UK: HIGH STREET STITCH-UP.

UK: HIGH STREET STITCH-UP. - If Stephen Hinchliffe was good enough for Sears then suppliers felt they were safe. Anyway they felt they had little option.

by Chris Blackhurst.
Last Updated: 31 Aug 2010

If Stephen Hinchliffe was good enough for Sears then suppliers felt they were safe. Anyway they felt they had little option.

Looking back, there always was something dodgy about Stephen Hinchliffe and his ambition to dominate the high street. All that grand vision of creating an integrated retail group, built from chains that had previously failed. The reluctance to talk in detail about performance figures and the even more marked refusal to discuss where his money was coming from.

The impossibly phenomenal growth of Facia that saw it go from a standing start to owning half the high street, or so it seemed. And then there was Hinchliffe's lack of retail experience.

All these things, when added together, set off alarm bells. When they were combined with the nature of the man himself, his big, showy lifestyle, his love of flashy jewellery, fast cars and luxury homes, his previous run-ins, the warning noises were becoming deafening.

Hinchliffe - or The Hinch, as he is known in his native Sheffield - you felt, we all felt, was just too much to be true. Yet, for a while, nobody succeeded in pinning him down. And such is the force of his personality that those who couldn't see how it could work - including Management Today - were prepared to suspend disbelief once they met the man. In the end, everyone went along with his dream, his expansive plans. He was a rough, tough, northern lad who was breathing life into some moribund businesses - or so we allowed ourselves to believe. Best of luck to him.

Now, of course, it has all come out: Facia was built on sand; and there is a strong smell of something much worse. The Serious Fraud Office and South Yorkshire police are investigating and a separate civil legal action is already under way. Hinchliffe, it has emerged since his downfall, is also fighting an attempt by the Department of Trade and Industry to disqualify him as a director after the collapse of an earlier, smaller business.

The man who in less than three years built an empire of 850 shops with some of the country's best known retail names, including Sock Shop, Salisbury, Oakland, Saxone, Freeman Hardy Willis, Torq, and Red or Dead, has fallen to earth.

Or so it would seem. Amazingly, having seen his group fall with debts of £70 million, he is now talking of making a comeback (and he does still have some assets in Germany which the receivers cannot touch), blaming the collapse on a hostile press, and claiming he has backers ready to support his next venture. It may all be pie-in-the-sky but it gives some hint as to Hinchliffe's breathtaking arrogance, the brazen gift of the gab that lay at the heart of his improbable success.

The receivers, KPMG, experienced this at first hand when they took over Facia's head office at Parkhead Hall, a stately home on the edge of Sheffield.

No sooner had they unpacked their bags than they were forced to quit.

Facia, it transpired, did not own the sumptuous premises and was behind with the rent. A representative of the landlord, a company called Allied Industrial, phoned up and asked them to leave. A check at Companies House revealed Allied Industrial was controlled by one Stephen Leonard Hinchliffe.

This was the first intimation for the receivers of the reality behind Facia - that beyond the public facade lay a myriad of deals and ties with Hinchliffe, his family and their private companies. He had, as one of those involved in the case put it, with a degree of understatement, 'an inability to distinguish between his money and the company's money'. Whenever it bought anything, for example, Facia paid 'a finder's fee' to a company called Chase Montagu. Not linked to Chase Manhattan, the US bank, or Samuel Montagu, the UK bank, as its name might suggest, this was Hinchliffe's master company, owned entirely by himself and his wife. The payments could reach absurd proportions: for 'finding' his corporate jet, Chase Montagu received £25,000.

In all, Chase Montagu was paid £1 million in such fees from Facia.There was more cash in Chase Montagu than £1 million, however. Investigators are now trying to establish where the rest, the money that paid for a classic car collection, paintings, a £700,000 Sikorsky helicopter and a London house off Eaton Square, came from. Chase Montagu was also the name on Hinchliffe's 15% shareholding in Sheffield United Football Club.

Nor was Parkhead the only Facia building to pay rent to Hinchliffe. A flat in London and other properties paid rent to Hinchliffe-controlled companies. When the group went down, they were owed £4.5 million. Meanwhile, another two private Hinchliffe companies, Colibri Lighters and French & Scott, received £2.5 million in interest-free loans from Facia.

Anyone visiting Hinchliffe's London office at the time could not have helped but notice his love of fast cars. Devoid of management textbooks, his shelves, as befitting a former used car salesman, held tomes on Aston Martin and Ferrari. Receivers have also come across his passion for motors.

