<PAGE>   1
                                                                    Exhibit 10.7


                             SUBORDINATION AGREEMENT


         THIS SUBORDINATION AGREEMENT ("Subordination Agreement"), dated as of
March 24, 2000, is by and between CONGRESS FINANCIAL CORPORATION, a Delaware
corporation ("Senior Creditor", as hereinafter further defined), and RICHEMONT
FINANCE S.A., a societe anonyme organized under the laws of the Grand Duchy of
Luxembourg ("Junior Creditor", as hereinafter further defined). Senior Creditor
and Junior Creditor are sometimes individually referred to herein as "Creditor"
and collectively as "Creditors."


                              W I T N E S S E T H:


         WHEREAS, Junior Creditor has or is about to enter into financing
arrangements pursuant to which Junior Creditor may make loans and advances to
certain direct and indirect subsidiaries of Hanover Direct, Inc. ("Debtor", as
hereinafter defined) of up to $10,000,000, which loans are and shall be
unsecured; and

         WHEREAS, Senior Creditor has entered into financing arrangements with
Debtor and certain of its subsidiaries, pursuant to which Senior Creditor has,
upon certain terms and conditions, made loans and provided other financial
accommodations to certain subsidiaries of Debtor, guaranteed by Debtor and
certain subsidiaries of Debtor, secured by substantially all of the assets and
properties of Hanover and of such borrower subsidiaries and guarantor
subsidiaries of Debtor; and

         WHEREAS, in order to induce Senior Creditor to continue the financing
arrangements with Debtor and certain subsidiaries of Debtor, Junior Creditor has
agreed to the subordination in favor of Senior Creditor as provided herein of
its right to payment of the existing and future obligations of Debtor to Junior
Creditor arising in connection with the revolving credit facility in the amount
of up to $10,000,000 to the prior indefeasible payment of the existing and
future obligations of Debtor to Senior Creditor under the Senior Creditor
Agreements, and related matters as set forth below;

         NOW THEREFORE, in consideration of the mutual benefits accruing to
Creditors hereunder and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto do hereby agree
as follows:

          1.   DEFINITIONS

         As used above and in this Subordination Agreement, the following terms
shall have the meanings ascribed to them below:
<PAGE>   2
         1.1 "Agreements" shall mean, individually and collectively, the Senior
Creditor Agreements and the Junior Creditor Agreements.

         1.2 "Banking Day" shall mean any day, other than Saturday or Sunday,
when Senior Creditor and commercial banks are open in New York, New York and
Europe.

         1.3 "Creditors" shall mean, individually and collectively, Senior
Creditor and Junior Creditor and their respective successors and assigns.

         1.4 "Debtor" shall mean, individually and collectively, Hanover Direct,
Inc., a Delaware corporation, Hanover Direct Pennsylvania, Inc., a Pennsylvania
corporation, Brawn Of California, Inc., a California corporation, Gump's By
Mail, Inc., a Delaware corporation, Gump's Corp., a California corporation, LWI
Holdings, Inc., a Delaware corporation, Hanover Direct Virginia Inc., a Delaware
corporation, Hanover Realty, Inc., a Virginia corporation, The Company Store
Factory, Inc., a Delaware corporation, The Company Office, Inc., a Delaware
corporation, Tweeds, LLC, a Delaware limited liability company, Silhouettes,
LLC, a Delaware limited liability company, Hanover Company Store, LLC, a
Delaware limited liability company, Domestications, LLC, a Delaware limited
liability company, and Keystone Internet Services, Inc., a Delaware corporation,
and each of their respective successors and assigns, including, without
limitation, a receiver, trustee, or debtor-in-possession on behalf of any such
person or on behalf of any such successor or assign.

         1.5 "Event of Default" shall have the meaning given in the Loan
Agreement.

         1.6 "Incipient Default" shall have the meaning given in the Loan
Agreement.

         1.7 "Excess Loan Availability" shall have the meaning given in the Loan
Agreement.

         1.8 "Insolvency Proceeding" shall have the meaning given in Section 2.3
hereof.

         1.9 "Junior Creditor" shall mean Richemont Finance S.A., a societe
anonyme organized under the laws of the Grand Duchy of Luxembourg, and its
successors and assigns.

         1.10 "Junior Creditor Agreements" shall mean, individually and
collectively, the Credit Agreement, dated as of the date hereof, among Junior
Creditor and Debtor the Revolving Credit Note, dated as of the date hereof, by
Debtor payable to the order of Junior Creditor in the principal amount of up to
$10,000,000, and all agreements, documents and instruments at any time executed
and/or delivered by Debtor or any other person to, with or in favor of Junior
Creditor in connection therewith or related thereto, as all of the foregoing now
exist or may hereafter be amended, modified, supplemented, extended, renewed,
restated or replaced.

