"High Risk" Retail Sector Facing Struggle

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Quarterly rent plus wage bills and VAT could force more retailers into administration, says president of R3.

The figurehead of the UK’s insolvency industry has warned that a new batch of retailers could be forced into administration as the high street attempts to trade through one of the most financially stressful weeks of the year.

This hefty bill comes as insolvency on British high streets has already seen over 21,000 jobs lost since the start of last year, due to difficult economic conditions and the rise of internet sales. Research by insolvency trade body R3, using the Bureau van Dijk Fame database, has found that in the retail sector, 26% of businesses are currently in the ‘caution’ or ‘high risk’ band, in terms of likelihood of company failure in the next twelve months.

Lee Manning, R3 President, comments:

“Quarter day will always present a challenge to struggling retailers. Some of their leases were agreed during the good times and will have many years to run at very high rents. Negotiating with landlords is key to staving off insolvency, although of course Directors must take care to avoid wrongful trading with regard to all of their creditors. More businesses are attempting to pay rent on a monthly basis or even negotiating turnover linked rents to help them manage their cash flow more effectively. This is more likely to apply to newer leases however.”

“The internet is cannibalising ‘bricks and mortar’ retail. Retailers need to adapt their business to stay in the game as we have seen a 12% drop in footfall on the high street in the year to April but this is doubly challenging when faced with too many underperforming stores held on long and inflexible leases.”

“We are also calling for greater clarity surrounding the issue of rent due in the event of an insolvency, whether it counts as an expense of the administration and over what period.  Currently, advance payment for a quarter’s rent is required despite actual usage – an administrator might only be using the premises for a short period of time, but be liable for a full quarter’s rent. Until recently the law allowed an administrator to pay on a daily usage basis for premises occupancy, this was changed by the ruling in the Goldacre case.”

“The net effect of this rule means it is often harder to trade a business during an administration. More businesses that are failing could be saved if the Government codifies what constitutes an administration expense, therefore alleviating any uncertainty. This current situation is clearly not ideal during these current difficult economic conditions and a business sold as a going concern by an administrator will almost invariably recover more for creditors, and save more jobs.”

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