Debenhams Plc
RCF Lenders and Noteholders Could Lose Secured Status If CVA Challenge Successful, Administrator Appointed; Hearing Concludes With Decision Expected Before Sept. 29
Fri 09/06/2019 11:59 AM
The challenge proceedings to Debenhams’ company voluntary arrangement, or CVA, have concluded after five days of submissions from counsel before Justice Norris in the English High Court. Disgruntled landlords mounted the challenge arguing against the fairness and jurisdiction of the U.K. retailer’s CVA, having been obliged to accept a rent cut of up to 50%.
Counsel made their final submissions this afternoon and the judge retired to form his decision, which must be provided by Sept. 29 in order for certain preference challenges to be available to an administrator.
If the landlords’ challenge is successful, not only could the CVA be unwound, but Debenhams could be placed into an administration. An appointed administrator would have the power to dispose of the group’s assets or parts of the business.
The administrator would also have powers under the Insolvency Act 1986 (IA 1986) to release fixed and floating security granted in March 2019 in favor of existing RCF lenders and noteholders (under section 245 and section 239 IA 86). The administrator is likely to have to apply to court to use these powers.
If the CVA challenge is successful, the RCF lenders and noteholders could be demoted to the status of ordinary unsecured creditors, losing their recently-gained secured status. The administrator would have the power to dismantle the Debenhams group and dispose of its assets to competitors, including its former majority shareholder, Sports Direct.
The CVA challenge is set against the backdrop of a conflict between Mike Ashley’s company and Debenhams. In April, Sports Direct, which was the largest shareholder of Debenhams at the time, put forward an alternative restructuring plan for the group but it was rejected by the company’s directors.
Sports Direct has already acquired House of Fraser and has suggested that there could be synergies between that business and Debenhams. Sports Direct has agreed to fund the applicants’ legal expenses and provide an indemnity against adverse costs during the CVA challenge. If Sports Direct is able to obtain control of Debenhams, it has agreed to pay the landlords more rent than they are due under their current rental arrangements.
The restructuring strategy pursued by Debenhams wiped out existing shareholders, imposed a CVA on the company’s landlords and partially equitized existing lenders. The company was placed into the hands of existing lenders, with Silverpoint being the largest shareholder. The company was given a super senior £200 million facility and the group’s existing RCF lenders and noteholders were given fixed and floating security.
The hearing itself was made on an expedited basis and Justice Mann, hearing the expedition application, ordered that the judgment be provided by Sept 29, driven by statutory deadlines for bringing a preference claim under section 239 of the IA 1986. The group's capital structure is below:
The company created fixed and floating security for its RCF lenders and noteholders on March 29 as part of its financial restructuring. These creditors did not previously have the benefit of such security.
If the challenge succeeds and the CVA is set aside, there is a realistic possibility that the company will go into administration. If this happens, the security granted by the company could be challenged by an administrator as a preference under section 239. In order to challenge the security under section 239, the company would need to enter administration or an administration application would need to be made by Sept. 29, due to the six-month clawback period for preferences.
Whether the section 239 claim is successful will be dependent on a full trial of its own, following the CVA challenge this week. In practice, if the CVA challenge is successful, Sports Direct would push to place Debenhams immediately into administration. This would allow it, among other things, to pursue a section 239 claim.
Debenhams will most likely appeal any decision against it and apply for a stay to block the administrator from pursuing a section 239 claim until a final decision is granted. For the purposes of the IA 1986, the appointment of an administrator within the six-month clawback period is sufficient to allow a section 239 claim to proceed.
It could be argued that the fixed charge granted by the company for the RCF lenders and the noteholders is a preference within the meaning of section 239(4), which prescribes that where a company has at a relevant time given a preference to any person, the office holder may apply to the court for an order to set aside that preference. A company is deemed to have given a preference to a person if:
For the purposes of the IA 1986, a fixed charge is created at a relevant time if the onset of insolvency takes place within six months of the creation of the charge, and if the company was unable to pay its debts at the time when the charge was created.
For Debenhams:
As such, it could be that all of the requirements for a preference claim are satisfied. The final requirement is that an applicant must show the existence of a “desire to prefer”. A court must decide whether there are circumstances that might give rise to the conclusion that the company was influenced by a desire to prefer the financial creditors.
Section 245(2) of the IA 1986 provides that “a floating charge on the company’s undertaking or property created at a relevant time is invalid”, except to the extent of any new money advanced to the company upon the creation of the floating charge.
It could be argued that the floating security for the obligations under the RCF and the notes created on March 29 will automatically be set aside under section 245 if the company goes into administration upon an administration application made on or before March 29, 2020.
A floating charge was created on March 29 to secure: (i) the £200 million super senior facility, (ii) the RCF, and (iii) the notes. The floating charge was valid to secure the sums advanced under the new super senior facility pursuant to section 245(2)(a). The IA 1986 prescribes that a floating charge is created at a “relevant time” if:
Counsel made their final submissions this afternoon and the judge retired to form his decision, which must be provided by Sept. 29 in order for certain preference challenges to be available to an administrator.