         1.11 "Junior Debt" shall mean all obligations, liabilities and
indebtedness of every kind, nature and description owing by Debtor to Junior
Creditor under the Junior Creditor Agreements, including principal, interest,
charges, fees, premiums, indemnities and expenses, however evidenced, whether as
principal, surety, endorser, guarantor or otherwise, arising under or


                                      -2-
<PAGE>   3
evidenced by or in connection with the Junior Creditor Agreements, whether now
existing or hereafter arising, whether arising before, during or after the
initial or any renewal term of the Junior Creditor Agreements or after the
commencement of any case with respect to Debtor under the U.S. Bankruptcy Code
or any similar statute (and including, without limitation, any principal,
interest, fees, costs, expenses and other amounts, whether or not such amounts
are allowable in whole or in part, in any such case or similar proceeding),
whether direct or indirect, absolute or contingent, joint or several, due or not
due, primary or secondary, liquidated or unliquidated, secured or unsecured, and
whether arising directly, or by way of subrogation, contribution, reimbursement,
indemnification, exoneration or otherwise, or howsoever acquired by Junior
Creditor in connection with the Junior Creditor Agreements.

         1.12 "Payment Account" shall have the meaning given in the Richmont
$10,000,000 Call Agreement.

         1.13 "Person" or "person" shall mean any individual, sole
proprietorship, partnership, corporation (including, without limitation, any
corporation which elects subchapter S status under the Internal Revenue Code of
1986, as amended), business trust, unincorporated association, joint stock
company, trust, joint venture, limited liability company, limited liability
partnership, or other entity or any government or any agency or instrumentality
or political subdivision thereof.

         1.14 "Richemont $10,000,000 Call Agreement" shall mean the letter
agreement, dated as of the date hereof, between Senior Creditor and Junior
Creditor, acknowledged by Debtors, as the same now exists or may hereafter be
amended, modified, supplemented, extended, renewed, restated or replaced.

         1.15 "Senior Creditor" shall mean Congress Financial Corporation, a
Delaware corporation, and its successors and assigns.

         1.16 "Senior Creditor Agreements" shall mean, individually and
collectively, the Loan and Security Agreement, dated November 14, 1995, by and
among Senior Creditor, Debtor and certain subsidiaries of Debtor, as amended
through the Fifteenth Amendment to Loan and Security Agreement, dated as of the
date hereof (the "Loan Agreement"), the Richemont $10,000,000 Call Agreement,
any related guarantees by Debtor in favor of Senior Creditor, any security
agreements by Hanover in favor of Senior Creditor and all agreements, documents
and instruments at any time executed and/or delivered by Debtor or any other
person to, with or in favor of Senior Creditor in connection therewith or
related thereto, as all of the foregoing now exist or, subject to the terms and
conditions contained in this Subordination Agreement, as may hereafter be
amended, modified, supplemented, extended, renewed, restated or replaced.

         1.17 "Senior Debt" shall mean all obligations, liabilities and
indebtedness of every kind, nature and description owing by Debtor or any other
subsidiary of Debtor to Senior Creditor and/or its affiliates, or participants,
including principal, interest, charges, fees, premiums, indemnities and
expenses, however evidenced, whether as principal, surety, endorser, guarantor
or otherwise, owing in connection with the Senior Creditor Agreements, whether
now existing or


                                      -3-
<PAGE>   4
hereafter arising, whether arising before, during or after the initial or,
subject to the terms and conditions contained in this Subordination Agreement,
any renewal term of the Senior Creditor Agreements or after the commencement of
any case with respect to Debtor under the U.S. Bankruptcy Code or any similar
statute (and including, without limitation, any principal, interest, fees,
costs, expenses and other amounts, whether or not such amounts are allowable
either in whole or in part, in any such case or similar proceeding), whether
direct or indirect, absolute or contingent, joint or several, due or not due,
primary or secondary, liquidated or unliquidated, secured or unsecured, and
whether arising directly, or by way of subrogation, contribution, reimbursement,
indemnification, exoneration or otherwise, or howsoever acquired by Senior
Creditor in connection with the Senior Creditor Agreements.

         1.18 All terms used herein which are defined in the Uniform Commercial
Code as in effect in the State of New York, unless otherwise defined herein
shall have the meanings set forth therein. All references to any term in the
plural shall include the singular and all references to any term in the singular
shall include the plural.

