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Coronavirus: Companies offered potential lifeline

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Posted by Caroline Benfield on 03 April 2020

Caroline Benfield Partner

All businesses are now operating in uncharted waters. The government is reviewing its support for businesses on an almost daily basis and, last weekend, the Business Secretary announced a  proposed relaxation of the law around ‘wrongful trading’ for 3 months (see our guide for more detail) thereby giving directors of otherwise viable businesses space to see whether the package of government incentives will enable them to survive the pandemic. Alok Sharma also announced he was considering other measures, largely based on the government response to the proposed changes to the insolvency regime in 2018.

Business Rescue Moratorium

What has become abundantly clear is that the unexpected, and rapid, economic fallout from the spread of COVID-19 has caught every business unaware. Coupled with the government’s instructions on social distancing, the subsequent lockdown and closure of office, retail and industrial premises bar those carrying out essential activities, most businesses are facing unanticipated challenges. Therefore, in order to ensure the survival of those that have had their cashflow hit hard by the attendant disruption, thus compromising their solvency, the government is proposing a moratorium (the length of which has yet to be confirmed but is considered likely to be a minimum of 28 days) during which no creditor can present a winding-up petition.

This move is not designed to throw a life line to businesses that were in danger of insolvency before the crisis but is designed to rescue those that had no liquidity problems before COVID-19 struck. Directors would need to apply to the courts to benefit from the moratorium and insolvency practitioners will assess whether the business in question is a suitable candidate which will hinge on its overall financial viability. Creditors can lodge an objection with the court if they felt they are being unfairly prejudiced.

Preventing the Termination of Certain Contracts

The supply of goods across the health, food and manufacturing sectors has been a particular headache for the government. Therefore, suppliers will not automatically be able to enforce termination clauses triggered by, for example, fear of insolvency. How this will impact on suppliers themselves struggling with liquidity issues is not clear and it would seem, from the government’s press statement that this provision is only really of interest to those companies involved in supply chains providing essential items. However, it appears that, in the event of insolvency, liabilities incurred to suppliers during the moratorium would get preferential treatment over other creditors.

Court-based Restructuring Tool

In common with similar procedures in the US (Chapter 11) and Europe, the government may introduce a new restructuring plan which will sit alongside the current scheme of arrangement. This will be overseen by the courts and apply to both solvent and insolvent companies. The new plan would bind all creditors, both secured and unsecured, including those that object. The idea is to give companies more time to come up with a rescue remedy.

These proposals are yet to become official but, given the speed at which events are moving, we anticipate an announcement shortly . Most commentators taking an active interest in such matters, such as the British Chambers of Commerce and the Institute of Directors are broadly welcoming of such initiatives. However, as ever, the devil will be in the detail.

About the author

Caroline advises on all aspects of contentious and non-contentious personal and corporate insolvency matters.

Caroline Benfield

Caroline advises on all aspects of contentious and non-contentious personal and corporate insolvency matters.

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