Insolvencies in premium fashion: how can Administration be of use to companies facing major challenges?
A recent string of insolvencies in the premium fashion industry comes against the backdrop of declining consumer demand for premium fashion. From falling disposable income to the rise of alternative retailers offering the same look for a lower cost, the industry is experiencing a challenging trading environment.
Some recent examples of financial distress in the industry include Ted Baker, Farfetch and Matchesfashion – all having entered Administration this year. Matchesfashion was acquired by Frasers Group only a few months ago for the sum of £52 million but has reportedly been making unsustainable losses due to a sharp decline in consumers’ discretionary spending. This trend of failing to meet forecasted targets is being observed across the industry.
Administration offers an effective solution for viable businesses facing significant financial distress. Unlike other formal insolvency procedures, it provides a chance for the company itself to be rescued. It is therefore often the insolvency procedure of choice for high-profile companies, with valuable brands.
The basic goal of the procedure is to allow the company breathing space to explore restructuring options, negotiate with creditors and identify the best placed strategy to preserve the company’s financial interests. It does so by swiftly effecting a moratorium. The most crucial impacts are that, during this time, creditors are unable to wind up the company via the courts, repossess assets held by the company or forfeit certain contracts. The insolvency practitioner works with the directors to establish whether the company can be saved or whether it can be sold to preserve its value and jobs.
Restructuring the company can involve negotiating with creditors, selling assets, making redundancies, implementing operational changes and seeking new investment. In some cases, via Administration, the company can be sufficiently restructured, such that it can be handed back to the directors once the Administration comes to an end, to trade on as it did before. The company, as a legal entity, remains intact and an agreement is reached with its creditors.
However, where a company’s financial burdens are too great for it to continue, even with restructuring efforts, selling the business provides for an appropriate alternative. This is often done via the ‘pre-pack’ process, in which the business is marketed before administration and sold immediately on the appointment of Administrators.
The main purpose is to preserve the company’s brand, reduce the loss of trade and ultimately maximise sale value. In effect, the business is passed over to the new company to trade on, along with any remaining employees whose contracts are transferred. Meanwhile, the legal entity of the company is shut down via the rest of the Administration process. The creditors of the company remain within the legal entity in Administration and may be paid a dividend from any surplus funds in the estate.
How we can help
It is an important time for creditors to consider their options for recovering their doubtful debts and for directors to seek expert advice as soon as insolvency becomes a risk, to maximise the chances of recovery. Our dedicated business recovery and insolvency team is here to help. We offer straightforward advice to help our clients navigate financial uncertainty.