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Blog Post: Re Debenhams Plc  EWHC 1755 (Ch)23rd July 2020 Corporate Recovery and Insolvency
In Re Debenhams Plc  EWHC 1755 (Ch), the High Court considered a without notice application brought by Frasers Group PLC, a minority shareholder, for an appointment of provisional liquidators over the ultimate holding company of the Debenhams Group prior to the hearing of its own winding-up petition (“the Application”).
ICC Judge Mullen found that there was no need for such a pre-emptive appointment of provisional liquidators, in particular finding it undesirable that a minority shareholder should appoint its own choice of liquidator prior to any winding-up order being made and without notice being given to other creditors or shareholders.
- On 9 April 2019, Mr Chad Griffin, Mr Andrew Johnson and Mr Simon Kirkhope, of FTI Consulting LLP (“the Administrators”), were appointed administrators of Debenhams Plc (“the Company”) by a security trustee under a Security Agreement of the Petition dated 29 March 2019. The security agreement secured repayment to certain lenders (“the Lenders”') of advances made under a £200m term loan facilities agreement dated on or about 29 March 2019 (“the Facilities Agreement”).
- On 9 April 2019, the Administrators procured the Company to sell, in particular, all of the shares held by the Company in Debenhams Group Holdings Limited (“DGHL”), an intermediate holding company which owned all of the shares in the main operating companies within the Debenhams group of companies, to Celine UK Newco 1 Limited, a company which is, or was as at 9 April 2019, owned by the Lenders (“the Pre-Pack Sale”). The consideration for the Pre-Pack Sale was the discharge of £101.81m due from the Company to the Lenders under a £200m term loan Facilities Agreement dated on or about 29 March 2019.
- Frasers Group PLC sought a winding-up order in respect of the Company so as to allow officeholders independent of the Lenders to investigate the affairs of the Company, including the Company's and its directors' dealings with the Lenders, and the Pre-pack Sale, and if appropriate pursue causes of action which the investigations may disclose.
Allegations made in respect of the Pre-Pack Sale
In summary, Frasers Group Plc alleged that the Company, as a result of its financial difficulties, entered into loan agreements which were designed to engineer a situation whereby the Company would be forced into administration and its business could be sold by the Administrators to a company controlled by the Lenders for the sum of £101.81 million.
Frasers Group Plc argued that this was a significant undervalue and sought an order winding up the Company so as to put into place independent officeholders to investigate the dealings with the Lenders and the sale of the business.
Mr Christopher Wootton, the Chief Financial Officer of Frasers Group Plc, stated in his witness statement in support of the Application and Petition that there was a clear collusive scheme, or a “loan to own” strategy, to bring about the sale of the business. The entry into a loan facility in February 2019, whereby the company was able to borrow some £40 million by way of a bridging facility from certain lenders was identified as “suspicious” because it was said that this sum was inadequate in any event and the Company was able to borrow more substantial sums without the condition that is said to have been attached to the bridging facility, which was that no finance could be obtained from third parties.
Mr Wootton also stated that Frasers Group Plc itself had offered various loans to the Company and those offers were all rebuffed. The Lenders provided further facilities and were granted qualifying floating charges that enabled them, when the Company was unable to meet the conditions of the loans, to appoint administrators. This was followed by the Pre-Pack Sale of the shares in DGHL, which held the shares in the trading entity, Debenhams Retail Limited, to a company controlled by the Lenders. It is alleged that this was at a substantial undervalue.
Accordingly, Fraser Group Plc made an application for an appointment of provisional liquidators to investigate the Company and any potential claims against the directors and the former Administrators.
Failed Attempt by the Minority Shareholder to Appoint Provisional Liquidators
The minority shareholder applied to the Court, but ultimately failed in its attempt, to appoint provisional liquidators in order to investigate the affairs of the Company, and, if appropriate, pursue claims against the former directors and/or former Administrators of the Company.
ICC Judge Mullen declined to appoint provisional liquidators and instead adjourned the Application to be heard with the hearing of the Petition, giving the following reasons:
- Where there is no danger to assets or documents and no compelling case that the Court requires any further information to assess the benefit to creditors, it would be inappropriate to grant insolvency practitioners the powers of a liquidator without the usual procedures for the appointment of a liquidation following a winding-up order being followed.
- There was no urgency for an investigation that would make it right to appoint a provisional liquidator, without notice to anyone, and thereby put in office insolvency practitioners of only one creditor’s choosing, without reference to any third party. Doing so would simply give the petitioner's choice of insolvency practitioners powers to investigate the company before the question of whether the company should be put into liquidation and, if so, who the liquidator should be, has been considered, either by the court or the general body of creditors.
ICC Judge Mullen noted that an order appointing provisional liquidators would confer upon the officeholders extensive powers, including the power to take hold of documents and to enter premises, and obstruction of the provisional liquidators would be a contempt of court. Accordingly, conferring such a power on a without notice application justified caution.
The High Court declined to make an order appointing provisional liquidators on the basis that doing so would have subverted the ordinary procedures that apply to the selection of an officeholder to investigate the affairs of a company following a winding-up order.