CANCELLATION OF EVENTS AND CONTRACTS
The current pandemic has wide-reaching implications and it is very difficult to say with any certainty how a court will deal with some issues going forward. It is possible that the government will look to legislate to provide relief in circumstances where the courts would otherwise determine liability and/or that the courts will address issues in line with a wider public policy stance. That said, the following should be borne in mind if you are facing an event or contract cancellation.
When cancelling or facing the cancellation of an event or contract as a result of Covid-19, the first point of reference will be the terms of the contract concerned. These may be oral or they may be in or evidenced by some written document (such as standard T&Cs). The most pertinent provisions of any written agreement will be any Force Majeure, cancellation and termination clauses.
Many parties are relying on ‘Force Majeure’ when cancelling events. The right to terminate a contract by reason of the occurrence of a ‘Force Majeure’ event only arises, however, if there is an express Force Majeure or Force Majeure type clause in the contract. If there is, the definition of Force Majeure in that clause should include the circumstances that you are facing. It should not be taken for granted that it will, simply because of the enormity of the situation that we are all facing. And it should not be assumed that certain automatic consequences will flow from the Force Majeure clause. Generally speaking, the clause itself will set out and determine the consequence of the occurrence of a defined 'Force Majeure’ event, including on what party any financial liability falls.
In the absence of express provisions, the Law Reform (Frustrated Contracts) Act 1943 may kick in to prevent any one party being unjustly enriched by the triggering event. This leads us on to the other term that we are hearing a lot in the context of event cancellations, namely ‘Frustration’. ‘Frustration’ is a legal doctrine that applies when an event occurs beyond the control of the contracting parties which makes the contract impossible to perform (the bar on ‘impossible’ is set high). We are hearing the terms ‘Frustration’ and ‘Force Majeure’ used inter-changeably, but they are not the same thing. Indeed, a carefully drafted ‘Force Majeure’ clause can actually prevent or inhibit a party’s ability to rely on ‘Frustration’ but where there is no Force Majeure clause or it is incomplete (including in respect of where the financial liability falls) the law of ‘Frustration’ may well apply. This briefing note is not and is not intended to be professional legal advice. It merely sets out certain key points to bear in mind as you navigate these difficult and uncharted waters. The position in each case will turn on the facts and the terms of any contracts, and you should make sure that you seek specific advice in each case, from your usual contact at Clintons.
The wide reaching implications of the current pandemic mean that it is very difficult to say with any certainty how a court will deal with some of the issues arising. It is possible that the government will look to legislate to provide relief in circumstances where the courts would otherwise determine liability and/or that the courts will address issues in line with a wider public policy stance.
Nevertheless, as the Covid-19 pandemic continues to cause widespread disruption, including closure of premises, and cancelled events and contracts, businesses need to consider the terms of any insurance policies that they may have in place. The impact of the pandemic is not just business interruption, but also an increased risk of dispute as parties find themselves unable to fulfil contracts or without the goods and services they need and to which they are contractually entitled. Most businesses will have employer and public liability insurance. Some may have professional indemnity and business interruption insurance. It is often the case that businesses will have a basket of insurance cover, the specific scope of which they will not be fully aware of or understand. It is always worth checking your insurance cover, and doing so as soon as possible.
If you potentially have cover, it is vital to ensure that you comply strictly with all of the insurance policies’ terms. Failure to do so may lead the insurer to reject, lawfully, a perfectly legitimate claim.
The first and perhaps most important of those obligations is prompt notification. Most insurance policies will include a requirement that you notify the insurer as soon as you acquire knowledge of a matter that may or will give rise to a claim. Bear in mind that from an insurance claim perspective, government ‘advice’ to do or not to do something may not have the same effect as a strict prohibition, so err on the side of caution, and notify your insurers if you think, for example, that adhering to the government advice may give rise to a claim. If the insurance policy prescribes a notification procedure, it must be followed to the letter even if, on the face of it, it falls outside the normal channels that you use to communicate with your insurer or broker. If in doubt copy the notification to multiple parties.