If the landlords’ challenge is successful, not only could the CVA be unwound, but Debenhams could be placed into an administration. An appointed administrator would have the power to dispose of the group’s assets or parts of the business.
The administrator would also have powers under the Insolvency Act 1986 (IA 1986) to release fixed and floating security granted in March 2019 in favor of existing RCF lenders and noteholders (under section 245 and section 239 IA 86). The administrator is likely to have to apply to court to use these powers.
If the CVA challenge is successful, the RCF lenders and noteholders could be demoted to the status of ordinary unsecured creditors, losing their recently-gained secured status. The administrator would have the power to dismantle the Debenhams group and dispose of its assets to competitors, including its former majority shareholder, Sports Direct.
The CVA challenge is set against the backdrop of a conflict between Mike Ashley’s company and Debenhams. In April, Sports Direct, which was the largest shareholder of Debenhams at the time, put forward an alternative restructuring plan for the group but it was rejected by the company’s directors.
Sports Direct has already acquired House of Fraser and has suggested that there could be synergies between that business and Debenhams. Sports Direct has agreed to fund the applicants’ legal expenses and provide an indemnity against adverse costs during the CVA challenge. If Sports Direct is able to obtain control of Debenhams, it has agreed to pay the landlords more rent than they are due under their current rental arrangements.
The restructuring strategy pursued by Debenhams wiped out existing shareholders, imposed a CVA on the company’s landlords and partially equitized existing lenders. The company was placed into the hands of existing lenders, with Silverpoint being the largest shareholder. The company was given a super senior £200 million facility and the group’s existing RCF lenders and noteholders were given fixed and floating security.
The hearing itself was made on an expedited basis and Justice Mann, hearing the expedition application, ordered that the judgment be provided by Sept 29, driven by statutory deadlines for bringing a preference claim under section 239 of the IA 1986. The group's capital structure is below:
Claim under section 239 IA 1986
The company created fixed and floating security for its RCF lenders and noteholders on March 29 as part of its financial restructuring. These creditors did not previously have the benefit of such security.
If the challenge succeeds and the CVA is set aside, there is a realistic possibility that the company will go into administration. If this happens, the security granted by the company could be challenged by an administrator as a preference under section 239. In order to challenge the security under section 239, the company would need to enter administration or an administration application would need to be made by Sept. 29, due to the six-month clawback period for preferences.
Whether the section 239 claim is successful will be dependent on a full trial of its own, following the CVA challenge this week. In practice, if the CVA challenge is successful, Sports Direct would push to place Debenhams immediately into administration. This would allow it, among other things, to pursue a section 239 claim.
Debenhams will most likely appeal any decision against it and apply for a stay to block the administrator from pursuing a section 239 claim until a final decision is granted. For the purposes of the IA 1986, the appointment of an administrator within the six-month clawback period is sufficient to allow a section 239 claim to proceed.
It could be argued that the fixed charge granted by the company for the RCF lenders and the noteholders is a preference within the meaning of section 239(4), which prescribes that where a company has at a relevant time given a preference to any person, the office holder may apply to the court for an order to set aside that preference. A company is deemed to have given a preference to a person if:
- That person is one of the company’s creditors or guarantor for any of the company’s liabilities, and
- The company does anything which has the effect of putting that person into a position, which in the event of the company going into insolvent liquidation, will be better than the position he would have been in if that thing had not been done.
For the purposes of the IA 1986, a fixed charge is created at a relevant time if the onset of insolvency takes place within six months of the creation of the charge, and if the company was unable to pay its debts at the time when the charge was created.
For Debenhams:
- A fixed charge was created in respect of the RCF and the notes on March 29. Prior to that date, the company’s obligations under the RCF and the notes were unsecured.
- The company was balance-sheet insolvent on March 29.
- Accordingly, if the company goes into administration on or before Sept. 29, then the fixed charge will have been created at a “relevant time.”
As such, it could be that all of the requirements for a preference claim are satisfied. The final requirement is that an applicant must show the existence of a “desire to prefer”. A court must decide whether there are circumstances that might give rise to the conclusion that the company was influenced by a desire to prefer the financial creditors.
Claim under section 245 IA 1986
Section 245(2) of the IA 1986 provides that “a floating charge on the company’s undertaking or property created at a relevant time is invalid”, except to the extent of any new money advanced to the company upon the creation of the floating charge.
It could be argued that the floating security for the obligations under the RCF and the notes created on March 29 will automatically be set aside under section 245 if the company goes into administration upon an administration application made on or before March 29, 2020.
A floating charge was created on March 29 to secure: (i) the £200 million super senior facility, (ii) the RCF, and (iii) the notes. The floating charge was valid to secure the sums advanced under the new super senior facility pursuant to section 245(2)(a). The IA 1986 prescribes that a floating charge is created at a “relevant time” if:
- The company goes into administration within 12 months of the “onset of insolvency”,
- The company was unable to pay its debts (within section 123 of the IA 1986) at the time when the charge was created. The inability to pay debts includes balance sheet insolvency.
- The floating charge was created on March 29. Prior to that date, the RCF and the notes did not benefit from any security.
- Debenhams was balance sheet insolvent on March 29.
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