Member Article

R3 sends stark insolvency risk warning to Yorkshire retailers

Almost a third of retailers in Yorkshire and the Humber are at risk of insolvency in the next year, according to research from R3, the insolvency trade body, ahead of the upcoming Rent Quarter Day at the end of the month*.

Traditional Rent Quarter Days see retailers pay three months’ rent in advance – and often see a spike in retail insolvencies shortly afterwards because of the squeeze on cash flow and complex rules on ‘administration costs’.

R3’s research, using Bureau van Dijk’s ‘Fame’ database of company information, found that 29% of retailers in the region currently have a higher than normal risk of entering an insolvency procedure in the next 12 months. However, this figure was slightly lower than the national average of 31% of retailers across the UK.

By comparison, only 24% of all businesses in Yorkshire and the Humber have the same risk of failure, close to the national average of 25%.

William Ballmann, chair of R3 in Yorkshire and partner at national law firm Gateley LLP, says: “High Street retailers have had a tougher time of it than other sectors in the past few years.

“Now, after dealing with recession, a sluggish recovery, and changing consumer habits, traditional retailers will be put under more pressure as they are exposed to the stresses of expansion as economic recovery picks up.

“Insolvency isn’t the end of the road for a retailer though. It can be an opportunity to restructure and rethink the business model. Many retailers have come out of administration and gone from strength to strength.”

As well as the added pressure of a large rent payment, Rent Quarter Days often see a spike in retail insolvencies because retailers will delay insolvency procedures until after rent is due, thanks to the complex rules on ‘administration costs’ that have developed in recent years.

Mr Ballmann explains: “As a result of a series of court decisions, there are certain costs that have to be paid by businesses in administration before money can be given back to creditors; rent is one of these payments.

“By delaying administration until after rent is due, unpaid rent becomes just another debt to be repaid to creditors, with no special priority. This could see a retailer rescued rather than dissolved, but, as a whole, the rules are a mess.

“They are a bad deal for landlords, retailers, and employees. Action is needed from the Government to provide clarification on costs.”

R3’s recent (July) Business Distress Index found that 42% of retailers were experiencing signs of financial distress, compared to 35% of all UK businesses.

*Rent Quarter Days traditionally fall on 25 March, 24 June, 29 September, and 25 December. 1 January, 1 April, 1 July, and 1 October are modern alternatives for some leases.

This was posted in Bdaily's Members' News section by Mark Lane .