COVID-19 and corporate restructuring & insolvency – week 4

Welcome to our 4th consecutive weekly blog on how our Corporate Restructuring & Insolvency team is responding to the challenges posed by COVID-19. When we launched this series we had imagined (or at least hoped) to be wrapping things up now and returning to some sense of normality, or at least moving into a new phase, but it was not to be!

As we write (on Saturday 18 April 2020), the Foreign Secretary, Dominic Raab, had only recently announced that Lockdown UK would continue for at least another 3 weeks, and we still do not have sight of any meaningful detail on the government’s plans to amend insolvency legislation, so we are sticking with our weekly digest format, at least for the minute. We may shake things up a bit next week, depending on what happens!

Guidance and court judgments

For our fourth instalment (the previous 3 instalments can be read in the business section of our Coronavirus, legal advice and guidance page), we are looking at the latest development in the journey which has taken us from adaptation, to gratitude and (last week) the emergence of new tools for IPs: this week we look at what happens when the pace of legislative change does not keep up with the times, namely we start to see guidance and court judgments necessary to fill the gaps.

The main developments of last week, from an insolvency legal perspective, were the rolling updates in terms of the implementation of the Coronavirus Job Retention Scheme (“CJRS”), the Coronavirus Business Interruption Loan Scheme (“CBILS”) and the latest addition, The Coronavirus Large Business Interruption Loan Scheme (“CLBILS”) as more and more guidance was published on a daily basis. The CJRS really kicks into gear this coming week, from 20 April, and a lot of necessary hard work has been done to improve the accessibility of CBILS loans to businesses, but our main point of interest this week has been the support the courts have shown for IPs having the courage to use these sorts of tools in practice, notwithstanding the government has not managed to assemble Parliament to change the law at this stage.

For more information on either the CJRS, CBILS or CLBILS you may wish to read our colleagues’ most recent blogs on these matters:

• Coronavirus Job Retention Scheme (upated 15 April) – watch out for our amalgamated update on this scheme (coming soon) as there have now been so many updates from government, all of which can be found in our Employer/Employee section of our Coronavirus – legal advice and guidance page).
• The Coronavirus Business Interruption Loan Scheme
• Coronavirus Large Business Loan Scheme (which has just been announced and is available from Monday 20 April)

However, the week also saw the development of the debate about the effectiveness of the protocol and practice of so called “light touch administrations”, a means of using the existing administration legal framework to effectively mothball otherwise profitable companies during the crisis, leaving them under supervised director control with a view to the administrators handing back the reins of a rescued entity at the end of it. Such procedures are not entirely without risk for prospective administrators, and they need also to have the certainty that initiatives such as the government backed furlough scheme will be available to them during this process.

The Insolvency and Companies Court has offered IPs a degree of confidence in this respect in connection with the administration of Carluccio’s, dealing with an application by the administrators for clarification as to how it was open to them to approach the CJRS.

Carluccio’s Administration

The Carluccio’s judgment, which was handed down on Monday 13 April 2020, is we believe the first judgment where the courts, having now struggled through the practical issues of advocates appearing via Skype etc. and reorganised their diary for the next few months, have actively expressed a wish to assist businesses struggling primarily by reason of COVID-19.

In brief, the court confirmed that the administrators of Carluccio’s were able to access the CJRS in order to protect both staff and the business itself from potential job losses, whilst also significantly reducing the business’ expenditure.

This clarification was required as the government’s guidance on CJRS had (perhaps surprisingly give that the government must have known the situation was putting many companies on the edge of insolvency) failed to provide for such circumstances.

The guidance currently states that the claim under the CJRS needs to be made by the employers and, once granted, would be paid accordingly to the employer (with the intention that this is passed to the employee). Of course, this raised concerns as to whether these funds – once received – would then become administration assets for the benefit of all creditors in light of it being paid to the company itself.

Snowden J assisted by confirming that these funds were not to be classed as administration assets and would need to be duly paid to the employees, subject to a successful claim by the administrators under the CJRS. On the facts of this case, the administrators were only able to claim on behalf of those employees who had consented to variations in their contracts which would permit them to be furloughed. For those who did not agree, or otherwise did not respond at all to the applicable correspondence, redundancy would likely be the only option.

It’s worth noting that in giving his judgment, Snowden J was careful to highlight that his directions to the administrators were “without prejudice to any argument which an employee may seek to raise as to the true legal position, and subject to any legislation or regulations that may subsequently be enacted to give effect to the Scheme…” therefore, whilst there appears to be an element of certainty at this moment it time, there is a real possibility that this could eventually dissipate in light of further legislation and/or guidance being provided.

Administration – a brief consideration of its rescue capabilities

Unfortunately, there is still a continued lack of any detail on the government’s proposals to amend insolvency law which has led to a standing initiative of the Insolvency Lawyers Association and other trade bodies who are – essentially – doing the government’s job for it.

This is being done by promoting the existing administration moratorium as a rescue tool which recognises that directors (and presumably their legal advisors) of pre-COVID profitable companies (who owe the same duties to the company in administration, as before it) can safely be left in day-to-day control of companies whilst they are, effectively, “mothballed” – that is, to stop using it for the time being with the intention to re-use it again in the future at such a time when the lockdown restrictions are lifted accordingly.

It seems to us that – in light of the Carluccio’s judgment – this offers wide potential for businesses to weigh up the respective benefits of the CJRS, CBILS and other insolvency remedies available to them.

Whilst traditional administrations as a means of transferring business, staff and assets without taking over the liabilities can often be quite expensive, the new protocol brought in to combat the commercial effects of the Coronavirus appears to offer a less labour-intensive solution which might be suitable now for smaller SMEs. Of course, the proof of the pudding will be in the eating, and IPs must be confident of the utility of such protocols before they will adopt it wholesale. Clearly it will not be right for every case.

Rounding Up

In summary, there appears to be an ever-increasing offer of rescue and recovery methods which can be utilised by businesses and their directors – as long as they know where to look.

The best starting point, in the majority of circumstances, is to seek the guidance and advice from a qualified insolvency practitioner accountant who can steer struggling companies in the direction of a beacon of light amongst these more than ever uncertain seas.

Should you require any guidance, please get in touch with one of our Corporate Restructuring & Insolvency team who have a wealth of connections with a variety of insolvency practitioners, and we can assist you with putting you in touch with the right individuals for your business needs.

We have a dedicated page, Coronavirus (COVID-19) – Legal advice and guidance, which we are continually updating with information as and when new measures come through from the government and other bodies.