It is also important to gather evidence that may support your claim at an early stage and before relevant documents are lost, and memories fade. That evidence will not only support your claim but it will help you comply with an obligation commonly found it in insurance policies, namely the obligation to actively co-operate with the insurer by providing the documents and information that the insurer requests.
It is also advisable to enlist the assistance of the insurance broker that obtained the insurance in the first place (if you used one). They will be able to advise on how best to present what may be complex claim and they may be able to apply commercial pressure on the insurer, which is not available to you.
Finally it is important not to exaggerate the value of any claim. Exaggeration may lead the entire claim to be rejected including those losses which were unquestionably incurred and covered.
Needless to say, this briefing note is not and is not intended to be professional legal advice. It merely sets out some general matters to consider. The position in each case will turn on the facts and the terms of any policy, and you should make sure that you seek specific advice in each case from your usual contact at Clintons.
This briefing note covers some key points to consider in relation the financial repercussions of the current pandemic and the ability of businesses to trade. Legal provisions in this area are evolving quickly with government legislating to take account of these extraordinary times. We anticipate that government will continue to legislate to provide relief in circumstances where the courts might otherwise have determined liability and/or that the courts may well in the future address issues in line with a wider public policy stance.
We have seen evidence of this already when Alok Sharma, the Business Secretary, recently announced that legislation would be passed with the overriding objective of helping companies continue to trade through these troubled times, either to trade through the disruption caused by the pandemic, or to give them the breathing space necessary to undergo a formal rescue or restructuring process. The proposed legislation will include:
relaxing the rules on directors’ personal liability in circumstances where a company is continuing to trade whilst insolvent (either on the basis of its balance sheet or on the basis that it is unable to meet its debts as they fall due (or both)) - this is to apply retrospectively form 1 March 2020 for a period of three months; and
having a moratorium on creditor action for companies adversely affected by COVID-19.
These are important and welcome, albeit temporary, changes (and we can expect more to follow) but it should not mean delaying careful and urgent consideration of what steps should be taken to ensure the long term survival of any business concerned. Indeed the proposed legislation is in place to allow precisely that.
Generally speaking the earlier that these steps are considered the more options will be available to the business, and the greater value can be preserved for the widest range of stakeholders (from shareholders to employees). The other key is to have a detailed and clear understanding of the financial position of the business and for that position to be documented. That information and those documents will help enable the right decision to be reached and for that decision to be justified if subsequently challenged. It will also be invaluable in implementing whatever course of action the company decides to follow.
More often than not, a restructuring process will be based on the company reaching an agreement with its creditors. There may well be a benefit in engaging in those discussions sooner rather than later. Any agreement reached may well have to be endorsed or ratified by following a formal and prescribed statutory process. These include:
A scheme of arrangement - (often used when a solvent business wishes to reorganise its group, restructure its affairs or merge / demerge parts of its business).
A Company voluntary arrangement - (initiated by the directors, this procedure is often used by insolvent companies when the underlying business is viable but time is needed to reschedule existing debt obligations over a finite period which is usually less than 5 years).
Administration - (often used when an insolvent business has preferential creditors and there is a need to realise value to satisfy liabilities to them or in circumstances where a business remains broadly viable and the realisable value of the business / assets is likely to be greater if they can be sold on a going concern basis rather on a simple winding up. Sometimes the sale is achieved through a pre-packaged administration where, rather than marketing the business / assets as part of the administration process, a prospective purchaser has already been identified such that the sale is concluded on a closed basis after an Administration order is made. In practice any acquirer of a business or assets of a company in administration will assume responsibilities for those employees wholly or mainly engaged in the business or assets being sold).
Liquidation (this is arguably the most extreme option when a liquidator is appointed to close the company down and to realise all its assets by whatever means. In practice the return available to creditors is likely to be less on a liquidation than on an administration as liquidation sales rarely achieve increased value for the business on a going concern basis).
