Retail chains turn to planned bankruptcies for restructuring
Retail chains in the Netherlands have increasingly found ways to continue operating after declaring bankruptcy, often in a slimmed-down form, De Telegraaf reports. These companies frequently leave suppliers, landlords, and employees with little to no compensation. While some question the fairness of this process, courts often view it as the "least bad outcome" when a company faces insolvency.
On Tuesday, fashion retailer Vanilia filed for bankruptcy but may continue its operations due to "interest from multiple serious buyers," according to the bankruptcy trustees. While negotiations are underway, the company's stores remain open. However, this does not necessarily mean rent payments are being made. The staff has not been let go, but if necessary, the Dutch Employee Insurance Agency (UWV) will cover their salaries.
If a restart succeeds, Vanilia will join the ranks of other retailers, such as Blokker, Dunkin' Donuts, and The Body Shop, that have continued in a reduced capacity following bankruptcy. Louis Deterink, a former bankruptcy trustee, noted, "These are cases where a bankruptcy resembles a reorganization. Especially when shareholders are involved in the restart, it raises the suspicion that the process was planned."
Reinout Vriesendorp, a professor of insolvency law, acknowledged that planned bankruptcies, where a buyer is ready to continue operations after the company goes bankrupt, are not uncommon. "It's going too far to call it 'wild west practices,' but trustees are actively looking for buyers for bankrupt businesses. If a buyer was involved before the bankruptcy was filed, it can raise concerns, especially if the sale was arranged before a trustee was appointed."
Dirk Mulder, a sector banker at ING specializing in retail, confirmed the trend of planned bankruptcies. "Labor costs in retail are rising dramatically, while revenue is not keeping pace. A reorganization involving cuts to headquarters and staff can be the ideal solution, but it's costly due to the need for a social plan. A bankruptcy followed by a restart can be an alternative."
Derk van Geel, a trustee currently overseeing the restart of Dunkin' Donuts, rejected the idea that shareholder involvement indicates a "planned bankruptcy." "Shareholders often have better knowledge, which increases the likelihood of them making a strong offer for a bankrupt company," he said.
In a typical reorganization, employees are entitled to their rights, but that rule does not apply in the case of bankruptcies, where the priority is to maximize returns for creditors. In practice, financiers, the Dutch Tax Authority, and the UWV are the main beneficiaries of quick restarts. "A restart often comes at the expense of smaller creditors, such as suppliers, landlords, and employees," Vriesendorp said. "But a trustee is just happy to find a serious party willing to buy the company. In a game where almost everyone loses, a restart is often the best possible outcome."
The FNV trade union strongly opposes this practice. "When a retail chain goes bankrupt and then restarts, the bill is passed on to society. Employees are left at a disadvantage," said Linda Vermeulen, an FNV board member for the retail sector. "We want legal conditions in place so that businesses follow the rules for reorganizations or transitions. That way, employees' rights are better protected."
Professor Vriesendorp added, "The European Court of Justice has ruled that planned bankruptcies with restarts need a legal basis. However, this issue remains unresolved in the Netherlands."
