From survival to revival

The River Island story is a familiar tale amongst today’s retail landscape, a growth in online sales increasing the cost base due to warehousing and distribution costs without any corresponding reduction in the costs of stores. Whilst strategic locations perform well, those in secondary locations with reducing footfall are underperforming with passing rents often significantly above market levels. When this is combined with the increase in National Insurance contributions and rise in living wage the resulting financial pressure can jeopardise the future of the business.

The solution for River Island has been a restructuring plan under Part 26A of the Companies Act 2006 (CA 2006), a tool introduced as part of the government measures in response to the COVID pandemic which crucially involves the company retaining control whilst accessing the ability to comprise all creditors, including secured and preferential with the added element of the “cross class cram down” mechanic (being the means by which the Court is able to sanction a plan despite opposition from certain creditor classes subject to the relevant conditions under 901G of the CA 2006 being met) thus avoiding a formal insolvency procedure.

Importantly, restructuring plans should be combined with an operational turnaround plan to ensure long term viability. Where a restructuring plan is seeking to comprise lease liabilities a strategic review of store profitability is required to identify those that could be made viable if short term reductions are achieved via the plan against those that are viable on their present terms and those that are straightforwardly loss making. In the case of River Island, prior negotiations and engagement with landlords and the BPF was evidenced by a number of consensual deals being reached prior to the plan being sanctioned.

Where the alternative is a sale of trading assets in administration and a restructuring plan results in the tenant remaining in occupation even under reduced rent, this is an attractive proposition to many landlords, particularly as a plan will always preserve the option for the landlord to recover possession if the market provides a better opportunity for the landlord than the amended lease terms.

The River Island plan itself is funded by new money and the plan company was able to evidence the funding is being provided on more favourable terms than would be available on the market which combined with the contribution of the compromised creditors under the plan provides the adjustments required for the plan company’s sustainable viability. In return for the compromises under the plan, the unsecured creditors will receive a payment equal to 200% of their estimated return in an administration together with the right to participate in a profit share fund, the terms of which ensure that the comprised creditors share in the future profits before there is any reduction in the net indebtedness to the lender and before any return to shareholders.

At the creditor meetings, 6 classes (Secured Creditor, Class B1 and B4 of the Landlords, the Business Rate Creditors and the General Creditors) all voted in favour, however the “dissenting classes” of the Class A, B2, B3 and C Landlords voted against, therefore the sanction hearing required consideration of the threshold conditions required to invoke the cross class cram down mechanic and the court’s discretion to approve the plan. The recent trilogy of Court of Appeal judgments in Adler, Thames Water Utilities and Petrofac have provided helpful guidance on the exercise of court discretion and further clarification is expected via a leapfrog application to the Supreme Court courtesy of Waldorf Production UK Plc. One of the key principles being that there must be a fair sharing of the burden of the restructuring plan amongst those whose rights are compromised and a fair allocation of its benefits, the burden being on the plan company to evidence such sharing of burden and benefit even if no opposing creditors appear at the sanction hearing. Following such consideration by reference to a Plan Benefits Report, the court in River Island was entirely satisfied the restructuring plan ought to be approved as a genuine attempt to formulate a fair and reasonable solution to a critical problem.

Previous examples of retailers successfully implementing a restructuring plan to avoid formal insolvency include Clinton Cards which announced a pre-tax profit of £8million for the financial year ending 29 June 2024 following sanction of its plan in August 2023 and Superdry which combined a plan with an aggressive restructuring strategy which included withdrawal from the London Stock Exchange aimed at ensuring the company’s survival.

More information on the case cited can be found here: Re River Island Holdings Limited EWHC 2276 (Ch)

Our national retail and leisure team has a wealth of sector experience. Our national team acts for multiple high-profile national retailers, supermarkets, leisure providers and provides sustainable, pragmatic and commercial solutions to respond to our clients’ business needs in a timely and cost-effective manner.