Creditors of the US-based clothing manufacturer and retailer, listed on the New York Stock Exchange, will wipe off US$200m in outstanding debt in exchange for equity in the reorganised company.
The chapter 11 bankruptcy filing in a Delaware court comes after six years of losses at the youth fashion chain and a string of sexual harrasment lawsuits against former chief executive Dov Charney, who was suspended in July 2014 and fired in December last year.
In the dismissal letter to Mr Charney, the American Apparel board noted: 'As is evident from a number of recent court rulings and arbitrator awards and decisions, you repeatedly engaged in conduct that violated the company's sexual harassment and anti-discrimination policy'. The directors claim the former CEO's actions made it harder for the firm to raise debt financing.
Litigation cases against Mr Charney include a US$260m sexual harrasment suit that was settled through arbitration and a successful case brought by actor and comedian Woody Allen, who was depicted on billboards dressed as a rabbi by Mr Charney.
The clothing company has long presented itself as an ethical fashion label, choosing to manufacter in the US rather then overseas, avoiding sweatshop labour practices.
The immediate pain of the bankrupcy, structured by Jones Day and GC Chelsea Grayson, will be felt by the firm's investors, with stores and employees remaining open. 'This is a debt-holder-owned company now,' Charles O’Shea, a Moody's analyst, told Bloomberg. He said American Apparel now had a 'fighting chance' of survival. Source: American Apparel press release