By Zaid Dadah
Zaid Dadah outlines the temporary measures introduced by the government designed to avoid business failure as a result of covid-19
The Bank of England has forecast that the UK economy will shrink by 14 per cent in 2020, representing the worst recession in 300 years. The current pandemic has had a devastating impact on businesses of all sizes, on a scale not seen since the Great Recession of 2006 to 2009. It has been widely reported that businesses in the retail, travel and leisure sectors have had their profits decimated by the pandemic. Business clients will be anxious to understand how they should proceed during these uncertain times. Many will, for the first time, be contemplating the dreaded ‘I’ word – insolvency. The Department for Business, Energy and Industrial Strategy has announced a slew of measures in response to the pandemic aimed at mitigating the impact on businesses. But are these temporary measures simply delaying the inevitable for distressed businesses? What alternative approaches are available?
Since the start of the pandemic, the government has announced the following initiatives to protect businesses (although many have not yet made their way into law):
— A temporary suspension of the wrongful trading provisions found in sections 214 and 246ZB of the Insolvency Act 1986.
— A moratorium for businesses undergoing a restructuring process to allow them to continue to access essential materials to allow them to trade.
— A temporary ban on landlords serving statutory demands and presenting winding up petitions where a tenant’s inability to pay is caused by the pandemic.
— Preventing landlords from exercising their rights under Commercial Rent Arrears Recovery unless rent arrears exceed 90 days. In conjunction with loan schemes and the job retention scheme, these measures represent the government’s attempts at keeping businesses solvent and viable. But do these government initiatives simply delay the inevitable for businesses which were struggling prior to the pandemic?
IT’S NOT PERSONAL
The threat of personal liability arising out of a company’s insolvency is often a trigger for directors of businesses to seek insolvency advice. The suspension of wrongful trading rules may appear to be welcome news to directors everywhere, but it should be noted that they do not mean that directors can simply disregard their director’s duties, as set out in the Companies Act 2006, or their common law duties. A difficult position for solicitors advising directors of distressed businesses is where a director had a potential liability for wrongful trading prior to the pandemic. The government’s suspension may have the unintended consequence of allowing those directors, and the businesses for which they are responsible, to continue to trade and to potentially increase the deficiency on their balance sheet to the detriment of the company’s creditors. The government’s temporary suspension on wrongful trading may inadvertently lead to issues for directors who try to continue to trade companies which were insolvent prior to the pandemic as directors could be personally liable for part or all of that deficiency.
A key consideration for practitioners advising directors will be what the solvency of the business was prior to the pandemic. The advice to most directors will invariably be to seek out the advice of an insolvency practitioner at the earliest stage possible to consider whether an insolvency or restructuring process is appropriate; and to consult with their accountant to understand the financial position of the company in question. Directors should then keep that position under review regularly, recording any decisions taken or observations noted.
Serving a statutory demand and subsequently presenting a winding up petition has often been used by creditors owed money as an aggressive method of debt collection. While many solicitors will rightly say such tactics are an abuse of process, more often than not this method is often successful in eliciting a debtor to pay a debt. The temporary ban on landlords serving statutory demands and presenting winding up petitions will take that option off the table for commercial landlords. This has forced landlords and tenants to come to the negotiating table and to reach agreements to defer, and in some cases, waive rent for the entire quarter rent period or longer. While tenant clients unable to pay rent as a result of the pandemic may have earned a temporary reprieve, what happens once the temporary suspension expires? Rent continues to accrue unless a deal is reached between the parties. Many tenants will not have the cash reserves to pay off large rent arrears once restrictions are lifted and many will fail to have the uptick in turnover allowing them to continue to meet their payment obligations to landlords.
At the same time, landlords will not be keen to wind up a tenant and face a potential rental void while the economy recovers. In light of the well-documented recent struggles of high street retailers, it seems likely that solicitors acting for both landlords and tenants will continue to have to take a more collaborative approach that has been forced upon parties by the pandemic. Keeping an open dialogue appears to be inevitable for the immediate future. Solicitors are likely to play a key role in facilitating such discussions and ensuring parties know what they can and can’t do from a legal perspective.
Another approach mooted for distressed businesses is entering into a ‘light touch’ administration. The main benefit of entering administration is the statutory moratorium preventing creditors from bringing proceedings against the company. In a typical administration, the administrators exercise the management powers of the company in administration, in place of the directors. In a ‘light touch’ administration, the administrators consent to the directors exercising day-to-day control of the company, under the watchful guise of the administrators. The benefit is that the directors of the company in administration will have a deep understanding of the business and will, hopefully, be able to manage the business back to solvency. Dozens of retailers and other businesses hit hard by the pandemic are lining up this approach as a way of weathering the current storm, Debenhams being a prominent example.
Light-touch administrations are not a new concept, but cases where they have been utilised have been few and far between. The reaction to this proposed method of administration in the insolvency industry has been lukewarm, with many commenting on the potential for personal liability for administrators if a light touch administration fails to steer a business to clearer waters. Nevertheless, a light touch administration represents a more collaborative approach that may save many businesses that have suffered as a result of the pandemic from a more terminal insolvency process such as liquidation. They may offer businesses greater respite than the temporary measures introduced by the government. Practitioners advising on light touch administrations will need to keep a watchful eye on the actions of both directors and administrators undergoing such a process to ensure that those parties do not unwittingly increase their own liabilities should the administration fail.
The government should be applauded for reacting quickly by introducing initiatives that have sought to address the immediate danger to businesses, but these measures are only temporary. In future businesses may need to take a more collaborative approach in dealing with their debtors and creditors. Solicitors advising on cases involving distressed business should consider opening lines of communication with creditors at an early stage to prevent the failure of the business once the pandemic is over; though the insolvency regime in England and Wales prevents one creditor from being treated differently to another – and so the need for open dialogue and collaboration becomes ever more important.
Processes such as a light touch administration may offer a pragmatic solution for those businesses suffering as a result of the pandemic; and may offer them a realistic prospect of survival in the future.