The fall of Debenhams: What does it mean to go into Administration?
Due to the current effects of Covid 19 and the consequent unprecedented market conditions with lockdown since March 2020 it is becoming increasingly common for businesses to face financial difficulties. This is no more obvious than with the recent news of Department store Debenhams.
We heard last Tuesday that Debenhams had fallen into administration for the second time in a year. It is understood that the company will continue to trade online and says it aims to “reopen and trade as many stores as possible” and the understanding is that they are then set to shut once the remaining stock is sold with discounts as high as 70pc. Their latest update states that “ The website is trading as usual and stores will be open in line with local Government guidance. We are accepting orders and processing refunds and returns as normal. We continue to accept credit cards, store cards, gift cards and Beauty Club rewards as forms of payment”
Debenhams has 142 UK stores, which were closed in line with Government guidance. It also has 22,000 employees, most of whom are currently on furlough and whose jobs are also at risk.The company first fell into administration in April 2019 which resulted in 22 stores being permanently closed.
Advisory firm FRP has been appointed to oversee the administration, which is what happens when an external firm is called in to run the company. Appointing administrators means Debenhams will be protected from legal action from its creditors, which could have threatened to push it into liquidation while its stores are shut.
What is Administration?
Administration is an insolvency process by which a company is placed under the control of an insolvency practitioner to enable them to achieve objectives laid down by statute. It is one of the non-terminal insolvency procedures a company may enter when it finds itself in financial trouble.
Generally, a company in this position has a number of options.
- Immediate winding up
- A formal agreement with its creditors.
- Company voluntary agreement
- Administrative receivership
The benefit of appointing an administrator is that it creates a moratorium, an action against the company. While the company is in a moratorium it sto0ps all legal action against the company without the consent of the administrator or the court. This gives the company some breathing space.
The administration must have a purpose. The primary purpose of any administration is to rescue the company as an ongoing concern. This will involve the company itself remaining intact or substantial parts of its business as a going concern.
It is intended to provide an opportunity to rescue the company from insolvency. The process allows for more business sales usually meaning higher realisations, more employee jobs saved and better returns to creditors.
What happens during Administration?
From when the administrator is appointed, they will take control of the company’s property. Administrators should use his or her powers to manage the company in accordance with any proposals which have been approved by the creditors or according to any directions given by the court.
When a company becomes insolvent, it usually loses the ability to deal with its assets.
The directors and the secured lenders can appoint administrators through a court process to protect the company and their position as much as possible. The administrator must always be a licensed insolvency practitioner.
The Directors of the insolvent company have no control over the Company once in Administration.
The administrator’s powers fall under the Insolvency Act 1986. To achieve the goal of trying to rescue the company, the administrator will put forward proposals which include which assets should be sold, which can possibly be retained. Which debts should be compromised, which contract will be performed?
As well as decisions as to whether or not the company should continue to trade the administrator is an officer of the court so must act fairly in essence his or her duty is to manage the business effectively through the administration for the overall benefit of creditors
For a company that has no assets or cannot be saved, liquidation would be the next step.
In the alternative a Pre-pack administration may be more appropriate. A ‘Pre-Pack’ Administration is governed by the same rules and requirements as the more traditional type of Administration, but with one main difference. In this instance the company arranges a deal to sell its assets before an administrator is appointed. As in the above case, this will also be carried out by a licensed Insolvency Practitioner. A pre-pack administration differs from a conventional company administration as the sale of assets is pre-negotiated before an administrator is appointed, whereas in a regular administration the administrator starts marketing the business for sale to potential buyers after being appointed. In addition, in this case there is never any intention of putting a proposal to the creditors as a deal has already been agreed prior to the company entering administration. The package deals prepared prior to the appointment of the administrator will be sold immediately the company is placed into administration.
This process has however sparked some controversy as it is said that it can leave creditors unpaid while letting directors walk away from the company’s debts. However, when a company enters into a pre-packaged sale it tends to be the case that they are not in a position to repay the debts regardless, and at that point liquidation and administration are the only options left. Therefore, in most cases, there is little to no loss for the creditors.
How we can help?
In the current climate, administration and insolvency is something that many directors may, unfortunately, have to consider. At RVS Solicitors, our litigation team has extensive experience dealing both with personal bankruptcies and company insolvency. Furthermore, our lawyers are well versed in dealing with debt recovery from sole traders and companies undergoing Bankruptcy and insolvency procedures.
If your business is in financial difficulty, time can be very precious and mistakes costly. Ensure your success by getting the best possible legal advice.