Insolvency risks as retail giant collapses

The collapse of Arcadia into administration is a sign of the times. The multinational retail giant - owner of brands including Topshop, Miss Selfridge and Dorothy Perkins - is the latest victim of the COVID-crisis. And it is unlikely to be the last. 

13,000 jobs have been put at risk and the firm has appointed Deloitte as its administrator, a move that will protect Arcadia from creditors as it seeks a buyer for all or parts of the business.

Ian Grabiner, the company’s CEO, identified COVID-19 and a prolonged period of lockdowns as the main cause of the collapse, saying the firm had hoped to “ride out the pandemic” but that “ultimately, in the face of the most difficult trading conditions we have ever experienced, the obstacles we encountered were far too severe”.

The Arcadia insolvency has already claimed other casualties, including High Street department store giant Debenhams, which is in administration. The firm’s 124 stores are now due to close after rescue talks collapsed, putting 12,000 jobs at risk.

Lockdown effect

The retail, hospitality and travel sectors have been hit particularly hard by the global pandemic and ensuing downturn.

Insolvency risks have soared since the crisis began and risk managers are now faced with trying to navigate an increasingly uncertain and volatile economic landscape, with UK-based firms expecting further complications due to Brexit.

Speaking to StrategicRISK earlier in the year, RIMS Australasia president Eamonn Cunningham said companies needed to conduct “regular scenario testing of cash outcomes based on a series of alternative assumptions”. Those in vulnerable sectors should “branch out” and “plan well in advance”.

Supply chain repercussions

There is also the potential impact of insolvency on the supply chain to consider. As the collapse of large firms, such as multinational construction firm Carillion, have shown in the past, large corporate bankruptcies have ripple effects that can be felt long after their demise. Carillion’s insolvency had devastating repercussions for UK SME contractors, with insolvencies increasing by 20% in the aftermath of the firm’s bankruptcy in January 2018.

Going forward, a change to insolvency law in the UK could also trigger further failures, as it is likely to curb the availability of floating charge finance, according to specialist Manchester commercial insurance broker RBIG Corporate Risk Services.

“The timing of this legislative change couldn’t be worse given widespread predictions that the insolvency rate will rise as the pandemic continues to bite, with England set for lockdown and restrictions already in place across Northern Ireland, Scotland and Wales,” commented RBIG’s commercial director, Stephen Hodgson.

“A single insolvency can cause a significant chain reaction down a supply chain, impacting not only otherwise financially healthy companies who dealt with the defunct business, but their suppliers,” he added.