Debenhams: Mike Ashley funding legal challenge to ‘eliminate store as a competitor’, court hears

Sports Direct owner Mike Ashley is trying to “eliminate a competitor” and “pick up its assets on the cheap” by funding a legal challenge to the deal that rescued Debenhams from administration, the High Court heard on Monday.

The ailing British department store chain was granted a lifeline by landlords through a company voluntary arrangement (CVA) in May, at the expense of 50 planned store closures and 1,200 job losses.

The CVA will see some landlords’ rents cut by between 35 and 50 per cent, and is being challenged by Combined Property Group (CPC), which owns six properties housing Debenhams stores in England.

Mr Ashley had been the company’s largest shareholder and launched several bids to take control of the retailer.

But lenders took control of the company in April after it rejected Mr Ashley’s offer of £200m, in part because of his desire to take over as chief executive.

Now, after dropping a legal challenge of its own against Debenhams in July, Sports Direct is funding CPC’s lawsuit to overturn the CVA that took the company out of administration.

CPC argues that Debenham’s CVA is “designed to create a situation in which the company’s general body of unsecured creditors is paid in full at the expense of certain landlords and local authorities”.

But, at a hearing in London on Monday, Debenhams’ barrister, Tom Smith QC, said the retailer considered that Sports Direct was funding the case because it “wants to drive its principal competitor out of business”.

Mr Smith told Mr Justice Norris that Sports Direct seemed to want to “drive Debenhams into administration so that it can pick up its assets on the cheap”, adding that such an objective “would be consistent with Sports Direct’s recent modus operandi”.

In written submissions, Mr Smith said Sports Direct’s role in funding the case was “highly unusual and a matter of significant concern to the company”.

He added that Sports Direct was a major shareholder in the Debenhams group and had “voiced grievances that its own proposals for the restructuring/refinancing of the group were not accepted”.

Mr Smith submitted that Sports Direct “is obviously doing this because it thinks it is in its own commercial interests to do so”, and suggested its conduct “may be borne of a desire to ‘punish’ the company and its lenders for rejecting Sports Direct’s proposals”.

Daniel Bayfield QC, representing the landlords, argued that the CVA was void as it “goes beyond the jurisdiction” set out in the Insolvency Act, and that it “unfairly prejudices the interests of the applicants”.

He told the court that retail CVAs, which many other retailers had used as a result of “the High Street crisis”, were a “controversial” tactic.

Mr Bayfield submitted that most of the applicant landlords held the properties “on trust for various charities”, adding: “Challenging a CVA is an expensive and uncertain process, particularly for a charity.

“In those circumstances, [Sports Direct] has agreed to fund the legal fees of the applicants and to pay any adverse costs order made against the applicants.”

The CVA was approved by nearly 95 per cent of creditors by value who voted on the proposed deal.

But Mr Bayfield said those figures should be “treated with great caution”, as many of those who voted for it “were not affected by it, and who expect to be paid in full at the expense of the most impaired categories of landlords”.

In a statement ahead of the hearing, a Debenhams spokesman said: “We remain extremely confident this challenge is without merit and expect it to fail.

“In the meantime, we are progressing with our restructuring, which was approved by the vast majority of creditors, including 80 per cent of landlords.”

A Sports Direct spokeswoman declined to comment.

Mr Justice Norris will hear the case over four days and is likely to reserve his judgment.

Additional reporting by PA