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.