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The Downfall of Debenhams

FEON WONG | LEGAL JARGON WRITER




What has happened?


Debenhams, a fashion retailer with more than 20,000 employees, reopened 50 stores in the UK from the 15th June. The same does not apply to Debenhams Retail (Ireland) Ltd in which the directors have confirmed to liquidate the Irish operations on the 9th April. This translates to the closing down of 11 stores and another 1,400 job losses.


It is no surprise that the multinational retailer struggles to survive a pandemic, although Covid-19 is not the sole culprit. The heavily indebted company went into administration last April due to its weakening financial performance, leading to the transfer of ownership to investors like US hedge funds Silver Point and GoldenTree through pre-pack administration.


Along with the health crisis that put people in lockdown this year, Debenhams once again entered into administration, although this time a ‘light touch’ one. This means that the operation of a company will remain in the hands of directors instead of passing over to the appointed administrator.


Debenhams is considering company voluntary arrangement (CVA) when it comes to restructuring its operation. It has reached out and communicated with landlords to ask for a five-month rent holiday and requested to a one month delay in payment to suppliers. Although landlords generally are themselves in hot water, the lease negotiation comes to fruition with 124 stores retaining its trading activities.


How does pre-pack administration in 2019 help Debenham to stay afloat?


By going into administration, businesses are protected from legal actions by creditors. This will allow the businesses to rethink their strategy and save their businesses from going into liquidation.


Pre-pack administration is an insolvency process that allows the pre-determined third party to purchase partially or fully the insolvent company’s asset. The process is negotiated prior to the engagement of an administrator. By doing so, a new company can be set up to continue the operation of the business debt-free. Although the old company still exists, most administrators will suggest liquidating it due to the high-level of debt. This method might cast doubt to some as it entails creditors not being paid. However, when the company opted for pre-pack administration, they are in no position to repay their creditors anyway. In fact, liquidating the old company might serve creditors’ interest better as they could still secure a portion of the return. Ultimately, this will be left to the administrator to prove that pre-pack sale is the financially optimal way for the insolvent company’s creditors.




FEON WONG

LLB student at The London School of Economics | Communication Officer at Japan Society at LSE

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