Were Debenhams to go into administration it would be the latest major retailer to run into trouble in recent years after rival chain House of Fraser, electronics firm Maplin, cycle shop Evans, and Toys R Us all struggled to stay afloat.
If Debenhams does use a pre-pack administration, Mr Ashley's near 30% stake in the company, which cost about £150m to build up, would be wiped out.
Administrator FTI Consulting will seek a sale of the company immediately, which could give Mr Ashley a new opportunity to bid.
The move Debenhams PLC said was to deliver "continuity" for all Group operations and to "minimises business disruption, ensures continuity for the businesses and their suppliers and protects the Group's employees".
The last-minute rescue package promised to underwrite a £150 million rights issue, on the condition that Mike Ashley be made chief executive of Debenhams.
Ashley reduced his previous demands, asking lenders to write off £82m of Debenhams' £720m debt pile, instead of the £148m his firm had previously demanded.
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But he said it would allow Debenhams to continue trading as normal, access new funding and carry out its turnaround plans, while reducing debt.
"The company's lenders have confirmed to the company that the proposal, on the terms set out, was not sufficient to justify an extension to the April 8 deadline".
The retailer gave warning this morning that it was now set to enter a pre-pack administration, which will hand control of the operating business to its lenders as early as today but wipe out Debenhams shareholders, including Sports Direct, which owns almost 30 per cent of the group.
Mr Ashley's attempts to take over Debenhams have resulted in him demanding that the board be investigated, two members to undergo lie detector tests and trading in its shares to be suspended. Debenhams Retail Limited has been transferred to a newly incorporated company and continues to trade and operate as normal.
George Charles from money-saving website www.MoneySavingHeroes.co.uk said the high street had taken a "massive hit" from Debenhams' going into administration.
A list of stores that could be affected is yet to be released meaning that the future of the Scarborough store, as well as that of dozens of stores across the country, remains uncertain.