They are trying to trace the ownership of 100 cars that have gone through Facia's accounts, including a Jade Mercedes, registration SH1, used by Hinchliffe, as well as another Mercedes, number M1 GOB, and an Aston Martin Vantage Vilante, registration VV1, both used by Gary O'Brien, his sidekick.

Hinchliffe's luxury holidays and helicopter flights were also charged to Facia, while both his wife and O'Brien's were paid salaries by Facia.

Picked up at knockdown prices from companies grateful to have the burden taken off their hands, Facia's operating chains appear to have had little purpose other than to send cash to head office. Soon after he bought Salisbury, for instance, Hinchliffe ordered that every Monday morning it should send £100,000 to Sheffield. This was money that Salisbury could ill afford.

It had a deficit of £20 million when Facia went under.

The civil action against Hinchliffe is from Texas American Group, a US-quoted retailer, which claims to have wasted $750,000 (£456,000) in exploring a takeover of Facia. The talks between Hinchliffe and Texas American took place shortly before the Facia collapse. Texas American maintains it was shown warranted profit figures by Hinchliffe which subsequently turned out to be bogus. Unsurprisingly Hinchliffe disputes the claim.

Considering this mess they inherited, the receivers moved rapidly. All bar one of the chains and most of the shops have been sold: Ciro Citterio bought 27 Oakland stores; Jumper purchased 75 Sock Shops; Wayne Hemingway, the former owner of Red or Dead, bought it back; Chancerealm, which owns Ryman, picked up the Contessa lingerie chain; and Carlton International and Mr Minit split the Salisbury chain. Only Torq, the jewellers, remained unsold. The proceeds were enough to repay in full Midland and Bank of Scotland, Facia's main secured creditors, and the obscure United Mizrahi, an Israeli bank, which was Hinchliffe's main source of finance.

In his heyday, whenever Hinchliffe was asked about where his funding came from, he would prevaricate. After his empire's demise it became clear why. United Mizrahi, a conservative institution, had loaned him £10 million.

Or rather, John Doherty, the bank's London deputy general manager until he was sacked last year, had loaned the cash. Doherty, who is fighting his dismissal at industrial tribunal, is understood to have exceeded his credit limit. Doherty and Hinchliffe were close: Doherty's consultancy company received a payment of £59,000 from Facia.

Unsecured creditors - and there are 750 of them - will not be so lucky as United Mizrahi, Midland and Bank of Scotland. For although the group's total indebtedness after repaying the trio was £50 million, only £5.6 million remained to distribute. Included among such creditors is the mighty Sears which agreed to sell Hinchliffe its footwear chains yet, after the sale, continued to pay staff, rent, supply stock and provide warehousing and distribution in return for a fee. In other words, Sears was left holding all the liabilities; Hinchliffe got the cashflow.

An indication of just how bad the deal was for Sears comes from the group's accounts for last year, well before Facia's crash. They show a write-down on a so-called sale of £54.2 million. When the fee was not paid, Sears put the chains, Saxone and Freeman Hardy Willis into administration. This was the action which prompted the meltdown of the whole Facia group and led to a further write-down for Sears of £25 million.

Sears, like everybody else, was taken in by Hinchliffe's bravado, his willingness to accept other people's rubbish, his claim he could turn it round. While the biggest of those who fell for his talk can perhaps afford to put him down to experience, the hundreds of small suppliers who relied on his shops are not so fortunate. Unlike the bigger players, they never met Hinchliffe, never succumbed to his charm but continued to trade with the retail chains as before.

David Bredo, for example, continued to supply shirts to Oakland, just as he had done for 18 years. In that time, as with many of Hinchliffe's buys, Oakland had enjoyed a chequered history and had changed its name several times. In a good year, Bredo's firm, Pastiche, would sell 70,000 shirts to Oakland. The previous owners always paid their bills within 10 days. When Hinchliffe took over, 10 days became 60 days. Bredo did not like it but needed the business. Besides, he consoled himself, Hinchliffe did that to all his suppliers.

Trade whispers about Facia's underlying weakness did not concern him either. 'There are always all sorts of rumours about all sorts of people.

Next is the most successful menswear chain in the high street, yet it is not that long ago that Next shares were 5p and suppliers would not supply them unless they had money upfront,' says Bredo.

