James Conomos participates in the IR Global Insolvency Virtual Series – Force Majeure: Insolvency and Restructuring in Uncertain Times
Foreward by Andrew Chilvers
Sometimes events can be so unprecedented that even the canniest business people fail to comprehend what’s happening until it’s too late.
The COVID-19 “coronavirus” crisis is one such event. Businesses across the world have been plunged into shock dealing with the fall out of lockdowns, plummeting revenues and sales, unpaid bills and new ways of remote working for staff. And some sectors have been hit harder than others.
The first industry to be swept off its feet was tourism and the airline industry. The UKs regional carrier FlyBe was the first big casualty, while Virgin Atlantic applied for hundreds of millions of pounds in UK state aid to stay afloat. Meanwhile, in the US, United Airlines quickly grounded most of its fleet amid class action brought about by disgruntled passengers and employees. Boeing shut production of its 787 aircraft at its factory in South Carolina and in Germany Lufthansa decommissioned 40 jetliners and ceased operations at its Germanwings discount carrier.
The entire hospitality industry was at risk across North America, Europe and Australia with chains such as British pubs Wetherspoons laying off staff and Italian restaurant chain Carluccio’s going into administration. Countless other famous names were predicted to follow in the next few months. Big and small retail stores across the globe were similarly adversely affected.
But it wasn’t bad news for everyone. Companies that had invested in technology fared better and in some cases business boomed. Companies such as Walmart in the US and Tesco in the UK outpaced European discount chains such as Aldi by investing in online delivery services. Ocado, a UK online grocer, saw such a spike in activity with overloaded servers crashing in early March that the company assumed it was a cyberattack. In reality it was people stocking up for food and drink ahead of the lockdown.
Elsewhere, many firms in all sectors were quick to adopt new technology models for business operations, which included the use of mobile meeting apps, file sharing and using online apps and channels for sales, service delivery and marketing. What would probably have taken years to implement in old-fashioned brick and mortar industries (including the legal sector) suddenly appeared in a matter of days.
To help companies pull through this crisis, governments around the world unveiled packages to help shore up endangered businesses, providing damage limitation to their economies. In the UK, the government unveiled a £330 billion package of loan guarantees and other support for businesses. Meanwhile, the US Federal Reserve was asked by President Donald Trump to provide a $1 trillion economic stimulus package.
Everywhere, however, it was the small and medium-sized companies that were the most exposed. A survey by the US Chamber of Commerce reported 54% of businesses with fewer than 500 employees were closed or expected to close in the coming weeks and months. In the UK the corporate finance network predicted that one-fifth of small and medium-sized businesses were unlikely to survive the first few months of the lockdown despite promises of government support.
Unsurprisingly, legal professionals working in the insolvency sector in all jurisdictions suddenly had to keep up with new legislations being rushed through by different governments.
What impact has the COVID-19 crisis had on insolvency tests in different jurisdictions?
In Australia, the insolvency tests are not unlike those in the UK. We have both the corporate insolvency regime under our corporation’s legislation and separately we have bankruptcy legislation that relates to individuals. And the definitions of insolvency under both bankruptcy and in the corporate area are the same – an inability to pay debts. That’s when they become due and payable and, generally, that’s a cash flow test.
The courts have determined that you take into account all the available assets of the company in respect of the individual and in respect of the debts that include both contingent and prospective liabilities. That was how things worked prior to COVID 19 and up until now, we’ve had the exposure for directors under our corporation’s legislation. Directors have a duty to prevent insolvent trading, which is incurring debts.
With the COVID-19 virus sweeping the world and with companies going into distress, the government is trying to help businesses. So they’ve introduced changes that relaxed the obligations of directors to enable them to continue to incur debts other than in a dishonest way. There’s a bit of uncertainty as to how those laws will be interpreted, but the desire is to avoid insolvency if possible.
