This information comes from the administrators’ proposals, which set out the likely steps that will be taken during the company’s administration and what outcome is anticipated for Agent Provocateur’s unsecured creditors.
These proposals give the first real insight into the pre-pack deal, as well as information on how much creditors are owed and what, if anything, is likely to be paid out.
Barclays Bank, the company’s secured lender, is owed £26.9m, excluding interest and charges. While the administrators expect to pay most of what is owed to Barclays, it is currently expected the bank will not recover everything due.
In an administration, creditors rank in classes, with secured creditors at the top of the order of priority of payment and unsecured creditors at the bottom. Each class must be paid in full before the next class in the hierarchical order gets an equal share of anything available in that class.
Due to changes brought in by the Enterprise Act 2002, a maximum sum of £600,000 is carved out of what is available to certain secured creditors to be made available to unsecured creditors. Unsecured creditors of Agent Provocateur are likely to be owed £20.7m. Of this, £15.3m is described as “inter-company creditors”, or other companies in the same group as Agent Provocateur, with £5.4m being third party creditors.
These third party creditors will include creditors such as suppliers and landlords. It is these creditors which will equally share the sum of £600,000 according to the amount each is owed, meaning a maximum payment of 2.9p for every pound outstanding.
Some of these creditors may find they are asked to enter into new contracts with the business, which continues operation in a new limited company following the pre-pack purchase from the administrators. These creditors, which will have no prospect of recovery of the balance of the debt owed, will need to think carefully about whether to enter into new contracts and/or extend credit terms to the new company.
The 2014 Graham Report into pre-packs, which examined their impact and continued place in the insolvency landscape in the current economy, found that in its review of a sample of pre-packs in 2010, five per cent of pre-pack purchasers failed within 12 months of completion of the purchase, with 25.5 per cent failing within 36 months of completion.
Accordingly, creditors still owed money from the old company will want to consider their options if they are asked to trade with the new entity. Some options to consider are whether they will require payment up front or on delivery, whether to include retention of title clauses in their standard terms, or whether to ask for guarantees from directors.
Such steps only provide a certain level of protection, and the new company may not be willing to provide them. Creditors will then have to decide whether to do business on terms that leave them exposed as unsecured creditors. In the current economy it can be difficult to turn away business, and therefore creditors may indeed work with the new company while at the same time still keeping a close eye on the level of unpaid invoices.
Katie Farmer is an associate at Ashfords