligation to maintain the concession stores, and it should be noted that the new business will itself be operating under occupational licences from the administrators such that until terms are agreed with the relevant landlord(s) their own rights of occupation may be uncertain, effectively enabling Sports Direct to pick and choose which stores to retain. Concession stall holders will review their existing concession terms, and will want to swiftly negotiate and, where appropriate, conclude new contract terms with the new business owner and, in the meantime receive clear assurances that net receipts entitlements arising after the start of the administration will be paid over to them.