         2. SUBORDINATION OF JUNIOR DEBT

          2.1 Subordination. Except as specifically set forth in Section 2.2
hereof, Junior Creditor hereby subordinates its right to payment and
satisfaction of the Junior Debt, and the payment and satisfaction thereof,
directly or indirectly, by any means whatsoever, is hereby deferred, to the
prior indefeasible payment and satisfaction in full of all Senior Debt.

         2.2 Permitted Payments. Senior Creditor hereby agrees that,
notwithstanding anything to the contrary contained in Section 2.1 hereof,

                  (a) unless and until Senior Creditor sends written notice to
Junior Creditor of the occurrence and continuance of an Event of Default or
Incipient Default under the Senior Creditor Agreements:

                  (i) Debtor may make and Junior Creditor may receive and retain
from Debtor, from time to time payments of principal to Junior Creditor in
respect of the Junior Debt; provided, that, as to any such payment, each of the
following conditions shall have been satisfied as determined by Senior Creditor:
(A) Senior Creditor shall have received not less than five (5) Banking Days'
prior written notice of the intention of Debtors to make such payment, which
written notice shall set forth the amount of the payment intended to be made,
the then current outstanding amount of principal and such other information with
respect thereto as Senior Creditor may reasonably request, (B) as of the date of
and after giving effect to any such payment, the Excess Availability on such
date and for each of the immediately preceding thirty (30) consecutive days
shall have been not less than $5,000,000; and

                  (ii) Debtor may make and Junior Creditor may receive and
retain from Debtor regularly scheduled payments of interest and of a monthly fee
in the amount of $79,200 as provided by the Junior Creditor Agreements as in
effect on the date hereof; and


                                       -4-
<PAGE>   5
                  (b) Debtor may make, and Junior Creditor may receive and
retain, payments by Debtor to Junior Creditor of the Junior Debt solely out of
cash proceeds pursuant to a rights offering by Hanover Direct, Inc., Harvard
Brands, Inc. or erizon, inc. or any other equity offering(s) or equity private
placement(s) of capital stock of Hanover Direct, Inc, Hanover Brands, Inc. or
erizon, inc. and Junior Creditor may convert the then outstanding amount of
Junior Debt for capital stock of Hanover Direct, Inc. or Hanover Brands or
erizon, inc.; provided, that, (i) Senior Creditor has received not less than
fifteen (15) Banking Days prior written notice from Debtor of the intention to
make such payment out of cash proceeds of such rights offering or other equity
offering or such conversion of the Junior Debt to capital stock, (ii) such
capital stock consists of ordinary common stock as in effect on the date hereof
or of other capital shares if consented to by Senior Creditor, which consent
shall not be unreasonably withheld in Senior Creditor's good faith judgment. To
the extent any such cash proceeds of any such equity offering or conversion of
Junior Debt permitted hereby reduces the amount of any commitment to advance
funds pursuant to the Junior Creditor Agreements, any such net cash proceeds or
conversion shall not also reduce the amount of any commitment to advance funds
pursuant to the Richemont $25,000,000 Credit Agreements as such term is defined
in the Senior Creditor Agreements.

         2.3   Distributions.

                  (a) In the event of any distribution, division, or
application, partial or complete, voluntary or involuntary, by operation of law
or otherwise, of all or any part of the assets of Debtor or the proceeds thereof
to the creditors of Debtor or readjustment of the obligations and indebtedness
of Debtor, whether by reason of liquidation, bankruptcy, arrangement,
receivership, assignment for the benefit of creditors, marshalling of assets of
Debtor or any other action or proceeding involving the readjustment of all or
any part of indebtedness of Debtor or the application of the assets of Debtor to
the payment or liquidation thereof (each of the foregoing, an "Insolvency
Proceeding"), or upon the dissolution or other winding up of Debtor's business,
or upon the sale of all or substantially all of Debtor's assets, then, and in
any such event, (i) Senior Creditor shall first receive indefeasible payment in
full in cash of all of the Senior Debt prior to the payment of all or any part
of the Junior Debt, and (ii) Senior Creditor shall be entitled to receive any
payment or distribution of any kind or character, whether in cash, securities or
other property, which is payable or deliverable in respect of any or all of the
Junior Debt.

                  (b) In order to enable Senior Creditor to enforce its rights
under Section 2.3(a) hereof, Senior Creditor is hereby irrevocably authorized
and empowered (in its own name or in the name of Junior Creditor or otherwise),
but shall have no obligation, to enforce claims comprising any of the Junior
Debt by proof of debt, proof of claim, suit or otherwise and take generally any
action which Junior Creditor might otherwise be entitled to take, as Senior
Creditor may deem necessary or advisable for the enforcement of its rights or
interests hereunder.

