High street stalwart Debenhams has become the first UK business to start a new kind of insolvency process – one designed to protect companies from their creditors during the pandemic.
The new ‘light touch’ administration allows company directors to file for administration, but without ceding day to day control of the company to an insolvency practitioner.
Many other retailers are now exploring whether the new insolvency mechanism could provide temporary debt protection, while also shoring up their long-term future.
Umbrella Insolvency licensed insolvency practitioner Tom Fox said: “It’s a completely new kind of insolvency, which hasn’t been approved in law yet, but early proposals have been given the nod by senior members of the judiciary after leisure and retail executives warned that coronavirus could lead to widespread business failures.”
Dozens of businesses have reportedly already consulted insolvency practitioners about this new type of administration, with many concerned that government may not arrive or may come too late.
Debenhams fell into administration earlier this month, but the department store chain has reportedly struck deals to keep most of its 142 stores open. The chain, which has more than £1bn in annual sales, has so far confirmed that seven stores will close permanently, with another handful at risk of closure.
Designed to mimic a piece of American insolvency legislation, the light touch scheme will benefit businesses that are currently struggling but will have a strong future once the pandemic is over.
Tom Fox continued: “In many ways, coronavirus presents a completely unique challenge for businesses and governments. And unique challenges require unique solutions.
“Normally when a firm goes into administration, there is an assumption that it is in some way a failed business and that liquidation will follow.
“A light touch administration would provide the same level of protection from creditors, meaning HMRC, lenders and suppliers wouldn’t be able to take legal action to recover outstanding debts. And administrators could put the directors back in charge once the government lockdown is lifted.
“This should only be applied in specific circumstances. It would not be practical to use this kind of administration if a company was already struggling before the lockdown started. And we should also remember that, as of now, this remains a set of proposals. There’s no guarantee that it will work in practice.”
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