COVID-19 sparks the most significant insolvency reforms in a generation
On 26 June 2020 the Corporate Insolvency and Governance Act 2020 introduced the biggest reforms in a generation of UK insolvency law. These temporary measures were due to expire on 30 September 2020 but last week the Government gave businesses much needed breathing space by granting an extension.
The COVID-19 pandemic looks likely to continue for some time and its effects are likely to affect businesses for quite some time, causing pressure on cash flow, funding and profitability. Coffin Mew’s insolvency and business recovery expert, Ed Bible, explores some of the options open to companies navigating a path into 2021 and beyond.
Light touch administrations
Administration is a statutory process whereby an insolvent company (or one that is on the brink of insolvency) has administrators appointed over it, who are obliged to pursue one of three statutory objectives:
- The first objective is the rescue of the company as an ongoing concern; however, in reality, this is often unachievable;
- The second objective of a better result for creditors than a liquidation is used more often, and
- The third objective is realising property in order to make distribution to secured or preferential creditors.
Whilst light-touch administration has been called a new insolvency process, it has been available as a tool since the introduction of the Insolvency Act 1986 and is effectively a more flexible approach in respect of the existing administration regime. It differs from the standard procedure for an administration in one key respect. The administrators consent to the directors continuing to exercise their management functions and remaining in control of the company following their appointment within agreed parameters. Whilst this clearly is appropriate in circumstances where there is a realistic prospect of achieving the rescue of the company and the company’s failings are not due to the directors’ mismanagement, the most high profit example of a light touch administration is the administration of Debenhams. Here a light touch administration has been used as the management team had been put in place by the shareholders to turn around the retailer and the administrators had sufficient confidence in the management team to reach agreement for them to continue to run the business on a day to day basis.
One of the key benefits of an administration is that the company enjoys a moratorium on creditor and other enforcement action, which gives the company a much needed breathing space to take action to improve its financial position. Where appropriate, a light touch administration could work well. The directors know the business and its market and so are well placed to navigate the challenging economic circumstances presented by the COVID-19 pandemic whilst the company is protected by the moratorium. In addition to maintaining a degree of business continuity, the costs associated with a light-touch administration are also likely to be lower than other administrations, since the administrators will be carrying out only minimal essential functions, rather than operating the company on a day to day basis pending a sale. Against that, the administrators still have overall responsibility for the company and its affairs and will have to put in place a structure to monitor the directors’ actions and ensure that they do not exceed the agreed powers which the administrators have consented to being operated by the directors.
It is likely that the use of light touch administrations will be restricted to cases where the management team has the capability of operating the business in a pressured environment underpinned by difficult financial circumstances. Whilst it is a useful tool, the use of light touch administrations is unlikely to be widespread and will depend on the willingness of administrators and directors to co-operate as the COVID-19 pandemic progresses.
Temporary regime on winding-up petitions
At the start of the lock-down in March, the Government was quick to indicate that it would legislate to restrict the ability of creditors to issue statutory demands and present winding up petitions against businesses which had been severely affected by the COVID-19 pandemic. The effect of the temporary rules has been successful and has limited the number of winding up petitions which have been presented since March 2020. Landlords in particular may wish to make use of the ability to serve statutory demands or threaten a winding up petition in the case of tenants who have not paid rent when they have been able to pay. Clearly, landlords will need to consider the viability of their tenant’s businesses if they wish to avoid having empty premises in the months ahead. However, the removal of the restrictions will help to re-calibrate commercial relationships and reposition them to a more normal basis.
The Government introduced a number of measures to help businesses to weather the COVID-19 pandemic. These included the employee furlough scheme, deferral of tax liabilities and suspension of business rates, as well as Coronavirus Business Interruption Loans (“CBIL’s”). As these schemes are wound down, businesses need to be aware of the effect on their cash flow and their funding requirements.
CBIL’s are guaranteed by the Government for 80% of the amount advanced and the Government also pays the interest and any fees due for the first 12 months of the loan. The anniversary of the loan could cause financial pressure on businesses and so it is important for them to take action in the next few months to ensure that they are prepared for the additional liabilities which the business will have to service going forwards. In particular, the deferral of VAT could catch out some businesses which have failed to set aside funds to pay the liability. It is also important for directors to continue to comply with their statutory duties and to take appropriate advice in order to assist them in managing the company and its business during the next stage of the COVID-19 pandemic.