House of Fraser accused of making a deal with Sports Direct “prior to administration”

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House of Fraser has been accused of making a deal with Sports Direct before it fell into administration while its administrator faces an official complaint.

According to City AM Paul Mckie, the head of luxury fashion house Fashion Collective, has launched an official complaint against Ernst & Young (EY) which handled the department store’s administration.

In a letter to the Institute of Chartered Accountants in England and Wales (ICAEW) Mckie, whose bid for 31 House of Fraser stores was rejected prior to its administration, alleged that he was told by EY that it had not been appointed on the morning of its administration on August 10.

He went on to accuse House of Fraser of agreeing a deal with Mike Ashley’s Sports Direct “prior to the administration”.

The department store fell into a pre-pack administration earlier this month, before being bought out by Sports Direct hours later for £90 million.

Another potential buyer Edinburgh Woollen Mill has also criticised the administration process, after its offer of £100 million, which would have included all the supplier and pension liabilities, was rejected in favour of Ashley’s £90 million bid.

As Ashley bought the chain out of pre-pack administration, he did not take on any of House of Fraser’s considerable debt pile.

Since his appointment he has been wrestling to solve disputes over debts owed to suppliers.

XPO Logistics, which runs House of Fraser’s distribution centre, is understood to be owed £30.4 million and has told its workers to down tools until a settlement is reached, leaving House of Fraser’s website out of action.

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5 COMMENTS

  1. I said exactly this at the time.

    In essence it’s no different to any other pre-pack, except usually a pre-pack is a deal done with the existing directors/owners of a company, not with a completely different entity.

    The speed with which the deal was done makes it pretty obvious to outside observers that there were discussions and deals done beforehand, but of course that’s only speculation.

    How legal any of this is remains to be seen, but it’s going to be interesting finding out.

  2. Surely the government needs to look into this debacle. Cashley had his offer accepted very quickly suggesting a pre pre-pack agreement had been reached. The big question is why The EWM offer, that protected more jobs, pensions and suppliers was rejected even tho it was substantially higher?? I smell a rat and a fat greasy rat at that!!

  3. I am not really sure that I understand what the accusation actually is here. By their very nature, pre-packs have to be agreed prior to the appointment of the administrators (and are implemented immediately upon appointment). The intending purchaser has to reach that agreement with the persons who are going to be appointed administrators (but of course have to do so at a time when the proposed administrators are not yet in office). That is a process in which the directors of the insolvent company will invariably be involved – up to the point of the administration, the directors are in control. So the statement in the article: “He went on to accuse House of Fraser of agreeing a deal with Mike Ashley’s Sports Direct “prior to the administration”.” seems to me to be merely an “accusation” that the purchaser probably did nothing more than what every purchaser does in a pre-pack – and if so, so what?

    As to why the EWM bid was rejected, I clearly have no idea, but one assumes that the administrators will be able to show that in their view the SD purchase would give a better outcome for creditors than they expected the EWM offer would have provided (if accepted and completed). There is always an element of judgement in that analysis but it is for the administrators ultimately to be able to defend their decision to:- (i) do a pre-pack deal at all; and (ii) do the pre-pack deal that they did.

  4. As previous posters have said, Ashley did no more than all purchasers do in a pre-pack – negotiate a deal with the proposed Administrators that is completed as soon as they are appointed. The Administrators have no locus to complete a deal and the appointment will be delayed until such time as the right deal is agreed.

    There should be an explanation in the Administrators’ SIP16 disclosure as to why they chose Ashley’s “cash” offer over any other, but one would expect that the outcome to all creditors and certainty of payment will have played a part.

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