The key always is to seek early advice, and it may be necessary, in some circumstances, to seek that advice from a licensed insolvency practitioner.
SUPPORT FOR MUSICIANS
A variety of measures have been announced by the UK Government and various music organisations and businesses, which may be of assistance to those in the music industry in these uncertain times. We have compiled a list of the various initiatives that have come to our attention.
a) UK Government self-employed support scheme
The government is providing a support package to help freelancers who have lost earnings as a result of the pandemic. As part of the package, freelance musicians will be able to apply for grants worth up to £2,500 per month for at least three months. This provision is subject to further review and may be extended to longer than three months.
In order to claim the grant, a self-employed person must have earned less than £50,000 in 2018-19 or as an average between 2016 and 2019 and the majority of his/her income must come from self-employment. The first payment is expected to be no earlier than the start of June. More information can be found on the government website here.
b) PRS Emergency Relief Fund
PRS has introduced the PRS Emergency Relief Fund to provide help to those suffering from financial hardship as a result of COVID-19. Eligible PRS members may apply for a grant of up to £1,000 here.
c) PRS Members Fund
PRS also provides general financial and psychological support via the PRS Members’ Fund. Applicants must have held membership for seven years or more, or earned at least £50 in royalties with PRS (more information here).
d) Help Musicians Financial Hardship Fund
Help Musicians has raised an emergency fund to help affected musicians with a one-off payment of £500 by applying through an online form here.
e) Musicians Union Hardship Fund
The MU has made available a £1,000,000 fund for members who have lost work as a result of the virus and are in dire need of financial support. Click here for more details.
f) Royal Variety Charity Grant
The Royal Variety Charity is providing grants to professionals working in the entertainment industry who are in need of support. The application form can be found here.
a) USA (for American artists)
The US has passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act. This creates a rescue fund for Americans who are self-employed, contract independently or own small businesses, including music industry professionals. It includes a $1,200 payment that will be sent to most adults making $75,000 or less annually, according to past tax returns, as well as a fund aimed at providing loans to small businesses. Details of the application process are not yet available.
The Recording Academy in the US are making grants available to American musicians via Musicares. Affected musicians can apply for assistance with their living costs and for loss of earnings due to cancelled gigs here.
We’ve seen a number of international PROs launching financial support funds for their members, such as SACEM in France and GEMA in Germany. Links to both of these initiatives are below:
SACEM - apply in the membership area
c) Other Funds and Resources
Live Nation Crew Nation Fund – this is designed to support backstage crew members. More information on how to apply should be available soon. In the meantime the website can be accessed here.
Soundcloud have also launched a fund to help affected musicians and have put together a helpful list of further resources and information on their blog here.
The above is a non-exhaustive list of funds available which focusses on individual assistance and relief.
Success and failure is never binary particularly in these extraordinary times. Moreover, many of the businesses facing financial difficulties at the present moment were, until very recently, solvent and thriving businesses. There is no reason, therefore, with careful planning and prompt decision making, that those businesses cannot survive and return to profit, even if it is in a different shape or form.
Please note that this briefing note is not and is not intended to be professional legal advice. It merely sets out certain key points to bear in mind as you navigate these difficult and uncharted waters. Needless to say, the position in each case will turn on the facts and circumstances of the business concerned, and you should make sure that you seek specific advice in each case from your usual contact at Clintons.
BRIEFING NOTE - Corporate Insolvency and Governance Act 2020
On 26 June 2020, the Corporate Insolvency and Governance Act 2020 (“Act”) came into force. The primary function of the Act was to introduce permanent and temporary measures to assist companies with the financial difficulties they may have faced as a direct result of COVID-19. The headline changes are outlined below:
Moratorium – permanent:
Struggling companies are now provided with an opportunity to rescue or restructure the business by applying for a moratorium (provided there has been no moratorium in the previous 12 months). The Act provides a company with 20 business days to either secure third party funding or restructure. There is also an option to extend for a further 20 business days (without creditor consent), or up to one year (with creditor consent or as ruled by the court). During the application process, an insolvency practitioner will be appointed to “monitor” the moratorium. The monitor has power to bring the moratorium to an end including where he or she thinks that either a rescue of the company is unlikely or where a rescue has been achieved.