                  (c) To the extent necessary for Senior Creditor to realize the
benefits of the subordination of the Junior Debt provided for herein (including
the right to receive any and all payments and distributions which might
otherwise be payable or deliverable with respect to the Junior Debt in any
Insolvency Proceeding or otherwise), Junior Creditor shall execute and


                                      -5-
<PAGE>   6
deliver to Senior Creditor such instruments or documents (together with such
assignments or endorsements as Senior Creditor shall deem necessary), as may be
reasonably requested by Senior Creditor.

          2.4 Payments Received by Junior Creditor. Except for payments received
by Junior Creditor as provided in Section 2.2 hereof, should any payment or
distribution or security or instrument or proceeds thereof be received by the
Junior Creditor in respect of the Junior Debt, Junior Creditor shall receive and
hold the same in trust, as trustee, for the benefit of Senior Creditor,
segregated from other funds and property of Junior Creditor and shall forthwith
deliver the same to Senior Creditor (together with any endorsement or assignment
of Junior Creditor where necessary), for application to any of the Senior Debt.
In the event of the failure of Junior Creditor to make any such endorsement or
assignment to Senior Creditor, Senior Creditor, or any of its officers or
employees, are hereby irrevocably authorized on behalf of Junior Creditor to
make the same.

          2.5 Instrument Legend and Notation. Any instrument at any time
evidencing the Junior Debt, or any portion thereof, shall be permanently marked
on its face with a legend conspicuously indicating that payment thereof is
subordinate in right of payment to the Senior Debt and subject to the terms and
conditions of this Subordination Agreement, and (a) after being so marked
certified copies thereof shall be delivered to Senior Creditor and (b) the
original of any such instrument shall be immediately delivered to Senior
Creditor upon Senior Creditor's request, at any time on or after the
commencement of an Insolvency Proceeding. In the event any legend or endorsement
is omitted, Senior Creditor, or any of its officers or employees, are hereby
irrevocably authorized on behalf of Junior Creditor to make the same. No
specific legend, further assignment or endorsement or delivery of notes,
guarantees or instruments shall be necessary to subject any Junior Debt to the
subordination thereof contained in this Agreement.

         2.6 Reduction in Credit Limit of Junior Creditor Agreements. Junior
Creditor may reduce the maximum credit available to Debtor under the Junior
Credit Agreements equal to the amount of net cash proceeds received by Senior
Creditor by reason of equity contribution(s) to Debtor or conversions of Junior
Debt into capital stock of Hanover Direct, Inc., Hanover Brands, Inc. and
erizon, inc. so long as each of the following conditions shall have been
satisfied as determined by Senior Creditor:

                  (a) Senior Creditor shall have received not less than fifteen
(15) Banking Days' prior written notice of the intention of Richemont to effect
any such reduction in such maximum credit and to make any such cash equity
contribution or conversion, together with the terms and conditions of such cash
equity contribution or conversion;

                  (b) such cash equity contributions or conversions shall be in
the form of capital stock consisting of ordinary common stock as in effect on
the date hereof or of other capital stock if consented to by Senior Creditor,
which consent shall not be unreasonably withheld in Senior Creditor's good faith
judgment; and


                                      -6-
<PAGE>   7
                  (c) any net proceeds of such cash equity contribution shall be
remitted directly to the Payment Account.

         3. COVENANTS, REPRESENTATIONS AND WARRANTIES

         3.1 Additional Covenants. Junior Creditor and Debtor agree in favor of
Senior Creditor that:

                  (a) Except as specifically set forth in Section 2.2 hereof,
Debtor shall not, directly or indirectly, make and Junior Creditor shall not,
directly or indirectly, accept or receive any payment of or any prepayment or
any payment pursuant to acceleration or claims of breach or any payment to
acquire Junior Debt or otherwise in respect of any Junior Debt;

                  (b) notwithstanding any rights or remedies available to it
under the Junior Creditor Agreements, applicable law or otherwise, Junior
Creditor shall not, directly or indirectly, (i) seek to collect from Debtor any
of the Junior Debt or exercise any of its rights or remedies upon a default or
event of default by Debtor under the Junior Creditor Agreements or otherwise or
(ii) commence any action or proceeding against Debtor or Debtor's properties
under the U.S. Bankruptcy Code or any state insolvency law or any similar
present or future statute, law or regulation or any proceedings for voluntary
liquidation, dissolution or other winding up of Debtor's business, or the
appointment of any trustee, receiver or liquidator for Debtor or any part of
Debtor's properties or any assignment for the benefit of creditors or any
marshalling of assets of Debtor or (iii) take any other action against Debtor or
Debtor's properties in respect of the Junior Debt;

