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19-03-2020

Coronavirus (COVID-19)—Insolvency and turnaround professionals well equipped to be the Médecins Sans Frontières of business

covid19

This is an unprecedented worldwide crisis which will have far reaching financial as well as social ramifications. It has hit the markets much harder than the 2008 crisis and the frenetic media coverage, which was much less enabled in 2008, appears to have fuelled the panic. It is hard to see how a global recession can be avoided.

We already know that leisure, retail and restaurant businesses industries have been immediately hard hit and getting special help from the government -announced on Tuesday:- 12 months free business rates (for RVs sub £51,000) and £25,000 grants, as well as access to the more widely available government backed Enterprise loans of up to 10 years on interest free terms for the 1st 6 months-aid to the tune of 330 billion.  Terms such as personal guarantees remain uncertain

However whilst the Chancellor announced that this ‘Coronavirus Business Interruption Loan Scheme’ (CBILS) will temporarily replace the Enterprise Finance Guarantee (EFG), becoming available over the coming weeks- full terms are yet to be announced (or finalised). It will operate in a similar way to EFG and be provided by the British Business Bank, but will –it is said-offer more attractive terms for both businesses and lenders, with the aim of supporting the continued provision of finance to UK businesses during the Covid-19 outbreak. The list of ineligible businesses appear to include residential care businesses.  However the borrower remains 100% liable for the debt and the CBILS merely provides a third party lender with a government-backed 80% guarantee against the outstanding facility balance. This still leaves the borrower with a debt and probably will lead to delayed capital investment as borrowing is used to fill liquidity holes. Zombie companies so prevalent since 2008 will limp along with further life rafting and the competitiveness a normal clear out would have improved will disappear from the horizon.  

The problem after 2008 was largely down to the practical application by banks of the lending. Will banks use an application as an excuse for more restrictive terms overall in a business’s other borrowing? That should be prevented.

Query why a rates holiday or grant should be so restricted in their target market? All businesses have been effectively told to shut down. If they cannot facilitate remote working to generate cash, why should it matter whether they are a publican or a printer? If only leisure and retail business are given cash as opposed to loans and given rate free periods, what is to happen to then after the 12 month period when other businesses have failed such that their staff are redundant and cannot afford to make use of those rescued leisure and retail businesses? A rate free period for all businesses seems sensible (albeit central government would have to provide funds to local authorities to replace the income now there is no central government funding to those authorities). Wider application of helicopter cash may yet prove necessary albeit this gives government a longer term issue in that it is not repaid. However many businesses simply will not be able to repay loans given now so the government guarantee will be called upon heavily no doubt.

A huge burden on all businesses but particularly thee squeezed middle are payments to government, tax VAT and rates. A complete holiday from these would go a long way to aiding cashflow.

However all businesses (including Insolvency Practitioners and Lawyers themselves) will have business disruption to a greater or lesser extent, even if only in extra management time dealing with remote working and staffing issues. Service and goods delivery will be challenging.

The real immediate losers are any businesses where only physical presence will do (whether of staff and/or customers); from care homes and conference organisations, to airlines, as well as oil and auto.

However there will be an overall effect on the global economy for years to come. Western economies such as ours rely on consumer spending. If consumers can’t or won’t go out, and can’t or won’t spend, then the economy slows down. The government can’t really replace that economic activity easily. Unemployment will rise

Amongst the winners will be businesses that truly can operate from anywhere- most well run professional service firms can do this although their client base will determine how productively; also tech companies (there is a run on laptops and other home working paraphernalia.) However tech purchase requires capital investment and an overall healthy economy plus skilled staff to operate the technology.

We shouldn’t however forget some of the positives:-more businesses will gear up to flexible working which will cut travel and improve work life balance for many and make business more robust for any future crisis; staff of many organisations and local communities are pulling together in a “blitz spirit”; reduced travel and activity will improve the environment –perhaps a permanent improvement as people realise how working life can change. This could be a social catalyst, though increased remote working may leave more empty office space which would have a knock-on effect on landlords and construction.

However, there is much pain to get through first. In London yesterday’s winding up list was postponed for a week the day before the hearing- unilaterally by the court; It is rumoured that HMRC will be/are agreeing 12 week adjournments of petitions. It is likely they will look much more favourably on CVAs, and landlords are already giving payment holidays or reductions for periods-better that than no tenant in the longer term. Time to pay will need to be negotiated across many businesses and this may need professional help and/or the protection of a moratorium* (the widening of which was delayed by the Brexit hiatus) for a small company** under a CVA, or for larger companies under the protection of administration.

The profession is ready willing and able to help. We need to get that message out front and centre to businesses and to government. We should encourage government- particularly HMRC at this critical time -to appoint office holders with light touch lines of approval, for efficiency and for maximisation of recovery and returns to creditors.

There will be many practical issues to tackle and for many cases those will need to be the subject of individual advice.  There will be practical issues immediately that cannot be got around- such as court attendances and even things as mundane as the swearing of oaths which need physical attendance in front of a solicitor or barrister or other professional. However we have to adapt to survive, and Insolvency and Turnaround professionals are very well equipped to be the “Médecins Sans Frontières” of business.

  • under Schedule A1 Insolvency Act 1986 introduced by the Insolvency Act 2000 (query whether the nominee will certify as required that “The proposed voluntary arrangement has a reasonable prospect of being approved and implemented, and the company is likely to have sufficient funds available to it during the proposed moratorium period to enable it to carry on its business”

**Section 382 companies Act 2006 defines a small company as a company which satisfies two or more of the following criteria:

  • Turnover of not more than £10.2m;
  • Balance sheet asset total of not more than £5.1m; or
  • Not more than 50 employees.

 

Previously published by LexisNexis 19.3.2020

 

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