Frances Coulson participates in the IR Global Insolvency Virtual Series – Insolvency & Restructuring: How the global pandemic changed the rules on insolvency
Foreward by Andrew Chilvers
Insolvency and restructuring legislation changed radically in all jurisdictions in the wake of COVID-19. While governments have tried to delay the number of insolvencies in the short term, most experts agree that distressed businesses will start to fail significantly later this year and into 2021.
For insolvency practitioners and lawyers alike, the pandemic has posed problems that have not been seen on a global scale in more than 100 years. Many businesses have faced sudden and catastrophic closures along with the evaporation of their revenue as emergency lockdowns have been implemented across all jurisdictions in an attempt to control the virus.
And now as lockdown measures have eased around the globe, those companies still functioning may well be tipped over the edge into insolvency by the loss of trade during and post the pandemic. No surprise then that later this year, the number of company insolvencies and liquidations is predicted to soar.
This provides the challenge for insolvency professionals; how to retain value and restructure decent businesses that were robust and profitable before March, while allowing zombie businesses to naturally fail?
Are different governments introducing new legislative or country regimes that allow for restructuring over liquidation? There is no legislation that allows restructuring, so how does it preserve its economic value?
The UK government introduced some rather robust legislation at the end of June in the Corporate Insolvency and Governance Act, which has three main permanent changes, with lots of peripheral Covid-related temporary provisions and reliefs also included.
The 3 biggest permanent changes have been long under discussion and some were in the pipeline but have been delayed because our legislative programme has been stalled for three years with Parliament so tied up with Brexit.
The first major permanent change is the introduction of a breathing space, a moratorium (which doesn’t have to lead to an insolvency) for eligible companies. It might allow time to refinance for example. The moratorium is achieved either by filing at court various documents -including certification by the proposed Monitor that the moratorium for the Company in his view would result in the rescue of the Company as a going concern-, or by application to court. A company which is an overseas company for example would have to apply to court rather than simply file documents to achieve the moratorium. The moratorium leaves directors in charge but monitored by the Monitor (a licensed insolvency practitioner). If they fail to supply information or if the Monitor determines the Company can no longer be rescued as a going concern he must bring the Moratorium to an end. Creditors are notified of the existence of the Moratorium.
The second permanent change is the introduction of a new restructuring plan, (and the first of those has just been approved in England for Virgin Atlantic). It allows cross class cramdown of creditors and requires a court application.
The third major permanent measure introduced is the banning of ipso facto clauses- that is contractual terms allowing suppliers to terminate contracts simply because of insolvency. There are other provisions including temporary reliefs during the Covid period and the government has given itself power to extend temporary reliefs. It is a 200+ page piece of legislation largely untested as yet but containing some welcome provisions.
Do “rushed through” insolvency measures address both large enterprises and small and medium-sized companies? Is there legislation pending to address this in your jurisdiction?
We’ve had a good combination of temporary measures and longer-term measures, and with the ability to do a lot more by secondary legislation. For instance, we haven’t been allowed to petition to wind up any company unless we can specify that they haven’t been affected by coronavirus, which is pretty hard. You have to go through a two-stage process to be able to wind up a company; even if the debt is historic and landlords are a particular issue, they can’t do anything here, they can’t forfeit the lease, they can’t do anything basically. As long as you pay the surcharges, they have no ability to enforce their rent.
It’s only temporary, but they keep extending. It was originally going to be till the end of June, but now it’s the end of September and everybody is still talking about extensions. Sensible landlords are negotiating lower rents and monthly repayments so that they can keep some income coming in. Those who are just intransigent may well suffer.
Of course, there’s a huge amount of investment, particularly by pension funds and so on in commercial property and it has got to change. You go into Central London today and it’s like a ghost town. Life is starting to come back, but nobody will get back to work in the same way as they were doing prior to Covid.
We’re still waiting for the tsunami of insolvencies. I think September will be too early for them to happen. What is critical is what the government does. For instance, we’ve had deferrals of VAT and tax payments until next year. The government has got to reschedule those long-term because people have had a period of not trading. They won’t suddenly have cash in January or April next year so if the government doesn’t reschedule those longterm, that’s when I think more companies will tip over.
With the “light touch administration” processes now being implemented in different jurisdictions, does this give too much power back to directors? What are the potential risks for the office holder?
With the moratorium, for example, the directors remain in control, but the monitor has to do a lot of monitoring. We don’t have in this country the same level of legal intervention or court control that you do in the US. Judges here, on the whole, just say ‘we’re not commercial animals, that’s your job, get on with it, don’t trouble us, and don’t use the court as a bomb shelter to ask us to make any decisions.’
And in a CVA, obviously the directors remain in control. But it’s like any contract, the people they are contracting with have got to trust them. And if they’ve messed up the management once, that’s the risk. Unless there’s some form of education, and improvement in the management, then it is going to fail again. And we have a lot of zombie businesses because they didn’t clear them out from 2008 onwards.
The reason we have so many zombie businesses is that with interest rates low for so long, there is no point tipping them over. And after the banks got such a kicking last time – well deserved – they were too afraid to put anybody into administration, we had to rely on the Revenue to wind them up. Now banks are just about getting their appetite back a little bit to take some action, business owners are getting interest free loans from the government as part of the package of coronavirus bounce back measures. Consequently, you are going to have businesses that keep struggling on and spinning plates and not going to put themselves into any form of insolvency until all of those avenues of money are cut off next year.