Debenhams administration could provide blueprint for ‘freezing’ companies during coronavirus crisis
Debenhams today gave notice to appoint administrators for what it said would be a “light touch” administration with the management remaining on board.
This approach accords with ideas being floated by City insolvency lawyers who have proposed using the administration regime to mothball companies during the crisis and reviving them when economic conditions improve.
Luke Harrison, a partner at law firm Debenhams Ottaway, said: “You are putting companies into cryogenic stasis, freezing them for a period of a few months and the idea is you wake them up at the end of it.”
Debenhams said the move will protect its business from the threat of legal action that could have the effect of pushing it into liquidation while its stores are closed due to coronavirus.
It said it is making preparations to resume trading once government restrictions are lifted.
David Ereira, a restructuring partner at law firm Paul Hastings, said going into administration in this fashion: “Provides a barrier around the company, a moratorium which prevents people from suing it, enforcing against it or generally doing nasty things to it.”
The Insolvency Lawyers Association (ILA) recently issued a briefing which advised using the administration regime in this way to protect companies hit by the coronavirus crisis.
“The starting point of the administration process is to rescue the company and in many covid-19 related cases that will be the purpose of the filing,” the paper said.
“In this context, administration is a powerful tool to prevent the value-destructive race for assets by individual creditors, providing management with a breathing space in which to determine how best to preserve value for creditors as a whole.”
Administrators can agree to leave directors in charge of the company under their supervision, making the process a great deal cheaper.
“It is designed to ensure that the joint administrators don’t need to put whole teams of really expensive insolvency practitioners and accountancy staff into the business which is how you end up with these eye-watering bills,” Harrison said.
Late last month Business secretary Alok Sharma said the government planned to relax insolvency rules during the crisis to help protect companies and their directors.
“Our overriding objective is to help UK companies which need to undergo a financial rescue or restructuring process to keep trading,” Sharma said.
Planned changes include enabling companies to continue buying supplies while attempting a rescue, and the suspension of wrongful trading rules so company directors can keep their businesses going without the threat of personal liability.
The ILA briefing said those reforms were “important and necessary” but argued that the existing administration regime remained a powerful tool “to stabilise, protect, and, if necessary, restructure companies”.