As the business world starts to count the cost of the COVID-19 pandemic and the government measures taken to contain it, attention is turning to the tools available to help companies that have been financially impacted.
Many companies are deferring payments to conserve liquidity, raising difficult questions around directors’ duties and leading to an immediate focus on how to protect the business from resulting creditor action.
Once the immediate crisis has passed, attention is likely to turn to how to address these deferred liabilities and ‘reset’ the balance sheet, often in a context where revenue from this period has been permanently lost.
The UK government has today published draft legislation that, once implemented, will provide more options to companies impacted by COVID-19. The suspension of personal liability for wrongful trading until 30 June significantly helps directors trying to keep businesses going. Combined with temporarily prohibiting creditors from filing statutory demands and winding up petitions for COVID-19 related debts and the introduction of a moratorium, which will give companies a protective shield outside administration, this may reduce the number of companies needing to make a formal insolvency filing.
The government is also looking to plug an existing gap in the moratorium, by banning suppliers from terminating or varying the terms of contracts on grounds of non-payment of historic liabilities or insolvency / moratorium itself. This will go a long way to mitigate the pressure on businesses to make ‘ransom payments’ to creditors threatening to otherwise switch off business-critical supplies.
Looking ahead, the new restructuring plan could help companies as they look to reset their balance sheet in the coming months. This will introduce cross-class cramdown for the first time in England, meaning that one impaired class of creditors (senior lenders, for example) could agree to compromises that bind all creditors, subject to various safeguards including court approval. In practice, this will make it more feasible to implement a wholescale financial and operational restructuring affecting the general body of creditors.
The new tools do not replace the existing regimes which will also continue to be available. One increasingly common theme in the restructuring market is around the ability to adapt the existing administration regime to address current needs.
In practice, administration has come to be associated with business collapse and the displacement of management, but it need not be so. The primary aim of the modern administration regime, introduced in 2003, is to restructure and rescue the company (akin to Chapter 11 in the US). For example, the administrators of Debenhams, a UK department store chain, have agreed that the executive team will remain in charge of day-to-day operations as they work together to position the business to reopen stores and resume full trading once the lockdown is ended. In the meantime, the administration, on which we are advising, has put a ‘protective shield’ around the business to insulate it from destabilising creditor action.
The UK’s reforms do not go as far as some other jurisdictions, which have implemented more comprehensive relief during this crisis period. However, combined with a creative approach to existing tools, they will add greatly to the ability of companies to weather the storm. The government has indicated it intends to implement the reforms on an accelerated timetable and the House of Parliament is debating all three stages of the Bill on 3 June 2020.