Article by Laura Walshe of The Business Debt Advisor
Debenhams recently collapsed into administration for the second time in a year. Its administration in April 2019 resulted in the closure of 22 stores, and now the remaining 142 stores are indefinitely closed amid the coronavirus pandemic.
Advisory firm FRP has been appointed to oversee the process, which means that Debenhams will be protected from legal action from its creditors. It has been reported the administration will be a ‘light-touch’ administration that will see the existing management team remain in place, under the direct control and supervision of the administrators.
What is ‘light-touch administration’?
Debenhams has said it has the support of its lenders to enter administration and is engaging with employees and suppliers about the move. So what will the process involve?
Light Touch Administration (“LTA”) has emerged in recent years, and is a process which creates all the benefits of the appointment of an administrator, such as the protection from legal action, whilst allowing the delegation of operational control to those with direct knowledge.
The majority of its UK employees are being paid under the Government’s Coronavirus Job Retention Scheme (the furlough scheme). However some employees are still working as Debenhams continues to trade online with customer orders, gift cards and returns being processed as normal.
The administrator will have an overriding duty to consider the statutory purposes of administration, whether that can be the rescue of the company as a going concern, or (more commonly) achieving a better result for company creditors as a whole that would be likely in alternative scenarios. At all times the administrator will oversee the process, but LTA could enable an appropriate team of professionals to deliver this, in the cheapest way possible.
What impact could LTA have in the future?
R3, the trade association for the UK’s insolvency and restructuring professionals, has confirmed that it “welcomes thinking which helps our members deploy UK insolvency framework processes in innovative ways in the current climate… We know that the profession will be using every means available to it to rescue businesses and jobs.”
Of course, LTA will not be appropriate for all companies, but a more positive use of this insolvency process could save businesses and preserve jobs. Where an administrator works flexibly with the existing management team, a company could use administration to protect its business whilst maintaining or mothballing operations, until the purpose of administration has been achieved. The ‘lighter’ the administrator’s involvement in the day to day running of the business, the more cost effective it will be.
Fashion retailers Oasis and Warehouse are reportedly set to appoint administrators, putting more than 2,000 jobs at risk. The owner of these brands had been in talks to sell the businesses before the coronavirus crisis, which has prevented a sale from proceeding.
At a time when many different businesses are facing unparalleled challenges it remains to be seen how many businesses might follow the LTA route, and what long-term effect this will have on their supply chain. For all business owners the key is to act quickly.
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