Disapplication of ‘ipso facto’ clauses – permanent:
The Act now expressly prohibits a third party supplier from terminating a contract with a company that is subject to an insolvency procedure (even where the contract provides for such termination). There are small number of exceptions – predominantly relating to the provision of financial services (banking and insurance). The supplier will be obligated to continue to supply the goods or services to the company throughout the insolvency procedure to provide the company with every opportunity to survive.
Restructuring plan – permanent:
Where a company has entered or is likely to enter financial difficulties, the Act now introduces a new restructuring mechanism where a company can propose a restructuring plan to its creditors or its members with a view to reducing, avoiding or mitigating the effect of the difficulties it faces.
Initially, the court is asked to convene meetings of the creditors (or classes of them) and the members (or classes of them) at which the restructuring plan is considered. Each class will vote on the restructuring plan and the plan is approved if 75% in value of those voting approve it. The court then decides whether to approve the restructuring plan. If one or more classes approve the plan, the court can bind dissenting classes provided a) the members of such dissenting class would not be any worse off under the plan than they would be under a relevant alternative (typically, liquidation) and b) the plan has been approved by 75% in value of a class of member or creditor who would receive payment (or have an interest in the event of a relevant alternative) under the plan.
Wrongful trading – temporary:
The Act temporarily suspends the pre-existing wrongful trading provisions between 1 March 2020 and 30 September 2020. However, the amendments only serve to mitigate but not eradicate the threat of personal liability arising from wrongful trading for directors who continue to trade a company between 1 March 2020 and 30 September 2020, not knowing whether the company will avoid insolvency in the future.
Although the Act does not suspend liability, it now directs the court to assume that where a director’s actions could constitute wrongful trading, the director was not responsible for any worsening of the financial position of the company or its creditors.
Whilst the Act mitigates the amount a director could be asked to contribute it stops short of ruling out a disqualification under the Company Directors Disqualification Act 1986. There is also no equivalent provision in respect of fraudulent trading or in the event of a misfeasance claim.
Statutory demands and winding-up petitions – temporary:
The Act now prohibits a creditor from serving a wind-up petition on the grounds of an unfulfilled statutory demand which was served between 27 April 2020 and 30 September 2020. Companies are not excused from winding-up orders where the financial difficulties were prevalent prior to or would have arisen in absence of COVID-19.
Company meetings – temporary:
Between 26 March 2020 and 30 September 2020, the Act adopts a more flexible approach to the formalities previously required to hold a legitimate company meeting. Where a company was required to have an annual general meeting during 26 March and 30 September 2020, the company will now be allowed to hold the annual general meeting at any time before the end of this period. In addition, quorum requirements may now be satisfied without any participants being physically present in the same place and meetings (and votes) may now take place electronically. The Act applies retrospectively to ratify those meetings that might have taken place on an electronic basis from 26 March 2020.
Company filing requirements – temporary:
The Act grants an extension to the filing of company accounts for public companies. Where a public company has a filing date between 26 March 2020 and 29 September 2020, the deadline will be extended to the earlier of 30 September 2020 and 12 months from the end of the company’s accounting period.
Additionally, the current 14 day deadline (commencing from the end of a company’s/partnership’s review period) will be extended to 42 days to file a confirmation statement.
This briefing note is not and is not intended to be professional legal advice. It merely sets out certain key points to bear in mind as you navigate these difficult and uncharted waters. The position in each case will turn on the facts and the terms of any contracts, and you should make sure that you seek specific advice in each case, from your usual contact at Clintons.