- Forever 21 filed for Chapter 11, a procedure that allows a company to be reorganised without immediate liquidation.
- The company will close stores in the United States and almost all in Asia and Europe, and keep Mexico and Latin America.
- Anyone with commercial dealings with a company in insolvency should act quickly to protect their claims.
On Sunday 29 September 2019, the fast-fashion chain Forever 21 filed for protection under Chapter 11 of the United States bankruptcy law. The company, based in Los Angeles, announced that it would close up to 178 US stores of the more than 500 it had in the country, and that it would exit most of its stores in Asia and Europe, while keeping its operations in Mexico and Latin America. Which stores close will depend on negotiations with landlords.
The case came a week after the collapse of the travel group Thomas Cook, and on the same Monday, 30 September, two European airlines, Slovenia’s Adria Airways and France’s XL Airways, cancelled their flights over financial difficulties. It is a sign of the demanding moment several sectors are going through, from retail to air transport, with tight margins and a consumer whose habits are changing. On top of this is competition from e-commerce and ultra-fast fashion brands, which have put pressure on the model of the large store in shopping centres.
What Chapter 11 is
Chapter 11 is a restructuring procedure that allows a company to keep operating while it negotiates with its creditors a plan to reduce debts, renegotiate contracts or sell assets. From the moment it is filed, an automatic stay prevents creditors from collecting or enforcing security on their own, and management usually stays in charge of the business, under court supervision. The reorganisation plan must be approved by creditors and confirmed by the judge, and may take months to negotiate.
In Spain, the equivalent is the insolvency proceeding, regulated by the Insolvency Act, which can end in an arrangement or in liquidation, and is complemented by preventive instruments such as refinancing agreements. A European directive approved in June 2019 pushes all Member States to offer preventive restructuring frameworks, so that viable companies can be rescued before reaching insolvency.
What happens to suppliers and landlords
For suppliers the effect is immediate: claims prior to the filing are frozen and treated according to an order of priority in the procedure. Those who continue to supply usually demand cash or advance payment, and it is worth knowing that deliveries made shortly before the filing may receive special treatment. In a procedure of this kind, claims are classified into categories and each category votes on the plan, so the bargaining position depends on the type of creditor one is.
Owners of retail premises are also interested parties, because the company can decide which leases to keep and which to reject. For a landlord, the closure of a reference tenant affects the profitability of the asset and the dynamics of a shopping centre.
What to review
Anyone selling to foreign companies should review their payment terms and guarantees, and consider trade credit insurance. If a customer announces such a procedure, the prudent course is to check the deadlines for filing claims and to consult a lawyer in the country where it is handled, because deadlines are usually short.
On the asset side, investors should remember that in a restructuring the order of payment matters: secured creditors first, then ordinary creditors and, at the end, shareholders. If you have doubts about your exposure, consult your adviser.
A bankruptcy is not always the end of a company, but it does change the rules for those who have lent to it or sold to it.
This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.