                  (c) Debtor shall not grant to Junior Creditor and Junior
Creditor shall not acquire any security interest, lien, claim or encumbrance on
any assets or properties of Debtor, and Junior Creditor shall not acquire any
guarantees or other agreements under which any person, other than Debtor, is or
may become obligated, directly or indirectly, for all or any portion of the
Junior Debt;

                  (d) Junior Creditor and Debtor shall not amend, modify, alter
or change in any material respect the terms of any arrangements related to the
Junior Debt;

                  (e) Junior Creditor shall not sell, assign, pledge, encumber
or otherwise dispose of any of the Junior Debt, or subordinate any of the Junior
Debt to any indebtedness of Debtors other than the Senior Debt, without the
prior written consent of Senior Creditor, which consent shall not be
unreasonably withheld in Senior Creditor's good faith determination;

                  (f) Junior Creditor and Debtor shall, at any time or times
upon the request of Senior Creditor, promptly furnish to Senior Creditor a true,
correct and complete statement of the outstanding Junior Debt; and

                  (g) Junior Creditor and Debtor shall execute and deliver to
Senior Creditor such additional agreements, documents and instruments and take
such further actions as may be


                                      -7-
<PAGE>   8
reasonably necessary or desirable in the opinion of Senior Creditor to
effectuate the provisions and purposes of this Subordination Agreement.

          3.2 Additional Representations and Warranties. Junior Creditor and
Debtor represent and warrant to Senior Creditor that:

                  (a) as of the date hereof, the total principal amount of the
Junior Debt outstanding is $-0-;

                  (b) Junior Creditor has no security interest, lien, claim or
encumbrance on any assets and properties of Debtor and the Junior Debt is
unsecured;

                  (c) as of the date hereof, no default or event of default, or
event which with notice or passage of time or both would constitute an event of
default exists or has occurred under the Junior Creditor Agreements;

                  (d) Junior Creditor is the exclusive legal and beneficial
owner of all of the Junior Debt;

                  (e) none of the Junior Debt is subject to any lien, security
interest, financing statements, subordination, assignment or other claim, except
in favor of Senior Creditor; and

                  (f) this Subordination Agreement constitutes the legal, valid
and binding obligations of Junior Creditor, enforceable in accordance with its
terms.

          3.3 Waivers. Notice of acceptance hereof, the making of loans,
advances and extensions of credit or other financial accommodations to, and the
incurring of any expenses by or in respect of, Debtor or its subsidiaries by
Senior Creditor, and presentment, demand, protest, notice of protest, notice of
nonpayment or default and all other notices to which Junior Creditor and Debtor
are or may be entitled are hereby waived (except as expressly provided for
herein or as to Debtor, in the Senior Creditor Agreements). Junior Creditor also
waives notice of, and hereby consents to, (a) subject to the terms and
conditions contained in this Subordination Agreement, any amendment,
modification, supplement, renewal, restatement or extensions of time of payment
of or increase or decrease in the amount of any of the Senior Debt or to the
Senior Creditor Agreements or any collateral at any time granted to or held by
Senior Creditor, (b) the taking, exchange, surrender and releasing of collateral
at any time granted to or held by Senior Creditor or guarantees now or at any
time held by or available to Senior Creditor for the Senior Debt or any other
person at any time liable for or in respect of the Senior Debt, (c) the exercise
of, or refraining from the exercise of any rights against Debtor or any other
obligor or any collateral at any time granted to or held by Senior Creditor, (d)
the settlement, compromise or release of, or the waiver of any default with
respect to, any of the Senior Debt, and/or (e) Senior Creditor's election, in
any proceeding instituted under the U.S. Bankruptcy Code of the application of
Section 1111(b)(2) of the U.S. Bankruptcy Code. Any of the foregoing shall not,
in any manner, affect the terms hereof or impair the obligations of Junior
Creditor hereunder. All


                                      -8-
<PAGE>   9
of the Senior Debt shall be deemed to have been made or incurred in reliance
upon this Subordination Agreement.

          3.4 Subrogation; Marshalling. Junior Creditor shall not be subrogated
to, or be entitled to any assignment of any Senior Debt or Junior Debt or of any
collateral for or guarantees or evidence of any thereof until all of the Senior
Debt is indefeasibly paid and satisfied in full. Junior Creditor hereby waives
any and all rights to have any collateral or any part thereof granted to or held
by Senior Creditor marshalled upon any foreclosure or other disposition of such
collateral by Senior Creditor or Debtor with the consent of Senior Creditor.
When the Senior Debt shall have been indefeasibly paid in full and discharged
and all the Senior Creditor Agreements have been terminated, to the extent
permitted by law, the Junior Creditor shall, to the extent permitted by law, be
subrogated to the rights of the Senior Creditor to receive payments or
distribution of assets in respect of the Junior Debt.

