Quarter day on September 29th 2011 has now come and gone, and the ramifications of companies’ being able, or not, to pay their rent quarterly in advance will have begun to filter through by the time this article is published.
What has been outstanding over the last 12 to 24 months is the resilience and ability of companies to defy economic gravity and avoid entering into formal insolvency proceedings. My belief is that the two major reasons for this are interest rates being so low and a determined reluctance on the part of banks to appoint administrators. How long one or both of these factors remains constant is something which remains to be seen.
The perceived wisdom from those in the industry with whom I have discussed it appears to be that the bubble will burst and it is just a question of when.
There has been a plethora of publicity in relation to the difficulties surrounding the retail sector. It cannot be denied that this sector has been in difficulties for a while and that such difficulties are likely to continue. There have been numerous high-profile casualties on the High Street. Indeed, a recent study by R3 stated that they expected some ten per cent of retailers to go into administration during 2011.
Senior managers at any retailer should know whether or not it is in trouble. The essential thing is that if they know that their business is facing difficulties and possibly insolvency, then they should seek advice from an insolvency practitioner and/or a specialist solicitor, as soon as possible. Delay will achieve nothing, and the problem will almost certainly not go away. If ignored, it can only get worse.
One area of work I envisage for insolvency solicitors during the next 2 to 3 years is wrongful trading actions against directors of companies who continued to trade, knowing that the company was hopelessly insolvent and with little or no prospects of trading out of such a situation.
At present, what will have made the recent quarter days significant is that there are a fair number of companies in the retail sector that not only had difficulties in paying this rental quarter in advance but also did not have enough cash to buy stock for the vital Christmas trading period. These two factors combine to make a lethal cocktail.
Banks are in a very difficult position. Obviously, factors vary from case to case, for in some cases the bank will advance more monies to fund the purchase of stock, and in others it will not. In the latter instance, a formal insolvency appointment almost definitely beckons.
Once a struggling retailer has identified itself as having the problem, and has obtained professional independent advice, it should follow that advice. This may sound simplistic, but there have been instances where retailers have been given sound advice, which they did not want to hear, and so they decided to ignore it. Transparent communication between all relevant parties is also nearly equally important..
Another option is to approach one of the specialist retail restructuring companies.
It is not possible in this article to provide a selection of tips to ensure the survival of any retailer. Each case varies, and the professional instructed needs to evaluate the factual matrix before he or she can begin to provide sensible advice.
However I would say that we are now in an era where it is a long time since landlords would refuse, point blank, to re-negotiate terms with tenants. Landlords are open to sensible dialogue, and it is in their interests to do so, for they do not wish to have vacant units.
The run-up to Christmas will be interesting. I suspect that consumer confidence is unlikely to return during that period or indeed shortly after. Also, cataclysmic events in Europe, such as the failure of Greece and any knock-on effects in Spain, Portugal or Italy could have an immediate and dramatic impact, not just upon the retail sector but upon the UK economy as a whole.
Pain is likely to come; it is just a question of when and to what degree. Most entities have now cut costs as far as they are able, so survival is a matter of being alert, nimble and proactive. The essential policy should be to recognise problems and address them with professional advice as soon as possible. Delay only makes matters worse.
Richard Curtin is a lawyer in the finance and restructuring practice at international law firm Faegre & Benson LLP.