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Last updated 30 March 2020
“Whatever it takes” is the mantra from government to business as it takes extraordinary steps to safeguard both people and the economy. But as businesses are ordered to temporarily close or being voluntarily mothballed, the pressure on some businesses will be just be too much.
The government have just announced measures to help businesses facing financial difficulties too and we explore what this means.
We expect suppliers, landlords and other creditors to adopt varying degrees of empathy where businesses cannot meet payments, it needs to be recognised that, ultimately, those suppliers will have their own pressures.
Creditors may, quite understandably, feel that they have an obligation to their own stakeholders to ensure that they take every step to collect money owed to them. The future of their own businesses may too be at stake and, whilst all businesses have empathy for the plight of the nation, attitudes might harden over time as the pressure mounts
UK insolvency law has worked well for years and is very well developed. However in 2016, when our restructuring partner Andrew Tate was President of the UK restructuring trade body R3, the government consulted on some new measures which would add to the suite of tools available to rescue businesses.
Unfortunately, these ideas were buried for years in the Brexit debacle but the draft legislation has been produced and is ready to bring onto the statute books. They will be a welcome addition.
The House of Commons is now on a recess until 21 April so this legislation is not likely to pass as quickly as the Coronavirus Act 2020.
The first, and most important, measure is breathing space for companies. This is called a “moratorium” and it provides a period of time for companies to reorganise themselves and implement a rescue plan without court action being taken by creditors. Crucially this measure will also prevent action being taken by the banks against customers.
Our banks are bending over backwards to help businesses but this measure is the first time in UK law that banks have been prevented from controlling the restructuring steps taken by companies.
So -what does this mean?
We have not seen the detail of the draft legislation but the last document seen from the government on this suggested that:
The idea of the moratorium is that a company has time to put a rescue package together and consult with its major stakeholders.
This will be a controversial measure for the restructuring profession. There is a similar monitoring role which has been in our law for some time which insolvency practitioners have been very reluctant to use because it is very onerous. I have sat in conferences of restructuring professionals where, on a show of hands, there are very few people who would agree to be a monitor under the new proposals for the same reason.
However, our economy needs every tool possible and we will be embracing any new proposals and making them work for our clients.
Another proposal made in 2016 seems likely to be brought on to the statute book at an early stage. This is to force suppliers to continue to supply a business which is in financial difficulties despite unpaid debts.
This forcing of supply is already in force for utility companies and IT companies so they cannot hold a company in financial difficulty to ransom. This measure will extend that to other suppliers who are deemed essential to the rescue of a business. Those suppliers will not be able to rely on clauses in their contracts (called ipso facto clauses) which allow them to end contracts of supply because of insolvency.
An example would be a car manufacturer which gets into difficulties. Its parts suppliers who are contractually bound to supply the car manufacturer would not be able to stop supplying simply because of the non payment of debt or the insolvency of the manufacturer.
One additional measure which was mentioned by the business minister on 28 March 2020 is the relaxation of the rules around wrongful trading. This is a welcome addition to help business leaders “hold their nerve”.
The UK has wrongful trading rules which essentially make directors potentially personally liable if the company trades on past the point where liquidation is inevitable. The liability is the increase in debt incurred beyond that point.
In truth, it is a very difficult action for a liquidator to bring but the question does worry directors of companies, particularly bigger businesses where the numbers are large.
We do not know the detail of this proposal but essentially it could help a situation where:
In this situation the owner has enough to worry about without the additional concern that a liquidator might pursue them at a later date.
Directors need no reminders that even in these unprecedented times they should be mindful of their duties to creditors and must aim to come through this crisis with a plan to meet the increased financial obligations which most businesses will be left with.
Some businesses will buckle under the enormous pressure and unfortunately some already have.
The first step to take in that situation is to consider if creditors will be prepared to work with the business to restructure the debt which is burdening the business. There are established processes for dealing with such discussions and tax reliefs are available where debt is forgiven by banks and other creditors.
When all restructuring options have been considered, as a last resort business owners can look to formal insolvency procedures available to help preserve the core business. The moratorium will be a great further addition but the existing tools are still really effective.
Administrations are designed to create a moratorium that protects a business whilst it, and their advisers, consider the options that may rescue the business. An administration is often used to sell a business.
A company voluntary arrangement, or CVA, will also be considered if there is a good underlying business and creditor liabilities can be settled from future profits over time. This will be especially useful for a mothballed company needing to repay debts over many years rather than within normal credit terms.
And, although it should be considered the last option, a liquidation may sometimes be the only option if a business has liabilities which it has no prospect of paying and the fundamental business model has been decimated by the economic circumstances.
Liquidation for a business really should not be an inevitable consequence of the current economic circumstances, and the earlier a business takes advice the more options that are open.
We have a well established and innovative team of business turnaround and restructuring experts that can offer advice and guidance helping directors reach the best outcomes during the crisis. Contact us here.
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