          3.5 No Offset. In the event Junior Creditor at any time incurs any
obligation to pay money to Debtor, Junior Creditor hereby irrevocably agrees
that it shall pay such obligation in cash or cash equivalents in accordance with
the terms of the contract governing such obligation and shall not deduct from or
setoff against any amounts owed by Junior Creditor to Debtor in connection with
any such transaction any amounts the Junior Creditor claims are due to it with
respect to the Junior Debt.

          3.6 Certain Amendments to Senior Creditor Agreements. Senior Creditor
shall not make loans or advances to Debtors under the Loan Agreement that would
result in the Senior Debt to be greater than $90,000,000 outstanding at any one
time and Senior Creditor shall not extend the Renewal Date (as such term is
defined in the Loan Agreement) beyond six (6) months without the prior written
consent of Junior Creditor; provided, that, if the Junior Creditor Agreements
are terminated to the extent provided herein, this Section 3.6 shall
automatically and without further action by the parties hereto shall no longer
be deemed to apply and have no further force and effect.

          4. MISCELLANEOUS

          4.1 Amendments. Any waiver, permit, consent or approval by either
Creditor of or under any provision, condition or covenant to this Subordination
Agreement must be in writing and shall be effective only to the extent it is set
forth in writing and as to the specific facts or circumstances covered thereby.
Any amendment of this Subordination Agreement must be in writing and signed by
each of the parties to be bound thereby.

          4.2 Successors and Assigns.

                  (a) This Subordination Agreement shall be binding upon the
parties hereto and their respective successors and assigns and shall inure to
the benefit of each of Creditors and its respective successors, participants and
assigns.


                                      -9-
<PAGE>   10
                  (b) Senior Creditor reserves the right to grant participations
in, or otherwise sell, assign, transfer or negotiate all or any part of, or any
interest in, the Senior Debt and the collateral securing same; provided, that,
Junior Creditor shall not be obligated to give any notices to or otherwise in
any manner deal directly with any participant in the Senior Debt and no
participant shall be entitled to any rights or benefits under this Subordination
Agreement except through Senior Creditor. In connection with any participation
or other transfer or assignment, Senior Creditor (i) may disclose to such
assignee, participant or other transferee or assignee all documents and
information which Senior Creditor now or hereafter may have relating to the
Senior Debt or any collateral and (ii) shall disclose to such participant or
other transferee or assignee the existence and terms and conditions of this
Subordination Agreement.

                  (c) In connection with any assignment or transfer of any or
all of the Senior Debt, or any or all rights of Senior Creditor in any of the
property of Debtor or its subsidiaries (other than pursuant to a participation),
Junior Creditor agrees to execute and deliver an agreement containing terms
substantially identical to those contained herein in favor of any such assignee
or transferee and, in addition, will execute and deliver an agreement containing
terms substantially identical to those contained herein in favor of any third
person who succeeds to or replaces any or all of Senior Creditor's financing of
certain subsidiaries of Debtor, whether such successor financing or replacement
occurs by transfer, assignment, "takeout" or any other means.

          4.3 Insolvency. This Subordination Agreement shall be applicable both
before and after the filing of any petition by or against Debtor or any of its
subsidiaries under the U.S. Bankruptcy Code and all converted or succeeding
cases in respect thereof, and all references herein to Debtor or any of Debtor's
subsidiaries shall be deemed to apply to a trustee for Debtor or any of its
subsidiaries, as well as to Debtor or any of its subsidiaries as
debtor-in-possession. The relative rights of Senior Creditor and Junior Creditor
to repayment of the Senior Debt and the Junior Debt, respectively, and in or to
any distributions from or in respect of Debtor or any proceeds of Debtor's
property and assets, shall continue after the filing thereof on the same basis
as prior to the date of the petition, subject to any court order approving the
financing of, or use of cash collateral by, Debtor or any of its subsidiaries as
debtor-in-possession.

          4.4 Bankruptcy Financing. If Debtor or any of its subsidiaries shall
become subject to a proceeding under the U.S. Bankruptcy Code and if Senior
Creditor desires to permit the use of cash collateral or to provide financing to
Debtor or any of its subsidiaries under either Section 363 or Section 364 of the
U.S. Bankruptcy Code, Junior Creditor agrees as follows: (a) adequate notice to
Junior Creditor (if required) shall have been provided for such financing or use
of cash collateral if Junior Creditor receives notice two (2) business days
prior to the entry of the order approving such financing or use of cash
collateral and (b) no objection will be raised by Junior Creditor to any such
use of cash collateral or financing. For purposes of this Section, notice of a
proposed financing or use of cash collateral shall be deemed given when given in
the manner prescribed by Section 4.5 hereof to Junior Creditor.

