Kiely Rowan plc, the trading entity of the Orla Kiely fashion and design business, went into administration in October 2018 with over £7 million owing to third-parties. The assets – supposedly totalling over £8 million in the accounts that were signed by the directors and the auditor in September 2017 – turned out to be worth £67,000.
All that went in fees to the liquidator. As a result those owed money had to write off the entire amount.
There have been several major bankruptcies like this in the UK recently in which ordinary, unsecured Creditors have taken a major bath.
These are Creditors who have delivered supplies on Open Account: as soon as the delivery is accepted by the Debtor, the Creditor no longer has specific title to the goods, but has an undivided claim on the Debtor’s assets, that is on those assets that the Debtor owns, and which have not been hypothecated in favour of another creditor, and which are not subject to a preferential claim thanks to the operation of applicable insolvency law.
So what assets will the Creditor have a claim on? Not many, Kiely Rowan plc being yet another case where, firstly, the Debtor turns out not to own the assets that are needed to run its business and, secondly, any assets it does own have been hypothecated.
The Trade Creditors – who should be near the top of the Creditor Ladder in a liquidation – found themselves at the bottom in practice.
How can a trading counterparty protect themselves in advance? What were the warning signals in the 2017 Annual Report of the company – Kiely Rowan plc – that was the debtor to the main bulk of Trade Creditors?
It does not take a particularly gifted professional to spot ominous signs at the highest level:
- Cashflow was negative in the year, by £1.9 million on sales of £8.3 million;
- Cash-in-hand was just over £2,000;
- Creditors, at £6.3 million, were three times Shareholders Funds of £2.3 million;
- Stocks were £3.9 million – that is 47% of annual sales in a business that was supposed to be Fast Moving Consumer Goods.
But it would have taken a professional to spot that the company’s asset valuations – both the present ones and the absent ones – represented flashing red lights, albeit that the notes to the accounts were only lucid to those experienced in reading the tea leaves.
Tangible assets were only £457,780, very low for a company producing £8.3 million of goods per annum, inferring that production facilities were either rented and not owned, or rather owned by shareholders in different companies and rented to Kiely Rowan plc.
Then we have a lack of any Intangible Assets, like the brand itself or the product designs.
These conundrums were resolved by Note 20 on “Transactions with Directors”:
- The directors owned the brand name “Orla Kiely” and charged the company £81,989 during the year for its usage;
- A balance of £100,535 of rent remained owing to D.J.Rowan and O. Kiely trading as Prescott Place Investments for occupation of real estate.
These directors also paid themselves £408,064 in “Directors’ remuneration” during the year.
Finally we have the portion of Debtors – the largest single asset of the company at year-end – that was “Amounts owed by related party”. Debtors were £4.4 million at year-end, but £3.1 million of this was owed by this “related party”, which turns out, upon reading of Note 21 “Related Party Disclosures”, to be not just one related party but several:
|Related Party and cause of indebtedness||Amount|
|Management fees owed by Killyon Stem LLP “an entity in which the directors are members”||£185,332|
|Management fees owed by Killyon Stem Home LLP “an entity in which the directors are members”||£650,706|
|Management fees owed by Kiely Rowan NY Inc “a company incorporated in the USA in which the directors are shareholders”, “which includes the cost of setting up a New York showroom which is used by the company”||£2,148,792|
|Management fees owed by Olive & Orange Limited, “a company in which the directors are both directors and shareholders”||£85,000|
Thus 69% of Debtors and 35% of Total Assets (of £8,817,181) were in the form of these outstanding balances of “Management fees” owed by arm’s-length companies under the control of Kiely Rowan plc’s directors and owners.
Owed these amounts may have been, but whether they were realisable at these values is another matter. The “Strategic report” on page 2 of the Annual Report signed by D.J.Rowan was upbeat and it attested that the audit was unqualified. On page 3 under “Financial Instruments” it is stated that “The company carefully vets potential customers in order to avoid the possibility of significant losses due to bad debts and makes use of facilities with Trade River Finance”, an invoice factoring and discounting company in London, but these facilities do not appear to have been used in the case of the debts owed by related companies. Was it “reasonable and prudent”, as is attested on page 4, for these debts to be carried at full face value in the accounts? Should the directors have represented that the company was a going concern?
The auditor – Harris Trotter LLP – states that the accounts give a “full and fair view of the state of the company’s affairs as at 31st March 2017”, and yet the company went into administration in October 2018, only 13 months after Harris Trotter LLP signed the 2017 accounts. At the point of filing for administration the company owed £2.1 million to Trade Creditors as opposed to £2.4 million at 31st March 2017. In addition Irish Tax & Customs were owed £100,000, and the UK HM Revenue & Customs £567,702 (Source: Attachment C of Liquidators’ Report).
Assets were £67,000 (yes that is sixty seven thousand pounds). Employees had a preferred claim on those assets of £49,762, and the liquidators’ fees were £138,000.
This left nothing at all for the banks that had a floating charge in working capital assets (stocks, work-in-progress, debtors). The banks lost all of their £2,204,317.
There was nothing for the unsecured creditors either, who lost £5,070,112.
That was a deficit of £7.2 million, for the banks and creditors. One wonders what the financial impact has been on O.Kiely and D.J.Rowan, with just their ownership of the brands, the designs, and the real estate to fall back on.
The implications are clear:
- Ordinary Trade Creditors were supplying on Open Account into an entity – Kiely Rowan plc – which was not creditworthy on an unsecured basis;
- Creditors with the professional ability to assess creditworthiness and run risk themselves were secured – the banks – but even they lost all their money;
- Assets (brands, real estate) were held at arm’s-length to their user Kiely Rowan plc, and in companies and “trading as” styles owned in parallel by the directors and owners, O.Kiely and D.J.Rowan;
- Kiely Rowan plc was being charged by these parallel companies and “trading as” styles for usage of these assets;
- Whatever reports Trade Creditors may have taken from independent credit agencies did not dissuade them from supplying, no doubt because the analysts at those agencies did not understand Kiely Rowan plc’s business structure or the question marks around their largest asset – “Amounts owed by related party”.