Debenhams in second administration in a year

Department store Debenhams is heading into administration for the second time in a year, in a bid to stave off a collapse into liquidation and in the hopes that it will be able to resume trading from its high street shops once the coronavirus control measures are lifted

Debenhams has filed a notice of intent that it plans to appoint Geoff Rowley and Alastair Massey of FRP Advisory in what the company has called a ‘light touch’ administration.

The retail chain said the move was a ‘necessary step’ to protect it from the threat of legal action from suppliers and to allow it to secure more funding from its owners and lenders. 

Debenhams first went into administration in April 2019, and was bought out by its lenders, comprising a group of banks and hedge funds led by US firm Silver Point Capital. At that point it shut 22 shops and announced a further 28 would close this year as part of restructuring plans.

Currently it has closed all 142 remaining shops during the covid-19 pandemic and most of its 22,000 staff are on furlough, with 80% of wages paid under the government’s coronavirus scheme.

Stefaan Vansteenkiste, chief executive of Debenhams, said: ‘These are unprecedented circumstances and we have taken this step to protect our business, our employees, and other important stakeholders, so that we are in a position to resume trading from our stores when restrictions are lifted.’

Debenhams is continuing to trade online via its website, but concerns were growing that suppliers were submitting winding-up petitions over unpaid bills. It has around £600m of debt.

Creditors will now be prevented from pursuing legal action for 10 working days while the company tries to secure a rescue deal.

Stuart Evans, commercial litigation partner at law firm BLM said: ‘There are two plans apparently under consideration by the retailer.

'The first could involve a pre-pack sale, where shortly before the administrators are formally appointed, all or part of the company’s business and its assets are sold to a third party. These can help the business to continue, save jobs and reduce insolvency costs, as the administrators will no longer be trading the business.

 ‘The administrators will have to do what they can to maximise the value of that sale. This leaves creditors behind in the ‘old’ company, where they will have to put in a claim in order to share any dividend payable.

'If a creditor is a key supplier to the business, then the ‘new’ company may still have to reach a deal with them in order to trade effectively.

'There will be significant negotiations with landlords of the stores, who will be asked to swallow outstanding rents and agree rental cuts going forward, accepting that some stores will close. The purchaser of the business will need to be confident that these negotiations will succeed.

‘The second plan is to enter into a Creditors Voluntary Agreement (CVA), which would be the second CVA Debenhams would have undertaken in less than 12 months. This agreement with existing creditors of Debenhams will enable it to trade on terms that will allow a better return to creditors than a liquidation, within the cocoon of this administration.

'We don’t know the details of the game plans the proposed administrators have, but a CVA might be progressed if the plans for pre-pack sale fall through.’

Debenhams is also in talks with its landlords and is seeking a five-month respite from payments and changes to its terms and conditions.

Julie Palmer, regional managing partner at Begbies Traynor, said: ‘Debenhams has been in financial difficulties for a while so this doesn't come as a major surprise.

‘But it will leave its 20,000 plus strong workforce in a precarious position who will struggle to get new employment during the ongoing uncertainty.’

By Pat Sweet

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