          4.5 Notices. All notices, requests and demands to or upon the
respective parties hereto shall be in writing and shall be deemed to have been
duly given or made: if delivered in person, immediately upon delivery; if by
telex, telegram or facsimile transmission, immediately upon


                                      -10-
<PAGE>   11
sending and upon confirmation of receipt; if by nationally recognized overnight
courier service with instructions to deliver the next business day, one (1)
business day after sending; and if mailed by certified mail, return receipt
requested, five (5) days after mailing. All notices, requests and demands are to
be given or made to the respective parties at their addresses set forth below
(or to such other addresses as either party may designate by notice in
accordance with the provisions of this Section:

To Senior Creditor:                         Congress Financial Corporation
                                            1133 Avenue of the Americas
                                            New York, New York 10036
                                            Attention:  Mr. Laurence S. Forte
                                            Telecopier: 212-545-4283
                                            Phone: 212-0545-4280

To Junior Creditor:                         Richemont Finance S.A.
                                            35 Boulevard Prince Henri
                                            L 1724 Luxembourg
                                            Attention:  Mr. J. Alan Grieve
                                            Telecopier: 011-4141-711-7138
                                            Phone: 011-4141-710-3322

         with a copy to:                    Robert P. Wessely, Esq.
                                            Dorsey & Whitney
                                            250 Park Avenue
                                            New York, New York 10036
                                            Telecopier: (212) 953-7201
                                            Phone: (212) 415-9200

Either Creditor may change the address(es) to which all notices, requests and
other communications are to be sent by giving written notice of such address
change to the other Creditor in conformity with this Section 4.5, but such
change shall not be effective until notice of such change has been received by
the other Creditor.

          4.6 Counterparts. This Subordination Agreement may be executed in any
number of counterparts, each of which shall be an original with the same force
and effect as if the signatures thereto and hereto were upon the same
instrument.

          4.7 Governing Law. The validity, construction and effect of this
Subordination Agreement shall be governed by the laws of the State of New York
(without giving effect to principles of conflicts of laws).

          4.8 Consent to Jurisdiction; Waiver of Jury Trial. Each of the parties
hereto hereby irrevocably consents to the non-exclusive jurisdiction of the
Supreme Court of the State of New York for New York County and the United States
District Court for the Southern District of New York and waives trial by jury in
any action or proceeding with respect to this Subordination Agreement.


                                      -11-
<PAGE>   12
          4.9 Complete Agreement.

                  (a) This written Subordination Agreement is intended by the
parties as a final expression of their agreement and is intended as a complete
statement of the terms and conditions of their agreement.

                  (b) The obligations of Junior Creditor under this
Subordination Agreement are in addition to, and in no way limited by the terms
of the Subordination Agreement, dated as of the date hereof, between Junior
Creditor and Senior Creditor, as acknowledged by Debtor and certain direct and
indirect subsidiaries of Debtor in respect of the Richemont $25,000,000 Credit
Agreements as such term is defined in the Loan Agreement, nor shall any of the
terms thereof be limited or affected by the terms of this Subordination
Agreement.

                  (c) The obligations of Junior Creditor under this
Subordination Agreement are in addition to, and in no way limited by the terms
of any other subordination agreement, heretofore entered into between Junior
Creditor and Senior Creditor, as acknowledged by Debtor and/or certain of its
subsidiaries and affiliates, nor shall any of the terms of any such
subordination agreement be limited or affected by the terms of this
Subordination Agreement.

         4.10 No Third Parties Benefitted. This Subordination Agreement is
solely for the benefit of the Creditors and their respective successors,
participants and assigns, and no other person shall have any right, benefit,
priority or interest under, or because of the existence of, this Subordination
Agreement.

         4.11 Disclosures, Non-Reliance. Each Creditor has the means to, and
shall in the future remain, fully informed as to the financial condition and
other affairs of Debtor and neither Creditor shall have any obligation or duty
to disclose any such information to any other Creditor. Except as expressly set
forth in this Subordination Agreement, the parties hereto have not otherwise
made to each other nor do they hereby make to each other any warranties, express
or implied, nor do they assume any liability to each other with respect to: (a)
the enforceability, validity, value or collectability of any of the Junior Debt
or the Senior Debt or any collateral or guarantee which may have been granted to
any of them in connection therewith, (b) Debtor's title to or right to any of
Debtor's assets and properties or (c) any other matter except as expressly set
forth in this Subordination Agreement.

