Chapter 11 Bankruptcy Explained
The chapter 11 process is comparable to filing for administration in the UK. The similarities in the process are as follows:
- The procedure allows for an automatic stay or moratorium on legal proceedings against the company.
- The process starts by filing the necessary documents in court. A hearing is usually not necessary.
- The administrator or United States Trustee will prepare a set of proposals or plan which will be set out for approval by creditors.
The main difference is that in administration the administrator takes full control of the business where in Chapter 11 bankruptcy the process is overseen by the trustee with the managements retaining control.
Chapter 11 is also more frequently used for breathing space to negotiate with creditors while the business undertakes a restructuring process. Whilst it is possible for a company to come out of administration as the same company, it is more likely that the business will be sold to a separate entity either as a whole or on a break up basis.
Why has Toys R Us filed for bankruptcy?
The company made its filing for bankruptcy late on 18 September 2017. The reason cited is the high level of debt which has accrued due to competition from online retailers. The company, which was set up in 1948 as a retailer of baby furniture, reached its peak in 2012 reaching a turnover high of $13.9 billion. Whilst the stores are a haven for children to run round, their aesthetic and layout has not kept up with the demands of the modern market for such large stores such as in-store coffee shops, events for children and toy demonstrations.
The level of competition is also much higher, with this, unfortunately, being another victim of the Amazon delivery revolution.
The current intention is to restructure the business under the court process. Whilst this potentially puts a number of the 64,000 jobs in North America at risk $3 billion in financial support has already been raised toward turning the business around through existing and new investors.
What does the bankruptcy mean for UK branches?
Official statements from the company are that it will be business as usual for the branches outside of North America. These branches are owned by separate companies registered in the UK. The last set of the group accounts for Toys R Us in the UK show retained profits in excess of £184 million.
As a result, it is not currently anticipated there will be any disturbance to the UK branches of the chain and all loyalty, savings schemes are otherwise shall remain valid at UK stores for the foreseeable future.
Notwithstanding that, Toys R Us UK are facing the same pressures that befell its American cousin, namely reduced footfall at retail parks, and increased competition from the online delivery market. The UK company may be safe for now, but it knows it needs to modernise to survive.