So we come to the end of working week 2 and it’s time to digest our second instalment of COVID-19 and corporate restructuring & insolvency ( what I’m now tempted to call “Lockdown: The COVID Chronicles”). Part 1 – “COVID-19 and corporate restructuring & insolvency – week 1” featured last week (in case you missed it or desperately want to read it again).
As we write, approaching 8pm on Friday 3 April, we in the Paris Smith Corporate Restructuring & Insolvency team are counting our reasons to be grateful as the world of business starts, we hope, to adjust more meaningfully to the shock of last week.
The first, theoretical, reason we had to be grateful was that last weekend (as I covered in an addendum to Part 1) the government announced that it would be bringing before Parliament a menu of shiny new insolvency tools and asking it to suspend laws prohibiting wrongful trading, with retrospective effect to 1 March 2020. Obviously Parliament hasn’t actually met yet and we don’t know quite when (or how) it will, so we don’t actually have those new tools, and we only started to be given a glimpse of what they were going to look like later on this week. We still don’t know exactly what they are, but we now expect them to involve a business rescue moratorium, a new court-based restructuring tool and new rules to prevent suppliers from cancelling contracts with businesses in an insolvency procedure.
It didn’t take us long to realise that, in substance, there isn’t too much to be grateful for in there. We already have business moratoria associated with administrations and CVAs, the new tool sounds very much like an old style Scheme of Arrangement, and we have been incrementally improving the ‘holding business to ransom’ supply routes for essential services for some time. We shall reserve judgement until we see the detail but this could be some weeks away still so we’re not wasting any more effort on them just yet. What we can say with certainty, however, is that the relaxation of wrongful trading was and will be a pretty serious mistake. Yes, it makes the right noises in terms of persuading business leaders that government wants to support them, but directors were already protected by the defences built into the wrongful trading laws, so really all this will do is remove a key factor which tends to signpost businesses to qualified insolvency advice, and signal to creditors that any lending they make or extend during this period is at heightened risk, i.e. the opposite of what the government claim to be aiming for. Stupid really.
The second, much more genuine, reason we had to be grateful was that on Monday we welcomed back into the team – from his supposedly hazardous travels in Japan – my number 2, Chris Parsons. It turns out that he was probably better off in Japan, where he says the crisis appeared much more under control (with free face masks and hand sanitiser being provided to all, non-essential shops remaining open and so on). In fact the worst challenge Chris faced was getting back to the UK, as thanks to the Foreign Secretary’s poorly timed announcement panic ensued causing Chris no end of issues rebooking flights and so on. Others have not been so fortunate, and are stranded on the far side of the world, so we are grateful, not least as his return has allowed me to lift my head out of our ongoing transactional and litigation work, and to keep my attention focused squarely on Paris Smith’s existing and future clients who have come to us with COVID-related legal and insolvency issues.
There has been no let up at all this week on the volume or complexity of our new enquiries, but the types of enquiry have seen a subtle shift, away from retail businesses feeling the immediate slap in the face from having to close their doors and meet payroll and rent demands, and towards secondary service providers, some of whose business has likewise dropped off a cliff as their own customers close their premises. Many of these businesses have been wrestling with furlough issues, some have been applying for government backed CBILS loans, still others have been looking to restructure because the virus has boosted one aspect of their business whilst threatening another. We have also begun to see more charities feeling the strain, and wondering where the support is for them. The common thread to all these enquiries has been that we have been able to work the problem with guidance from qualified insolvency practitioner accountants and/or their trade body R3, who have been putting out guidance left and right like some sort of whirling dervish.
The third and final reason we are offering to be grateful this week is that the courts are getting back on track. After the initial panic, manifesting amongst other things in the insolvency lists being adjourned for 12 weeks of the court’s own motion and the closure of numerous court centres, we have begun to see a proliferation of video hearings, new court rules allowing parties to agree longer extensions of mandatory timescales by consent, and even the county courts recognising that applications which have as their object or effect the continuation of business in the face of financial difficulty is business deserving of priority. This mirrors the fact that advocates and core insolvency professionals have this week been recognised as key workers. It is certainly true to say that those who are ensuring that businesses stay in business and employees in employment are every bit as in demand as our manufacturers, our farmers and shelf stackers and our refuse collectors (insert joke here about insolvency practitioners clearing out the trash).
Of course, amid all this gratitude we have also seen the flip-side of human nature returning in spades. As people have become used to home working, the volume of case-related correspondence in our inboxes has ramped up massively. All those tactics we hoped perhaps we might have seen the back of for a bit as the country started to pull together against a common threat have begun creeping back: the opportunistic debtor hoping for an unrealistic deal whilst our attention is diverted, the officious opponent who doesn’t have enough work so starts manufacturing issues to fill his/her timesheet and/or who tries to put you to unnecessary work knowing you cannot easily access your hard copy files, the ‘clever’ tactician who refuses a perfectly reasonable offer because they know your client is under financial pressure and might therefore agree to a bad deal rather than litigate. I did not miss these people last week when they were sheltering in their bunkers!
Possibly the worst behaviour we have witnessed this week, which is hopefully being addressed with the new, revamped CBILS loan scheme in force from Monday, however has been from approved lenders trying to deny lending to deserving businesses and/or to insist on personal guarantees when they should not. Only this evening I saw such an attempt by a leading bank which seems to have forgotten too readily the value of state-backed bailouts. The sooner everyone gets to grips with the idea that business needs to be wrapped in cotton wool for a relatively short time, for the good of us all, the better. Businesses which were eventually going to fail anyway can go into administration now, and they are clearly doing so in increasing numbers. The value within those businesses will be recirculated by the insolvency profession. However, there is no reason for essentially sound businesses with good, long-term structures to be the unwitting victims of the insolvency curve when the tools are there for us to preserve them, provided we all demonstrate fairness, good sense and forbearance. Businesses which seek advantage at others’ expense during this period can rightly expect to be vilified by social and other media, and find their own businesses damaged in the long term.
So finally, then, to round off our round up of the week we want to share with you a first which I shall not soon forget. On Tuesday of this week, a regional insolvency practitioner who shall remain nameless (if only to spare his blushes) organised a business development lunch. Knowing of course how many of us are surviving on perhaps a more mundane menu than we have been accustomed to as professionals in a busy city, he ordered Domino’s pizzas (other pizza providers are available!), pudding and drinks for my entire family, delivered to my door 5 minutes before our video chat. Not only did this enhance our business, chewing the cud over many of the above issues, but it also raised the spirits of my children as they took their break from their online school work. I should say that, of course, he also had pizza delivered to his house at the same time. A fantastic idea which I am more than happy to emulate for any of my valued contacts over the coming weeks, but an example also of how we need to find new and creative ways of doing what we have always done, only sometimes better than we used to do them. If we keep forming some of the habits we’ve all been developing these past few weeks, we can expect to be equally well nourished as we (those of us who are not furloughed at least) work our way through the coming weeks, and as we return to some of our more traditional habits in the future.
If you would like to book in for a Paris Smith sponsored remote lunch session, or to discuss any insolvency issue (whether or not raised in this blog), please do get in touch with Mike Pavitt, Chris Parsons, or any other member of our Corporate Restructuring & Insolvency team.
Our dedicated “Coronavirus – Legal advice and guidance” page has further information for businesses, employers, employees, the self-employed and is regularly being updated as and when new guidance emerges from government and other regulatory bodies.