Following the demise of House of Fraser and its acquisition by the Sports Direct group, what legal rights do suppliers have regarding unpaid debts?
Shortly after their appointment on 10 August 2018, the administrators of various House of Fraser (HoF) companies sold the business and assets of those companies to the Sports Direct group. This is known as a “pre-pack administration sale” which is one entered into swiftly after the entry into administration in order to minimise disruption to the business and operations.
However, the pre-pack certainly did not minimise disruption for suppliers, with reports from the administrators estimating suppliers were owed £484m by HoF entities. This included XPO Logistics, HoF’s warehouse operator and logistics provider, who are owed £30.4m.
Within a week of the acquisition, it became clear that Sports Direct wouldn’t agree to pay those outstanding amounts. In response XPO stopped processing orders, forcing HoF to cancel and refund all online orders. XPO has since commenced redundancy consultations with employees. The supply chain impact on the retail sector has echoes of that on the construction sector following the Carillion insolvency.
What are the legal rights and obligations of the new owner in relation to such outstanding amounts? The answer is that the Sports Direct companies that now own and trade the HoF business and brand are unlikely to have any legal obligation whatsoever for the outstanding £484m.
This is because the acquisition was an insolvent asset sale, where liabilities are left behind, rather than a solvent share sale, where the buyer inherits all historic liabilities.
While Sports Direct acquired HoF’s IP, fixtures, stock and the rights of HoF under all supplier contracts, it expressly did not acquire, or agree to pay, any liabilities relating to the date prior to the acquisition.
All amounts owed to suppliers up to and including 9 August 2018 are therefore left behind as a debt owed by the insolvent companies in administration. As the administrators have to first use the £90m proceeds to pay HoF’s bank and bondholders (who are collectively owed £400m), the administrators have confirmed that the maximum amount available to satisfy the £484m owed to suppliers will be the £600k specifically reserved for unsecured creditors under insolvency law’s “prescribed part”. Suppliers will therefore only receive a tiny fraction of the amounts owed.
Do the suppliers have any legal rights to protect their position? The answer will depend on each supplier’s underlying contractual terms with HoF.
Suppliers should review three key points related to their contracts:
(1) Whether suppliers have an effective retention of title clause, which allows them to retain title to stock until they are paid, and will give them leverage opposite Sports Direct requiring amounts to be paid before the stock can be sold;
(2) Whether suppliers have a right of consent before an assignment can be made to Sports Direct of their contract so that they can look to require payment of historic amounts by Sports Direct as a condition to assignment (known as a “ransom” payment);
(3) Whether there is any recourse to suppliers as a result of the appointment of administrators or non-payment. Often this will only be termination of the contract which may not be palatable but there may be the ability to halt supply (as XPO have done) or to remove stock from stores (as press reports suggest others can) and either can be used to give commercial leverage.
A thorough analysis of these key contractual elements will help HoF suppliers – and others faced with similar disruption – understand their legal rights regarding outstanding debt owed by newly insolvent owners.
Marc Trottier is a partner and Simon Clarke is a senior associate in Bryan Cave Leighton Paisner’s restructuring and insolvency team