David Jones administration and receivership, Digi Mart USA News (Australia): After 188 years of history, Australian retailer David Jones has been forced to admit defeat this week, with both administrators and receivers appointed. Shoppers are wondering what is going on and what comes next for the iconic retailer.
To understand what is unfolding, it helps to consider what happens when individuals or households cannot pay their debts. They can try to cut costs or boost income, appeal to creditors for an altered repayment structure under a financial hardship arrangement, default and wait for a lender to recover money owed, or voluntarily declare bankruptcy to the Australian Financial Security Authority, which appoints a trustee to sell assets and distribute proceeds among creditors.
A company that cannot pay its debts when they fall due is described as insolvent. Company directors face strict penalties if they continue trading while insolvent or on the brink of insolvency.
Companies facing insolvency have their own options, including appealing to creditors and suppliers for a reprieve from payments, which David Jones had been doing with its unpaid rent, including to its biggest landlord, Scentre Group, which owns Westfield shopping centres.
If that fails, directors who suspect their company is insolvent or about to be can voluntarily appoint an administrator to take over day-to-day operations. This can trigger a freeze on payments due while administrators assess the business.
Creditors can also appoint an administrator or a receiver to protect their interests.
In David Jones’s case, both steps occurred this week. The company’s directors appointed McGrathNicol as administrators, and its largest creditor, Hilco Global, appointed FTI Consulting as receivers.
The administrators and receivers will now work to decide the company’s future, which is likely to include a radical downsizing of its retail footprint and the sale of excess stock, against which Hilco’s loan is secured.
To insiders, the collapse comes as no surprise. The rise of online shopping has decimated the share prices of physical retailers over the past decade, and the decline of big chain stores has been on the cards for some time.
This week’s interest rate rise, which pushed borrowing costs to levels not seen in 18 years, is expected to further crimp consumer spending in the lead-up to the busy Christmas period.
Remaining retailers may welcome the prospect of cheaper rents as David Jones exits malls around the country. A tussle is likely between the creditor-appointed receiver and the board-appointed administrator as they seek to restructure or ultimately wind down the retailer.
Hilco Global took the stock on shelves and hanging on racks in David Jones stores as security for its loan. Corporate law expert Tamara Wilkinson from Monash University’s Faculty of Law said Hilco and its receivers would be weighing their options.
“They have a chance to make money off it if they have a fire sale. But if that’s their security, maybe they do better taking that stock and giving it to someone else to sell at full price,” Dr Wilkinson said.
With a drastically reduced store footprint and stores stocked with products, there may be some bargains for shoppers at David Jones this Christmas. For the owners of the iconic retailer, however, there is little cheer.
