Live to Fight Another CVA: Mike Ashley funds legal challenge against Debenhams’ CVA

September 19, 2019

2 min read

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What's going on here?

Sports Direct’s owner, Mike Ashley, is funding a legal challenge against the company voluntary arrangement (CVA) between Debenhams and its landlords.

What does this mean?

The challenge has been made by the Combined Property Group (CPC). A CVA allows an insolvent or distressed company to service its debt to creditors through an agreement. This allows for settlement by paying only a proportion of the debts over a period of time. Under Debenhams’ CVA, a number of stores will be closed by the lenders. Rent will then be negotiated for the remaining stores. Essentially, the distressed Debenhams has been granted a lifeline preventing it from going into administration (via the CVAs). However, it seems that Mike Ashley is doing all he can to wipe out this lifeline.

What's the big picture effect?

Some assert that Mike Ashley has a vendetta against Debenhams. Early this year, Debenhams refused to accept his £200 million lifeline. Others argue that the challenge is valid – it is discriminatory. The minority landlords who are against the CVA have had their voices drowned out by the majority. 

From a broader standpoint, this issue takes place amidst the decline of the high street. Year-on-year retail sales are falling, they fell 2.7% in May 2019, and more than 1,500 retail stores reduced rent in that time period. These shocking statistics have led to greater numbers of stores resorting to drastic measure, meaning Debenhams’ use of the CVA is not unique in these times of despair for retailers, as other big names turn to CVAs as well (see our article on Topshop’s CVA here).

In addition to this, employment will also be affected. Employees in affected outlets will seek legal advice on employment rights, meaning an increase in employment law work. Further, corporate solicitors will be in high demandas retailers, like Debenhams, have complex corporate structures due to leases being held by several companies. Corporate restructuring advice would be required to draft the CVAs to raise the profitability of remaining outlets. In the worst cases, if retailers become insolvent, restructuring and insolvency lawyers would be required. These lawyers could arrange alternative repayment arrangements between the insolvent company and creditors or negotiate for out-of-court settlements. On the creditors’ side, they might want to sue the insolvent retailer for debt owed. Lawyers could also advise on the strength of creditors’ claims and validity of their collateral over the insolvent debtors’ assets. Disputes work would, therefore, see a rise in volume.

Therefore, it can be seen that the continuing effects of the decline of the high street will undoubtedly affect the legal world, even if this only means that firms will have more work to deal with as retailers look for innovative solutions or file for insolvency.

Report written by Sherard Siahaan

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