Before last Christmas, Bredo did begin to worry, however: his firm was owed £195,000 by Facia. Yet over January and February, that debt was paid.

Bredo's response was to allow Facia more credit, to let it keep running up large debts. 'You can ask why did we let them have that much credit, especially with stories circulating about them being in trouble, but we had done it before and had been paid,' he explains.

On 20 June, three weeks after Facia's crash, Pastiche also went bust.

Facia owed the firm £172,000. Bredo, aged 53, and having just recovered from major heart surgery, saw his life's work disappear. Pastiche bought shirts and sold them on - it did not make them - so job losses were not huge. Nevertheless, four people lost their jobs. Bredo, who paid himself £33,000 a year, in contrast to Hinchliffe's opulence, was one of them.

Bredo never came across Hinchliffe. The only thing he noticed, apart from the extended credit terms, was Oakland managers' talk of moving upmarket, of selling Ralph Lauren ranges, a move which Bredo counselled 'they would have to throw a lot of money at and be patient'.

There was no money and there certainly was not any patience. A supplier to Torq recalls how 30 days' credit became 60 days' the moment Hinchliffe bought the chain. 'From the word go, he appeared to be sweating the assets,' recalls the supplier. At one point, Facia owed the Torq supplier £100,000. When he inquired after his money, he was told that there was 'a cash-flow difficulty, a cheque-signing problem'. One of Hinchliffe's rules was that any cheque over £10,000 had to be signed by him personally. Deliberate or not, it had the effect of holding up payments. The Torq supplier got his debt down to £50,000, with Facia paying it off at the rate of £10,000 a week. Even so, when the end came, it was still rather a lot for a small company to bear. So why did he allow it to happen? 'If I had known the DTI was trying to disqualify him (Hinchliffe), I wouldn't have done,' he says.

The day before Hinchliffe went down, the Torq supplier received a large - £175,000 - order. That, he says, makes him feel that Hinchliffe did not see the end coming, that the receivership was not planned. 'He had almost completed a group distribution centre and had a new fleet of lorries, so it was strange.'

Yet Tony Thompson, the receiver, describes the distribution centre that Hinchliffe boasted of, as 'not worth anything. It was a lease on a building in Corby, it had never been occupied, there were no items in it.' With Hinchliffe, says Thompson, his fall was 'always going to be a question of when rather than whether'. The writing was on the wall when he asked landlords to move to receiving their rent one month in advance rather than the normal three months. Some landlords accepted the change, others did not. Those who did not, stuck to their guns which led to a building of claims against Facia.

This build-up, which became common knowledge in the property market, says Thompson, should have been one of the factors to have put suppliers on notice, certainly in the immediate run-up to Hinchliffe's collapse.

Comment in the press about Facia's slowness in filing its accounts should have been another warning to them. And, Thompson adds, checks with credit analysts would have left no doubt about Facia's parlous state. Certainly a Dun & Bradstreet report for Red or Dead, obtained by Management Today gave the chain 'a rating of 04, which indicates a financial strength which is undisclosed and an overall condition which is poor'. Dun & Bradstreet awarded Red or Dead 'a payment score of 40, which corresponds to an average of 60 days beyond terms'.

Suppliers worth their salt, says Thompson, should have read such reports.

'They should have picked up on credit analysts. Dun & Bradstreet took a pessimistic view it was going to end in failure. The reports should have alerted them - therefore they deserved what they got.'

Hinchliffe, says Thompson, simply filled a need. 'He was a good deal-maker. He didn't pay more than anyone else, he was the right man at the right time in the right place who was prepared to take chains off companies in a way they wanted him to. That was the secret of Hinchliffe's success. Just look at Sears.'

For many suppliers, that was precisely the problem. They had precious little else to go on. Hinchliffe gave nothing away about himself or his company. His accounts were late, he said, because he had changed the year end. Press scrutiny was difficult because he threatened writs and kept a tight grip on his staff. Dun & Bradstreet was critical but then other suppliers were still dealing with him. Besides they had little choice: he owned much of the high street and was adding to his empire all the time. And then there was always Sears. Desperate to offload their footwear chains, The Hinch, it seems, was good enough for them. 'Sears screwed everything up for everyone,' says the Torq supplier, 'because they added serious credibility to him. I thought, if Sears trust him, he must be okay. I was just a typical supplier who sent his stuff, got the money, then the money stopped.' He was not alone.

Chris Blackhurst is assistant editor, the Independent on Sunday.

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