Structuring a business for survival

August 2020 | SPOTLIGHT | BANKRUPTCY & RESTRUCTURING

Financier Worldwide Magazine

August 2020 Issue

Since the lockdown was imposed in the UK on 23 March 2020 in response to the COVID-19 pandemic, the government has spent an unprecedented amount of money supporting businesses through the initial phase of the crisis. But as the picture improves and lockdown restrictions start to ease, what will happen when the government begins to withdraw its support? In this article we look at some of the options UK businesses may want to consider as they seek to survive and thrive in the post COVID-19 world.

Since March, the government has, through a series of initiatives and with varying degrees of success, attempted to provide support to UK businesses of all shapes and sizes directly, via the Coronavirus Job Retention Scheme and the VAT deferment scheme, and indirectly, via the various loan schemes – start up loans, bounce bank loans, the Coronavirus Business Interruption Loan Scheme (CBILS), the Coronavirus Large Business Interruption Loan Scheme (CLBILS+) and the COVID Corporate Finance Facility (CCFF).

In addition to these schemes, we have also seen a number of announcements designed to support retail, hospitality and leisure businesses that have suffered the hardest and quickest impact. These measures, some of which are temporary and some of which are permanent, are set out in the Corporate Insolvency and Governance Bill, which is expected to come into force in July.

The loan and job retention schemes are intended to support businesses by allowing them to preserve existing cash reserves, access additional liquidity, retain employees by covering a substantial portion of the wages paid to those employees and prevent otherwise viable businesses which are essential to the UK economy from collapsing. Although this support has been crucial to support many businesses through the lockdown phase of the crisis as restrictions ease and life begins to ‘normalise’, the tap will slowly be turned off and for many businesses the removal of this support could mean they lose the battle to survive.

So, what steps can businesses take now to try and ensure that when this support ends, they are in a position, not just to survive, but to thrive?

Although lockdown restrictions are beginning to ease, until everyone has a clearer picture of what ‘normal’ looks like, and this may be different depending on which sector your business is in, it is difficult to update business plans and financial projections. That is not to say that you should not make a start, if you have not already, on thinking about updating both.

Bounce back loans, CBILS loans or CLBILS+ loans, borrowed to defray the immediate impact of the coronavirus, just like any other loans, need to be repaid and businesses need a plan to do so, but if there are signs of financial distress do not ignore them. Early engagement with lenders is critical as it will, provided the business is still viable, be in everyone’s interest to negotiate and reschedule existing debts rather than enter a formal insolvency process.

But if you cannot avoid having to enter a formal insolvency process, what options do you have?

The new Corporate Insolvency and Governance Bill includes some of the most significant changes to UK insolvency law in many years and it is important for all directors to understand the changes.

Permanent measures introduced by the bill include a new moratorium procedure which will give companies a short window to take urgent steps to restructure, seek new investment or otherwise pursue a turnaround strategy, free from the immediate threat of creditor action, as well as new restructuring procedures modelled on the existing scheme of arrangement that will enable businesses to comprise both shareholder and creditor claims in accordance with an agreed restructuring plan.

The new moratorium, which can last for a period from 20 business days to 12 months, is available to most companies and, unlike the current process, the company’s directors remain in control. A licenced insolvency practitioner will be appointed as a ‘monitor’ in order to protect the interests of creditors. The monitor’s role is limited: he or she will approve the grant of any new security and sales outside the normal course of the company’s business, and will make sure that the moratorium is, at all times, likely to result in the rescue of the company as a going concern. Creditors will have the ability to challenge the directors’ conduct and the actions of the monitor if they have been unfairly prejudiced during the moratorium. Importantly, liabilities incurred during the moratorium will be payable as an expense, for example in higher priority to unsecured debts, granting some comfort to creditors regarding the ability of the debtor to repay liabilities that accrue during the moratorium.

Under the new restructuring procedure, creditors will vote on the proposed plan in separate classes, and the procedure will bind both secured and unsecured creditors if approved. To be approved, the scheme must be sanctioned by at least 75 percent of creditors in each class. However, the new procedure also includes the ability to ‘cram down’ classes of creditors, similar to US Chapter 11 bankruptcies, and the court may grant final approval to the restructuring procedure even if a class of creditors (or numerous classes) do not approve the plan.

Changes are also being made to restrict the application of supplier termination clauses. Supplier termination clauses are commonly found in commercial contracts and can usually be invoked by one party or the other on the occurrence of insolvency, but in a large number of cases the use of these clauses can make it more difficult to rescue a business as a going concern.

The temporary measures introduced by the bill include restrictions on the presentation of winding up petitions and statutory demands, as well as relief for directors from the consequences of wrongful trading, and allow companies to hold meetings remotely, as well as providing more time for certain statutory filings to be made. But directors should be aware that, as things stand, these temporary reliefs may only apply where it is clear that the coronavirus was the source of the problem and may only provide relief until 30 June 2020 or, if later, the date falling one month after the bill becomes law.

These changes sit alongside other tried and tested insolvency procedures, but overall the changes introduced further promote the rescue culture in English insolvency law, with an emphasis on protecting jobs and rescuing viable businesses. As we emerge from the lockdown, if refinancing or rescheduling debts with existing creditors is not an option for your business, utilising the measures introduced by the new bill may be worth considering.

Simon Banks is an associate and Katharine Lewis is a partner at Trowers & Hamlins. Mr Banks can be contacted on +44 (0)161 838 2127 or by email: sbanks@trowers.com. Ms Lewis can be contacted on +44 (0)20 7423 8041 or by email: klewis@trowers.com.

Simon Banks and Katharine Lewis

Trowers & Hamlins