Out-Law News 2 min. read
26 Jun 2012, 4:40 pm
R3 said that 26% of companies listed on the Bureau van Dijk Fame (registration required) database were currently considered to be in the "current" or "high risk" QuiScore bands. The QuiScore is a measure of the likelihood of company failure in the 12 months following the date of calculation.
'Quarter Day' is the deadline for advance payment of quarterly commercial property rents. It fell on Sunday.
R3 president Lee Manning said that retail insolvency as a result of difficult economic conditions and the "cannibalising" of high streets by internet retailers had already cost 21,000 UK jobs since the start of last year.
"Quarter day will always present a challenge to struggling retailers," he said. "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 their creditors."
Insolvency law expert Alastair Lomax of Pinsent Masons, the law firm behind Out-Law.com, said that a "steady stream" of traditional high street retailers entering formal insolvency seemed "likely" for as long as consumer spending remained tight.
"Those most at risk are often in the squeezed middle with little to distinguish themselves on price or quality," he said. "Such businesses often struggle to reposition themselves when every spare penny is going to pay lenders and landlords in line with terms negotiated during the boom times. Ultimately it is often those creditors who are required to bear the brunt of losses on insolvency."
He added that it was "little wonder" that landlords, which unlike banks lack security to recoup any losses in the event of insolvency, were "fighting back" on a High Court decision in April that appeared to confirm that rent could not be treated as an expense of an administration process if it became due before administrators were appointed, even if that rent was paid in advance and covered a period where the administrators continued to trade the business from the rented premises.
The April decision against landlord X-Leisure, owner of various nightclubs leased by insolvent operator Luminar, found that rent falling due before administrators were appointed should not be treated as an administration expense. It followed the judgment in a 2009 case involving landlord Goldacre that found that quarterly rent falling due after administrators were appointed will automatically rank as an expense of the administration, meaning that a landlord's chances of recouping its debt now hinges on when administrators are appointed.
Last week industry publication Property Week claimed that a consortium of landlords, led by the UK's four biggest property companies, was preparing a legal test case aimed at extending the Goldacre ruling to ensure the payment of rent for the time that stores are trading. The landlords were motivated, the publication said, by the collapse of Game which went into administration the day after its second-quarter rent was due.
Manning said that "greater clarity" was needed on whether rent due in the event of an insolvency counted as an expense of the administration and, if so, over what period.
"The net effect of [the Goldacre case] means it is often harder to trade a business during an administration," he said. "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 the current difficult economic conditions as a business sold as a going concern by an administrator will almost invariably recover more for creditors, and save more jobs."
Some businesses were attempting to enter into arrangements to pay rent on a monthly basis, Manning said, or negotiating rent payments linked to turnover. However, this was more likely to apply to newer leases, he said.
