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A Body Shop retail store at Shops at Don Mills, which is slated for closure, in Toronto on March 1, 2023. From November through January, The Body Shop Canada generated $12-million in earnings before interest and taxes, according to an affidavit, but payments from the U.K. head office to vendors have stopped.Ian Willms/The Globe and Mail

The Body Shop Canada Ltd. is accusing its U.K.-based parent company of “improper” management of its funds, leading to a liquidity crisis, the closing of nearly one-third of its stores and the loss of more than 200 jobs in Canada, according to court documents.

The Toronto-based retailer’s finances “deteriorated sharply” in December of 2023, shortly after German private equity firm Aurelius Investment acquired parent company The Body Shop International Ltd., according to an affidavit sworn by Jordan Searle, general manager for The Body Shop in Canada and the U.S.

Historically, the parent company handled the cash management for the Canadian business, by regularly “sweeping” cash from its accounts, according to the affidavit. The Body Shop International would then make payments such as rent and payroll for the Canadian operations.

But last month, without warning, those payments to vendors stopped, the affidavit stated. That has left the Canadian company with roughly $3.3-million in debt, with payments owed to vendors including landlords, utility providers, marketing agencies, insurers, shipping companies, and others. The company has continued paying staff and remitting HST payments.

The payments stopped, according to the affidavit, even before the parent company collapsed into “administration” on Feb. 13, a process under the U.K.’s insolvency laws that allows companies to restructure or sell a business. From Nov. 1, 2023 until that date, the parent company swept $42.9-million from the Canadian accounts, and paid $21.8-million in payables and payroll, leaving the operations with “depleted bank accounts, significant outstanding payables and severed shared services,” Mr. Searle wrote in the affidavit. Similar cash withdrawals also occurred in the U.S. operations.

“But for the improper withholding of the Company’s funds, TBS Canada would be able to pay all its obligations in full,” Mr. Searle said in the affidavit, which was sworn on Friday, the same day The Body Shop Canada filed a “notice of intention to make a proposal” under the Bankruptcy and Insolvency Act. The process prevents creditors from taking certain actions against a company in financial crisis, allowing it to come up with a plan to restructure or wind down its business.

In the affidavit, Mr. Searle added that before this occurred, the Canadian retailer was “on track to being profitable by the end of 2023.”

The cash that was “swept” from the Canadian accounts includes revenues from the all-important holiday season. From November through January, The Body Shop Canada generated $12-million in earnings before interest and taxes, according to the affidavit.

“Where is the cash that was pooled from the N. America org over the last 6‐8 weeks?” Mr. Searle asked in a Feb. 13 e-mail to Katrina Wright, global people director of The Body Shop International, which was included with the affidavit. “Can we ensure that these payments are made?”

The information about the cash-pooling arrangement with its parent company was also described to employees in an internal memo obtained by The Globe and Mail last week. The financial crisis led to the decision to immediately close all of the retailer’s stores in the U.S., to lay off nearly all of its employees there, and also to shut down its distribution centre.

That is a problem for the Canadian operations, because the U.S. warehouse received shipments of all of the inventory for North America from the parent company, which “holds title” on all of that inventory as long as it remains in the warehouse.

In a Feb. 16 e-mail to the parent company and its administrators, included with the affidavit, Mr. Searle detailed “major operational dysfunction” at the distribution centre, including a lack of boxes, its freight company refusing to collect packages, and other vendors not providing services.

With the warehouse closing, The Body Shop Canada is now unable to replenish products at its stores, has shut down its e-commerce operations, and can no longer ship products to wholesale partners, and Shoppers Drug Mart.

Currently, the U.S. distribution centre holds inventory with a retail value of roughly US$85-million, according to the affidavit.

The Body Shop Canada operates 105 stores, and had 784 employees in Canada as of Friday, March 1. That day, the company announced that it would be closing 33 stores across the country. Liquidation sales have already begun. The Body Shop will lay off more than 200 people who work at those stores by the end of this month. It also laid off half of its 40 head office employees in Toronto on Friday.

None of the Canadian employees are unionized. The company “intends to make further head count reductions,” according to a factum filed with the Ontario Superior Court of Justice in Toronto on March 3. It did not specify how many jobs would be cut.

A spokesperson for Aurelius declined to comment on Monday, referring all questions to the company’s administrator in the U.K., FRP Advisory.

In an e-mailed statement on Monday, FRP confirmed that The Body Shop International and its subsidiaries “had operated, on a long term basis, a cash pooling and group treasury function as is often customary for a global group of companies.”

This arrangement ceased when the U.K. parent company entered into administration, “with funds then remaining with each subsidiary entity,” the statement said. It did not address the affidavit’s claims that payments to vendors had been pulled back before the administration process began.

The Body Shop Canada is now seeking further breathing room under the Bankruptcy and Insolvency Act proceedings. It is asking the court to provide “certain protections” including ordering suppliers to continue providing it services, and allowing the Canadian operations to continue using its license for the business under its franchise agreement with the parent company. It is also seeking to block any further withdrawals from its bank accounts by the U.K. parent.

Pending court approval, The Body Shop Canada plans to pay rent on a week-by-week basis this month, and every two weeks after that. Retailers generally pay an entire month’s rent on the 1st of that month, but doing so would “exhaust its available liquidity,” according to a report from the trustee overseeing the Canadian proceedings.

As of March 2, The Body Shop Canada had a cash balance of roughly $2.4-million, according to the trustee’s report. According to a 13-week cash flow forecast provided in the report, the company expects its cash balance to shrink to $562,000 by March 24.

If the company cannot identify “viable going-concern alternatives,” it may be forced to seek other relief, the trustee’s report said, including the possible liquidation of the rest of its stores.

The Body Shop Canada is seeking court approval for a $700,000 administration charge to pay legal and other professional fees under the proposal process, and a $2.1-million charge to secure the indemnity of the company’s directors and officers against liabilities during the proceedings. And it is seeking an extension of the process to April 16, from its current March 28 expiration date.

The factum also describes a £2.7-million loan that Aurelius made to The Body Shop International to assist with funding the acquisition. The loan allowed for The Body Shop to “on-lend” funds back to Aurelius. The Body Shop parent company’s loan obligations are guaranteed by the Canadian subsidiary, allowing Aurelius to issue a “demand” to the Canadian company. Under the guarantee, Aurelius also has a security interest in all of Body Shop Canada’s “present and after-acquired property.” The Body Shop owns no real estate in Canada, where its stores and head office are leased. The company “has not received any such demand and is unaware of the current status of the loan facility,” according to Mr. Searle’s affidavit.

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