         4.12 Term. This Subordination Agreement is a continuing agreement and
shall remain in full force and effect until the indefeasible satisfaction in
full of all Senior Debt and the termination of the financing arrangements among
Senior Creditor, Debtor and certain subsidiaries of Debtor.






                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]


                                      -12-
<PAGE>   13
         IN WITNESS WHEREOF, the parties have caused this Subordination
Agreement to be duly executed as of the day and year first above written.

                                            CONGRESS FINANCIAL CORPORATION

                                            By:     /s/ Janet Last
                                               ---------------------------

                                            Title:  Vice President

                                            RICHEMONT FINANCE S.A.

                                            By:    /s/ Jan P. du Plessis
                                               ---------------------------
                                            Title:   Director

                                            By:    /s/ Alan Grieve
                                               ---------------------------
                                            Title:   Director


                                      -13-
<PAGE>   14
                                 ACKNOWLEDGMENT


         The undersigned hereby acknowledges and agrees to the foregoing terms
and provisions. By its signature below, the undersigned agrees that it shall,
together with its successors and assigns, be bound by the provisions hereof.

         The undersigned acknowledges and agrees that: (i) although it may sign
this Subordination Agreement, it is not a party hereto and does not and shall
not receive any right, benefit, priority or interest under or because of the
existence of the foregoing Subordination Agreement, (ii) in the event of a
breach by the undersigned of any of the terms and provisions contained in the
foregoing Subordination Agreement, such a breach shall constitute an "Event of
Default" as defined in and under the Senior Creditor Agreements, and (iii) it
shall execute and deliver such additional documents and take such additional
action as may be necessary in the opinion of either Creditor to effectuate the
provisions and purposes of the foregoing Subordination Agreement.

                                        HANOVER DIRECT, INC.

                                        By:  /s/ Brian C. Harriss
                                           ------------------------------
                                        Title:  Senior Vice President
                                              ---------------------------

                                        HANOVER DIRECT PENNSYLVANIA, INC.

                                        By:  /s/ Brian C. Harriss
                                           ------------------------------
                                        Title:  Vice President
                                              ---------------------------

                                        BRAWN OF CALIFORNIA, INC.

                                        By:  /s/ Brian C. Harriss
                                           ------------------------------
                                        Title:  Vice President
                                              ---------------------------

                                        GUMP'S BY MAIL, INC.

                                        By: /s/ Brian C. Harriss
                                           ------------------------------
                                        Title:  President
                                             ---------------------------


                       [SIGNATURES CONTINUED ON NEXT PAGE]


                                      -14-
<PAGE>   15
                     [SIGNATURES CONTINUED FROM PRIOR PAGE]


                                        GUMP'S CORP.

                                        By:  /s/ Brian C. Harriss
                                           ------------------------------

                                        Title:  Vice President
                                              --------------------------

                                        LWI HOLDINGS, INC.

                                        By:  /s/ Brian C. Harriss
                                           ------------------------------

                                        Title:  Vice President
                                              --------------------------

                                        HANOVER DIRECT VIRGINIA INC.

                                        By:  /s/ Brian C. Harriss
                                           ------------------------------

                                        Title:  President
                                              --------------------------

                                        TWEEDS, LLC

                                        By:  /s/ Brian C. Harriss
                                           ------------------------------

                                        Title:  Vice President
                                              --------------------------

                                        SILHOUETTES, LLC

                                        By:  /s/ Brian C. Harriss
                                           ------------------------------

                                        Title:  Vice President
                                              --------------------------

                                        HANOVER COMPANY STORE, LLC

                                        By:  /s/ Brian C. Harriss
                                           ------------------------------

                                        Title:  Vice President
                                              --------------------------

                                        DOMESTICATIONS, LLC

                                        By:   /s/ Brian C. Harriss
                                           ------------------------------

                                        Title:  President
                                              --------------------------


                       [SIGNATURES CONTINUED ON NEXT PAGE]


                                      -15-
<PAGE>   16
                     [SIGNATURES CONTINUED FROM PRIOR PAGE]


                                        HANOVER REALTY, INC.

                                        By: /s/ Brian C. Harriss
                                           ------------------------------

                                        Title:  President
                                              --------------------------

                                        THE COMPANY STORE FACTORY, INC.

                                        By: /s/ Brian C. Harriss
                                           ------------------------------

                                        Title:  Vice President
                                              --------------------------

                                        THE COMPANY OFFICE, INC.

                                        By: /s/  Brian C. Harriss
                                           ------------------------------

                                        Title:  Vice President
                                              --------------------------

                                        KEYSTONE INTERNET SERVICES, INC.

                                        By: /s/ Brian C. Harriss
                                           ------------------------------

                                        Title:  Vice President
                                              --------------------------


                                      -16-