Another week, another administration. When Woolworths closed its doors a decade ago, it seemed extraordinary that such a well known high street name could disappear without trace. In recent years, such failures seem almost routine. It was resignation, rather than shock, that greeted the news Poundworld had gone into administration.
As always, news reports have focussed on the potential for store closures and job losses. However, the fact the business was placed into administration does not tell us much about what is likely to happen next.
In statute, the first objective of any administration is to rescue the company so that it can continue trading as a going concern. In reality, saving the company, as opposed to saving the business, is normally impossible. The focus of the administrators is therefore on the second objective of administration – achieving a better result for the company’s creditors as a whole than would be likely if the company were put into liquidation.
In meeting that objective, administrators will normally concentrate on selling the business – either in whole or in part. They will normally do so in two ways, either by a pre-pack administration, where the buyer is identified in advance, and the sale takes place immediate after the company enters administration, or by allowing the business to trade while a buyer is found.
Some struggling businesses have managed to find a buyer without going through any formal insolvency process. Homebase are a recent example, having been sold to turnaround specialists Hilco for £1. However, administration has many advantages in this scenario. By entering administration, Poundworld will benefit from a statutory moratorium, which will prevent creditors taking enforcement action against them, and allows them to carry on trading to preserve the goodwill.
A necessary rebrand
Whether this tactic proves successful remains to be seen. As with Toys r Us, the initial news was that Poundworld were looking for a buyer, and administration followed when the talks fell through. Even with the benefit of a moratorium, the administrators will not have funding to carry on trading indefinitely. Given their aim is to achieve a better result for creditors than in the case of liquidation, they will be looking for a buyer soon, before (as happened with Toys r Us) the stores have to close their doors.
While there is still a prospect that Poundworld will survive as a brand, it seems unlikely it will survive in its current form. If that had been possible, it is likely a sale would have been agreed already. As with many other recent retail casualties, it seems one of Poundworld’s main issues was a significant number of underperforming and unprofitable stores, so even buyers interested in the bulk of the business will only want the better performing stores. A sale of part of the business seems the best case scenario.
The effect of this on employees is also unclear. When a company goes into liquidation, its business shuts down and its employees will lose their jobs. An administration is not so clear-cut. In this case, staff are being kept on while Poundworld continues to trade.
“When a company goes into liquidation, its business shuts down and its employees will lose their jobs. An administration is not so clear-cut.”
If even part of the Poundworld business is sold, it is likely employees assigned to the part of the business that is being sold will transfer to the new owner on their existing terms and conditions under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (‘TUPE’) legislation. In many respects, this will resemble the situation where a solvent sale takes place, and similar consultation and redundancy provisions will apply.
However, there is greater freedom to vary the terms of the existing employees, and the liability for unpaid wages of the employees that transfer over will not necessarily pass to the buyer, as would normally be the case. Up to certain limits, the employees would have a claim on the National Insurance Fund for their wages, and only claims in excess of those limits will pass to the buyer. While staff who do lose their jobs will also have a claim on the NIF up to the limits, any claim in excess of those limits will be against the company in administration, so will be far from guaranteed.
For good or ill, more will be known about Poundworld’s fate over the next few weeks. However, the real concern is that other retailers will find themselves in a similar position over the next few months. What was once extraordinary is now a well-worn path.