It has been alleged that the individuals misled suppliers about the retailer’s dire financial position while it attempted to stay afloat towards the end of 2017 and early 2018.
According to multiple reports in the US media, including Bloomberg, several former Toys ‘R’ Us executives are set to stand trial over historic allegations that they misled suppliers over the retailer’s dire financial position while the company tried to stay afloat during bankruptcy proceedings towards the end of 2017. The allegations involve significant sums – potentially as much as $600m.
On Monday, US Bankruptcy Judge Keith Phillips confirmed that a trial should go forward, ignoring a request from the former executives to throw out the creditors’ claims. The former directors and officers have all denied any wrongdoing.
According to the judge, questions are likely to include whether the retailer was already insolvent when it paid nearly $18m to its private-equity backers — Bain Capital, KKR & Co. and Vornado Realty Trust — between 2014 and 2017.
The creditors also allege that multi-million dollar bonuses paid to 117 Toys ‘R’ Us executives and managers just prior to the company’s 2017 bankruptcy amount to a breach of the former executives’ fiduciary duty. The largest bonus – $2.8m – went to former chief executive officer David Brandon. According to court papers, an official committee of creditors subsequently negotiated a reduction in the bonus amounts.
The collapse of Toys ‘R’ Us involved a bankruptcy filing in 2017 which triggered efforts to restructure the company in bankruptcy court which lasted for several months, before the retailer finally entered liquidation early the following year. The company had been struggling for a decade with a crushing debt load, following its 2005 leveraged buyout by Bain, KKR and Vornado.
The directors revealed in pretrial depositions that they knew the company couldn’t comply with the terms of debt taken on to finance the bankruptcy, according to filings by the unpaid creditor group. Financial forecasts which the directors admit reviewing in August 2017, prior to bankruptcy proceedings being initiated, allegedly showed that the company would breach a liquidity covenant by January 2018.
The company’s breach of that covenant marked the beginning of a change in strategy, abandoning the restructuring effort in favour of winding the operation down.
The creditors also argued that the executives’ decision to take on more debt to fund the bankruptcy was negligent. However, Judge Phillips has already ruled against that and other related claims, deferring to the court’s blessing of ‘debtor-in-possession’ financing during the bankruptcy.
