As we rapidly head towards an exit from lockdown and a phasing out of the Job Retention Scheme (Furlough) my phone has started to ring as clients and contacts anticipate cash flow issues and have concerns about their responsibilities as business owners or directors.
Some sectors will be worse affected than others of course. Indeed, some will actually do well out of this crisis and, equally, resilient businesses with strong cash flows and supportive funders will no doubt seize opportunities.
For the majority however, this will be an extremely challenging time and for many small businesses the future may look bleak. The Government measures have been extremely effective in delaying the economic impact but unfortunately it is not sustainable.
The good news, if there is any, is that further measures will be put in place to protect struggling businesses affected by Covid 19. Aimed at protecting businesses which are viable in the longer term, it recognises that for many businesses, breathing space is required and things may get worse before they get better.
We believe these protective tools will come to the fore in the current crisis. The key changes for business owners are:
For company directors, you can expect to benefit from a 20 business-day moratorium that is easier to obtain than the current version and can be extended. This prevents legal action by any creditor, including secured creditors, allowing breathing space to come up with a viable plan. It also does not automatically mean that the company will enter administration, there is an opportunity to propose a CVA etc., once the moratorium is over.
The current Bill excludes LLPs but will be available to the large majority of businesses.
A company moratorium requires a Monitor, someone who must be an Insolvency Practitioner. It will be their role to make various statements about the eligibility of the company – one of which being that it will rescue the company as a going concern. This is subject to a temporary relief however, recognising that the COVID-19 crisis makes it impossible to predict.
New Restructuring Plan
The outcome of the moratoriums could include the new Restructuring Plan. This could potentially see Courts approving plans despite dissenting creditors. Similar to Schemes of Arrangement (governed by the Companies Act), this will see directors retain control of their companies while creditors, and then the Court, consider the proposal.
This may be a process suited to companies capable of dividing their creditors into different classes (where each class has similar rights) and where creditor objections are expected.
Temporary Suspension of wrongful trading
During this crisis (commencing retrospectively from 1 March and expiring on 30 June, or the later of that and one month after the Bill comes into effect), and to further protect companies and their directors, the Bill controversially proposes a temporary suspension of wrongful trading provision where a director can be found personally liable for certain debts of the company. This is not a mandate for misconduct however, with all other director obligations remaining in force. The intention is to free up directors to trade on without worrying about personal liability. Although, the reality is that wrongful trading actions are exceptionally rare and good judgement still needs to be applied with professional advice being sought.
Temporary restriction on winding up petitions
To extend this further, there will be a temporary restriction on winding up petitions where a debt is unpaid due to COVID-19 and is based on a statutory demand.
Statutory demands issued between 1 March and 30 June cannot be used as a basis for liquidation petitions on or after 27 April. Furthermore, until 30 June, a creditor needs to demonstrate that a company’s inability to pay is not COVID-19 related.
The Bill is not yet finalised, and changes are expected to be made before it comes into effect, however, the key structural changes above are likely to be in law by July – subject to the legislative timetable at Westminster.
It is ‘horses for courses’ however and it may be that a business is not viable and needs to be placed into liquidation. Other processes may be more suitable or it may be the case that no formal process is needed if creditors can be negotiated with. Every business is different.
This is a guest blog by Donald McNaught.
Restructuring partner @ JCCA