Shares in online specialist fit clothing retailer N Brown (BWNG:AIM) sank 8.5% to 57.9p after the company revealed an unexpected additional £36 million litigation claim.
The claim relates to a legacy issue between the company’s women’s fashion brand JD Williams and insurer Allianz over the sale of historical insurance products.
N Brown had already disclosed in a note to the preliminary accounts to 27 February 2021 a contingent liability of £29 million in relation to the Allianz claim, which the company anticipated represented the maximum downside.
Allianz has now increased the scope of its original claim and believes the extension to be worth £36 million, taking the total contingent liability to £65 million.
ACCOUNTING FOR LIABILITIES
In the world of accounting, a contingent liability is recorded to reflect the possibility of a future outflow of funds. This is slightly different from a provision which relates to a probable outflow of funds.
The company said the claim and counterclaim are ‘extremely complex, and proceedings remain at an early stage.’ As such it is still gathering information and consulting ‘expert’ witnesses.
N Brown is saying that it doesn’t have enough information to put a reliable estimate of ‘any potential financial outflow’ and has therefore decided to record a contingent liability, rather than a provision.
EXPERT VIEW
Retail analyst at Shore Capital, Clive Black, said it would be inappropriate to comment on the likely success or otherwise of the claim and counterclaim at this stage. The case is scheduled for trial in March 2022.
Black continued, ‘There will undoubtedly be a feeling of frustration on behalf of N Brown shareholders in reading this news as the Group has been through a sustained period where legacy matters have involved cash outlays from a dispute with HMRC through to a series of exceptional items and provisions that drew heavily on company resources.’
