L.K. Bennett - Trading in administration – options for creditors

L.K. Bennett entered administration on 7 March 2019, joining Patisserie Valerie as one of the marquee high street insolvencies of 2019. Rising rents and business rates, complaints now heard almost universally in retail insolvencies, were cited among the key factors in its collapse. On entering administration, L.K. Bennett operated from circa 130 stores globally. Online sales made up 33 per cent of total sales.

Talks were reported to have begun around a month ago to secure a buyer for the business. Had they been successful, L.K. Bennett might have been sold in a pre-pack administration sale, as was the case with the purchase of House of Fraser (which owed L.K. Bennett circa £400k) by Mike Ashley's SportsDirect.com group in 2018. Instead, L.K. Bennett continues to trade while a formal marketing and sales process is carried out. Five stores have been closed and internet sales have been suspended.

How does trading in administration work?

Once appointed, the administrators take over the running of the business, seeking to retain or increase its value for the benefit of creditors. Management have no formal role but may provide commercial input. The company enjoys a statutory moratorium on any legal claims being brought against it, including debt claims, except with the consent of the administrators or the court. This gives it breathing space in which to stabilise its affairs or realise assets.

Throughout the process, the administrators must be able to justify that trading the company fulfils one of the following statutory purposes of administration: to rescue the company as a going concern; or, failing which, to achieve a better result for its creditors as a whole than would be likely if the company were wound up; or, failing which, realising the company's property to make a distribution to one or more secured or preferential creditors. To achieve the second purpose, which appears to be the aim with L.K. Bennett, the administrators will generally seek to run the business as normal insofar as possible.

Options available to unsecured creditors

Trading with the company

The company will need to retain its trading relationships with key suppliers. Where the goods or services are essential to the company's continuing ability to trade, a creditor's position may be comparatively strong. While generally they must not prefer one creditor or class of creditors over another, administrators can justify making 'ransom payments' to creditors whose cooperation is necessary to the continuation of the administration.

While it is beyond the scope of this article, certain essential suppliers (utilities, IT infrastructure etc.), assuming they are paid in full, are obliged to continue supplying a company in administration. The default position, however, is that creditors may elect to terminate supplies.

Recovering debts

The statutory moratorium can prevent unsecured creditors from exerting meaningful pressure on a company trading in administration. Generally, only expenses incurred during the administration will be payable, meaning that historical unsecured debts, which will include most of a company's unpaid suppliers, are paid alongside all other unsecured claims from what remains of the company's assets at the conclusion of the process. Recovery for unsecured creditors at this stage is, typically, poor.

Contractual recovery

There are a number of situations in which unsecured creditors may be entitled to recover monies ahead of the statutory waterfall of distributions. These include:

  • Retention of title clauses in contracts. Frequently found in equipment hire or similar agreements, these can be enforced once the administrators have satisfied themselves that the provisions of the agreement are valid.
  • Monies impressed with a trust. Where monies were put into the business for a specific purpose, such as to pay a particular liability, they may be held on trust for the payer and therefore recoverable. This can include formal rent deposits or monies injected by third parties to pay specific debts.
  • Factoring or invoice discounting. Where it is shown in the relevant agreement that title to any book debts or invoices passed to a third party, those assets will fall outside the administration estate and be recoverable by that party.

In all of these scenarios, it will be for the creditor to show that such an arrangement exists.

We can help

Our Insolvency and Restructuring Group has acted in a number of retail insolvencies including Mothercare, Toys "R" Us and Maplin.

If you are a supplier to or a creditor of L.K. Bennett and are seeking legal advice on your position, or if you would like to discuss a retail insolvency issue more generally, please contact Martin Young, Coralie Gass or Douglas Hawthorn.