Blog - 07/05/2020
Restructuring & Insolvency
Insolvency: The calm before the storm?
May Day is only just behind us, yet already 2020 has been historic. The year started with the national devastation of Storms Ciara and Dennis, and has descended into the global pandemic of Covid-19. No-one has escaped unaffected and it is likely that more people and businesses will come up against increasing challenges in the coming months. Yet, with unprecedented circumstances, come unprecedented solutions.
The press has been dominated by the increase in struggling businesses. The retail, leisure and hospitality sectors seemingly the hardest hit. This week, there has been further news from the distressed company, Virgin Atlantic, which has been forced to take drastic measures in cutting 3,150 jobs (a third of its workforce) and stopping its operations at Gatwick, after a prolonged campaign by Richard Branson to obtain governmental funding. This news came as rival airline, British Airways, also announced that it could not rule out closing its Gatwick operations. Across the world, major companies are struggling to weather the Covid-19 storm.
For many businesses, these two turbulent months have been moderated by government-backed loans and grants. Fears of the unemployment rate surging, caused the chancellor, Rishi Sunak, to devise the Coronavirus Job Retention Scheme (CJRS), which sees employers receive a grant from the government for 80% of a furloughed employee’s salary up to £2,500. The CJRS was announced within a couple of days of the lockdown being declared and, as of 3 May, HMRC has confirmed that 6.3 million jobs have been furloughed under the scheme. This figure represents almost a quarter of the British workforce and has so far cost the public purse £8 billion. Experts now believe that the CJRS could eventually cost more than £40 billion.
Other schemes within the government’s wider package of support for UK businesses and employees are The Coronavirus Business Interruption Loan Scheme (CBILS), helping small and medium-sized businesses to access loans and other finance up to £5 million, and the newly implemented Bounce Back Loans Scheme (BBLS), which helps small and medium-sized businesses to borrow between £2,000 and £50,000. Both schemes give the lender a government-backed guarantee for the loan repayments to encourage more lending at a time when businesses are starved of income and banks are wary of bad debts. Within a minute of the BBLS going live, Barclays saw 200 applications; within the first three hours, Lloyds received 5,000 applications; and within the first day, more than 110,000 businesses had applied.
The take up of governmental support has been immense, as has the cost of such schemes on the economy. Yet, amid the parlous state of the economy, the schemes are providing a lifeline to business. They are the buffer in a monumental and uncertain storm, without which individuals, businesses and the long-term national economy would be even more battered. It does, though, beg the increasingly-urgent question: what happens when the buffer is removed?
The chancellor has allayed some concerns with regard to employees. Whilst the CJRS is set to end on 30 June, Mr Sunak has now confirmed that the government is “working… to figure out the most effective way to wind down the scheme and to ease people back into work in a measured way.” Uncertainty prevails, however with a quarter of the workforce to consider, it is hoped that a pragmatic and sensitive plan will be rolled out as the economic stimulus is removed.
Under the BBLS, the government has pledged to support businesses with the payment of associated fees and interest for 12 months. Whilst assistance to secure funds has been welcomed, it cannot be ignored that the schemes in place are to generate loans, which will in due course need to be repaid, together with further interest and fees beyond the government’s 12 month support. And as the government’s package of support is gradually removed, the already immense strain on companies’ finances will become ever greater.
On insolvency measures: directors can, for the time being, breathe easier as a result of the suspension of wrongful trading provisions – but only until 1 June; the measures announced, but not yet enacted, to ban statutory demands (made between 1 March to 30 June 2020) and winding up petitions (presented from 27 March through to 30 June 2020) against commercial tenants are indeed temporary; the amended CPR, staying possession proceedings for 90 days, is in place until 30 October 2020; and the much anticipated moratorium for companies in financial difficulty is yet to be made law.
The government has not held back in extending support to help businesses weather the initial impact of Covid-19. But once the initial impact has passed, we will be heading into the eye of the storm. And when we do, the extensive protection put in place will be lifted: commercial tenants will be exposed to disgruntled landlords, many of whom will be also suffering financially, and who are determined to recover mounting rent arrears; directors will trade their businesses in fear of trespassing into the already uncertain territory of wrongful trading; and the shelter provided by a corporate moratorium, may just be too little, too late. As to the aftermath, we can only speculate. The government will encourage a collective approach between landlords and tenants, companies and creditors, which could see an increase in voluntary arrangements. But, more likely, as the buffer is swept away, there is likely to be a deluge of claims, winding up petitions and insolvencies.
Without certainty as to when normality will be restored, there is no certainty as to how long emergency measures will be needed. For some businesses, the turbulent past two months have been enough to signal insolvency. For others, the government support has meant avoiding otherwise inevitable financial devastation. At a time of so much uncertainty, of one thing we can be certain: for many businesses, and for insolvency practitioners and lawyers alike, this is merely the calm before the storm.
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