Retail Industry and Insolvency: protecting your company from financial difficulty

Wilko Limited, known as ‘Wilko’, the well-known retailer specialising in home goods and gardening, is reportedly experiencing significant financial difficulties and is now relying on financial support to keep the business afloat.

Wilko has traded since 1930 as an independent family-run store and has expanded to over 400 stores. Despite this, Wilko has revealed it is experiencing financial difficulties when publishing its annual accounts to Companies House in November 2022.

The accounts highlighted a loss of £38.7 million on its profits before tax. The director’s report highlighted that if no additional financing was secured, and the ‘severe but plausible’ scenario of continual reduction of sale volumes, the available sources of finance held by the Company would be extinguished by December 2023.

In an attempt to survive, the Company has since received a £40 million loan from an investment company, Hilco Capital Limited. Wilko also sold and leased back its distribution centre in November 2022 in order to secure more finance.

What does this mean for the wider retail industry?

The financial difficulties experienced by Wilko demonstrate the current pressure on the retail industry as a whole. 17,145 retail shops closed in 2022, which is a 50% increase from 2021. There are a number of reasons for consumers spending less, which include inflation, the cost of living and higher interest rates. If larger companies are struggling, it is inevitable that smaller retailers will also be under severe pressure sooner rather than later.

A number of other larger retailers are also reported to be struggling and relying upon financial support to continue trading. Examples include Matalan, which secured a £60 million funding solution, and Superdry, which secured a £30 million three-year loan. Fenwick’s has also recently sold its Bond Street Store in December for £430 million.

Advice to directors

With the current market uncertainty, smaller retailers are likely to find themselves in a difficult financial position. There were at least 20,154 corporate insolvencies in 2022. It is therefore important that directors are aware of the financial position of their company and have a strategy in place to deal with the uncertainties of the retail market.

If you are a director of a retailer facing financial difficulties, you should consider taking the following steps, to protect your own personal liability and creditors:

• When becoming aware of potential financial difficulties, seek independent advice from a lawyer or licensed insolvency practitioner.
• When deciding whether continuing to trade is a realistic option, take advice from a licensed insolvency practitioner on your options and decide whether a recovery strategy or insolvency strategy is more appropriate.
• Ensure your actions comply with your director duties, as you may be scrutinised at a later date by an office-holder if the company enters into a formal insolvency process.
• Only continue trading if it is the best course of action for creditors as a whole and take steps to minimise the loss to creditors.
• Keep a good line of communication with all creditors.
• Have regular board meetings to discuss the company’s financial position, keep details and accurate minutes which set out each step taken to improve the creditor’s position or ensure their interests are not prejudiced. Keeping minutes will assist the board should they be required to explain their decision-making at a later date.
• Carefully monitor any demands for payment and legal proceedings served on the company. Make sure you immediately respond to them even if you are not in a position to pay, and take legal advice at the earliest opportunity.
• Ensure that regular updated realistic budgets, forecasts and management and trading accounts are reviewed (ideally weekly).
• Ensure accounts are being properly kept up to date.
• Conduct a full review of the costs and expenditure of the company. Consider what non-essential expenditure can be reduced or avoided at an earlier stage.
• Check what insurance cover the company has, check these policy documents carefully and seek guidance from your broker if necessary.
• If there is no reasonable prospect of avoiding insolvent liquidation, you should take immediate advice on instituting a formal insolvency procedure without delay.

If you are concerned about the impact of this or if you are concerned about the financial health of your company, please contact Aman Sehgal and Sam Hall-Burnett.