Vouching for solvency

It’s clear Jessops hadn’t had an easy time of it for a long time. A debt for equity swap (2009) is never a good sign &, realistically, it’s tough to see how they could survive selling luxury items (and smartphones and recession really have made most standalone cameras a luxury as far as I can see) at prices significantly higher than those being offered online. Their collapse has prompted me to write this blog but I should make it clear that I’m blogging the broad issue out of my system. I’m not pointing fingers at Jessops. I’ve read a few things about what led to their collapse: suppliers renegotiating terms, HSBC not selling when they had an offer, generally poor trading with a small number of store closures before the administration. Whether, to what extent and (most crucially for the purposes of this blog) when these factors (and others I haven’t read about) led to their collapse, I don’t know. I don’t know what went on behind closed doors.

Right. Disclaimer over. If you’ve been paying any attention at all since 2008, you’ll know that the proud holders of gift vouchers are creditors. When the axe falls and the administrators are called in, they’re unsecured creditors. They stand behind the banks, employees, HMRC, landlords. Oh yeah, and the administrators themselves. They take their pound of flesh. So they’re left, holding a useless piece of plastic. The only way it will have value is to use it to scratch a winning scratchcard. What’s on my mind is the continued sale of vouchers right up to the point the administrators are called in. Directors are obliged to act in the best interests of the company but they are also obliged to consider the interests of creditors when the company’s ailing. For example, in entering into a debt for equity swap in 2009, Jessops’ directors had to be confident the company was solvent and could trade its way out of trouble. Having survived three and a half years, it’s safe to say they were right for these purposes.

I’d better drop the Jessops example now because I’m aware of no wrongdoing in the run up to their administration.

If a company is in serious trouble; if it’s facing slumping sales, inflated rents, difficulties with its terms with suppliers and/or lenders and/or customers, it’s time for the directors to have a long hard look at the company’s financial standing and whether to keep going. To either neglectfully or wilfully ignore the situation and keep on trading, and incurring debts in the process, could result in wrongful trading. Wrongful trading is an offence by the individual directors and the penalties fall on the directors, not the company. Wrongful trading happens when a company continues trading after the time at which, the Courts have said, a reasonable and prudent businessman would’ve put up the shutters. It takes a lot to get to that point (insolvent liquidation needs to be inevitable) but there has to be reasonable cause to see a light at the end of the tunnel if the company continues trading. Going through hard times won’t constitute wrongful trading but flogging a dead horse could.

Trading while insolvent wouldn’t lead to an automatic conclusion that the directors have traded wrongfully but a factor the Courts give a significant degree of weight to is whether the directors have taken the steps they ought to have taken to minimise the potential loss to the company’s creditors once they knew (or ought to have known) that there was no light at the end of the tunnel. The Courts have said that a key step is not incurring further debt. I’m boring you with all this for one reason. When retailers sell vouchers, they take on more debt. It’s only debt by the definition of insolvency practitioners and the Courts. Most people probably think it’s ridiculous because all these “creditors” want is to receive goods in return for the money that’s been pre-paid, usually by someone close to them, but here we are anyway. They’re creditors. So, here’s the punchline. Surely there should come a time when an ailing retailer should withdraw its vouchers from its stores. Wouldn’t failure to do so run the risk of wrongful trading?

I’m not an insolvency lawyer but I know my corporate stuff and do advise on decision making in hard times. My view is that, in theory, it could happen. I don’t know what went on inside the various retailers who’ve folded since 2008. I’ve no idea whether wrongful trading occurred in any cases on this basis. Some people might argue that the public withdrawal of vouchers would be the final nail in the business’ coffin. They’d be right if a company wasn’t already at the putting up the shutters stage but the hypothetical argument I’m putting in hypothetical mouths would assume public confidence could still make or break the business. If there is no light at the end of the tunnel, if a company is past the point of no return and is actually both insolvent and on a one way track to liquidation, public confidence ceases to be the most important issue. The interests of the creditors and requirement not to take on more debt would trump it. There’s a difference between legal theory and the high street reality and it’s one hell of a tightrope to have to walk but, once a business has no realistic prospect of survival, during a period where it already has to incur certain day to day debts such as wages, taxes, rent and stock to survive, it seems irresponsible to continue to sell vouchers. That could cross the line and become wrongful trading. In practice, it seems unlikely creditors will take action against the directors if this kind of wrongful trading occurs (mostly due to the expense) but directors of large retailers are themselves susceptible to a failure of public confidence which could affect their own futures if they leave themselves open to criticism on this point. I don’t envy them when it comes to making these decisions but I do hope the issue of vouchers is accorded a reasonable degree of consideration in a year when, sadly, we are expecting more high street names to fail.


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