Dozens of UK retailers and restaurant chains are in talks to take advantage of an experimental “light touch” administration that is intended to protect companies from creditors during the coronavirus pandemic.
Department store chain Debenhams, which has 142 stores and more than £1bn of annual sales, last week became the first high-street business to enter into such a process.
A light-touch mechanism allows company directors to file for administration but retain day-to-day control, rather than ceding power to insolvency practitioners.
The mechanism has been given provisional approval by members of the judiciary after leisure and retail executives warned the coronavirus pandemic could lead to widespread business failures.
A number of insolvency practitioners said they had received a deluge of inquiries from companies that want the light touch insolvency tool “ready to go” if government support was not granted or came too late.
“There’s a lot of people looking to take advantage of what is at the moment just a set of proposals, rather than the law,” said one insolvency expert close to the Debenhams process. “It suits those businesses that have had to close like shops and restaurants because they may well have a future after the pandemic is over. Many are lining this up for when the slack provided by the government and the taxman runs out.”
The Debenhams administration is the first test for a concept that is designed to emulate elements of the US Chapter 11 system. Lawyers and insolvency practitioners say it could be deployed much more widely to save companies hit by coronavirus-related difficulties.
“Normally when a business goes into administration, the assumption is that it is a failed business and some kind of liquidation will follow,” said David Ereira, a partner at law firm Paul Hastings. “Light-touch administration is intended to provide a moratorium so creditors cannot sue or threaten to wind up a business.”
Mark Phillips QC, who wrote a template for practitioners to run such an insolvency, said: “If we get this right, it is the difference between a recession and a depression. Often what happens in insolvency is that a business goes into a terminal procedure and someone buys it, but there won’t be enough buyers out there for thousands of bust businesses in this environment, so the pain has to be shared.”
The process is based on an interpretation of an existing provision in English insolvency law, which says the officers of a company in administration may not exercise the powers of management “without the consent of the administrator”.
It provides the usual protections of an administration, meaning a company’s creditors, which typically include HMRC, its lenders and suppliers, are prevented from taking legal action to recover outstanding debts. At the same time, the administrators will attempt to rescue the business, which could mean handing full control back to the directors after government lockdowns are lifted, or explore a sale or liquidation.
It is being explored by insolvency professionals ahead of expected legislation that could put a moratorium on winding-up petitions — court orders brought by a creditor to a company to force it into liquidation.
However, the process has attracted scrutiny over perceived increased risks for insolvency practitioners, creditors and directors.
“It is important to make sure it is only being applied in the correct circumstances,” said Duncan Swift, president of R3, the trade body for insolvency practitioners. “If a company had impaired debt prior to the crisis, you would have to query if a light-touch administration was appropriate.”
The head of restructuring at a large accounting firm said: “If you can find a mechanism to be a bit less hands on while discharging your responsibilities as an administrator, that is good. But the success very much depends on the viability of the company, the quality of existing management, the attitudes of stakeholders and the support of funders.”
KPMG, which supervised Debenhams’ company voluntary arrangement last year, declined to get involved with the light-touch plan because of the risks, said two people with knowledge of the matter. KPMG declined to comment.
“There’s no way a big firm would get it past their internal risk committee,” said a partner at another restructuring practice. He said the liability for partners if something went wrong would be too great, even if the appointing party offered some kind of indemnity.
Practitioners will be held personally liable for management decisions taken during the administration process and so will have to tightly monitor all transactions, expenses and contractual agreements made during that time. Any commercial or governance failures could result in regulatory fines or litigation brought by creditors.
Meanwhile, the risk to creditors include increased costs, even if the business is ultimately rescued, or they could see their stakes in the company’s assets diluted during the administration process.
“The management of Debenhams can call it anything they like, but the bottom line is that the administrators still have to operate under the confines of existing insolvency law,” said a senior restructuring expert. “It might survive, the directors still might be in charge at the end of this, but there are no guarantees and this is still an administration process.”
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