Some additional things they’ve done is to prevent people from pursuing debts and making companies insolvent or making individuals insolvent. The thinking of the Australian government is that we need to give businesses the opportunity to avoid being insolvent, except in extreme cases and to assist them they’re providing financial incentives and financial assistance so that businesses can restructure their affairs without having to necessarily use the insolvency tools, except as a last resort. The tests for insolvency are not dissimilar from what David said.
What steps could and should companies take to survive the pandemic crisis and the economic downturn?
In Australia, I don’t think they markedly different from either France, Italy or the UK. However, if you start from the position of what existed prior to the COVID-19 crisis, there have been mechanisms in place to assist companies that are in financial difficulty. They are, of course, liquidation or administration. Additionally, in the last couple of years, the government has brought legislation called Safe Harbor, which is designed to give medium to large companies an opportunity of avoiding either administration or liquidation by effectively entering into an arrangement with their creditors, taking advice from their accountants in certain circumstances.
The starting point is really to make an assessment as to whether you’ve got a viable entity at the commencement of this process, and if you have then there are significant measures that are in place that the government seems to be implementing in Australia. Not unlike in the UK, there’s assistance with the payment of wages, arrangements with banks to defer their loan payments for six months on the basis that the interest continues to accrue but loans are extended by six months at the end of their terms. There are similar arrangements that are being reached with the Australian Taxation Office (ATO) in relation to the payment of various different types of taxes.
If the directors decide that they’re at risk, then they can voluntarily appoint an independent person who can come along and help them to develop, in effect, the moratorium or restructuring. For those companies that are in a poor state now, at the commencement of this difficult phase, these solutions will only provide a short-term fix. Debt isn’t the answer. Reducing expenses will help but as David indicated, businesses such as in the hospitality industry have been completely decimated. Most of the restaurants, for example, on the east coast of Australia have completely closed and many of the decent restaurants are closed for good. So it’s a total disaster here.
While the government is trying to assist them, a number of businesses won’t come back. And when things do get back to normal I’d expect to see an enormous number of insolvencies.
What business sector will need the most support during and after the global pandemic?
We obviously should pitch ourselves to the SME market because I think that’s a market that is attractive to the IR Global brand. And I suspect the issues that will exist for those types of businesses in each of the jurisdictions, for the people that we’re talking about, aren’t dissimilar from each of our governments where they’re implementing similar strategies.
Developing a 10-point plan of things that people need to take into account in their jurisdiction might really help. In each jurisdiction, they will be slightly different versions of what can and can’t be done.
We’ve had to do them in our own practice and we’re using them to advise our own clients. There is a lot to take in at the moment about what to do and what not to do. There’s so much information and it’s hard to keep up to date.
think what David said at the start is right, it depends on your area. If you are weak at the start of this, then a number of areas will be really attractive like mergers and restructures but others will fold.
The hospitality industry is close to my heart because some of my relatives have got restaurants. Being a lawyer and frequenting almost all the decent restaurants in Queensland, New South Wales and Victoria, you get to know all of the restaurateurs. Most of the very decent restaurants on the east coast of Australia are in deep trouble and I wonder whether a restructure will really assist them, so many will fold. I think across all business sectors the weakest who can will restructure, merge, do some sort of insolvency. The rest will die.
Those who need a break will have a bit of cash and can survive by slightly restructuring. I also think for many businesses there will be a strong rebound. The impression I get and I’ve talked with lots of people almost every day, is there won’t be anything like what happened following the Great Financial Crisis.
Once people have got the opportunity to return to do what they were doing prior to this virus, there will be a really strong rebound. And so people will be eager to get out of their homes, to get back to living a normal life, maybe having learned some really good lessons from the isolation. The truth is a lot of people want to work and do want to do better things. I’m really optimistic that there will be this really strong rebound and I’m cautiously optimistic that whilst I think there could be some really bad outcomes for some businesses, there will be a lot of opportunities for restructures and for mergers.