HMRC and a number of small businesses are set to lose out on millions of pounds after fashion retailer Blue Inc, which owns, among others, the Officers Club brand, closed many of its stores using a controversial insolvency procedure.
According to documents filed by administrator Leonard Curtis, Blue Inc placed A Levy & Son, the subsidiary that held and ran the stores’ leases, into administration then paid £1.2m to buy back 160 of the more cost-effective stores in a pre-pack administration deal.
The move offers Blue Inc the opportunity to continue trading without the significant debts incurred over recent years, with the retailer running up losses up almost £9m in the first 10 months of 2015.
However, HMRC are likely to miss out on up to £3m in VAT, and the administrators’ report outlined that the company owe an estimated £31.6m to a number of suppliers, including business landlords, clothing manufacturers and cleaning companies.
According to the Guardian, sources close to Blue Inc claim that suppliers should receive between 50p and 80p in the pound, but HMRC’s debt remains uncertain as it represents VAT on Christmas sales that were due after the subsidiary went into administration.
Commenting on the deal, Leonard Curtis stated that it had marketed the business to other parties, but the offer from Blue Inc was the best available.
In January this year Blue Inc appointed administrators for A.Levy & Son, closing 76 stores and shedding 500 jobs in the process.
The pre-pack administration system has increased in popularity since the passing of the Enterprise Act 2002. It allows a restructure plan to be agreed before a company declares insolvency, allowing the more lucrative sections of a business in administration to be sold quickly, often to its own directors, in order for the business to continue trading and paying its staff.
In the case of Blue Inc, administrator Leonard Curtis announced that the company buying its leases out of administration helped secure 1,500 jobs that were under threat.
Critics of the pre-pack administration system, however, feel it allows directors of insolvent businesses the chance to sell a debt-free version of their company to themselves at a reduced price, leaving suppliers and other creditors unpaid.