QUESTION: WHAT HELP IS AVAILABLE TO SUSTAIN MY BUSINESS?
Answer: The Chancellor of the Exchequer, Rishi Sunak, has announced a package of measures to support businesses which are outlined on the Government's coronavirus support page https://www.gov.uk/government/publications/guidance-to-employers-and-businesses-about-covid-19/covid-19-support-for-businesses You should check what support your business may be eligible for and apply without delay.
The Government, banks and regulators are still looking for ways to get funds urgently to the companies that need them most, with indications being that only a tiny minority of businesses have been able to access these support measures to date. Further measures were announced on 2 April 2020, including a new Coronavirus Large Business Interruption Loan Scheme for companies with turnover of between £45 million and £500 million.
The Financial Times has published free to read guidance on how UK companies can apply for Covid-19 bailout funds.
Most recently, the Chancellor has announced further measures to support small businesses in the form of the so-called "bounce back loan" - see here for details of how to apply https://www.gov.uk/guidance/apply-for-a-coronavirus-bounce-back-loan
QUESTION: WHAT OTHER STEPS ARE THE GOVERNMENT TAKING TO ENSURE BUSINESSES COMING OUT OF THE CRISIS CAN BE RESCUED?
Answer: On 28 March, Alok Sharma, the Business Secretary, announced new measures to help UK companies "which need to undergo a financial rescue or restructuring process to keep trading". This will be implemented by the keenly-anticipated Corporate Insolvency and Governance Bill, which started its passage through Parliament on 20 May 2020, with the second reading expected to take place on 3 June 2020. It can be read at https://services.parliament.uk/bills/2019-21/corporateinsolvencyandgovernance.html
The objective of the Bill is to help UK companies and similar entities to continue to trade during the pandemic and avoid insolvency. The Bill aims to achieve this through:
- introducing greater flexibility into the insolvency regime;
- temporarily suspending parts of the insolvency regime to support directors in navigating the emergency without threat of personal liability and to protect companies from aggressive creditor action;
- temporarily easing company filing requirements, and requirements relating to meetings (including annual general meetings (AGMs)).
As ever, the devil is in the detail, but here are some highlights:
Company moratorium - a new moratorium procedure has been introduced to give companies in difficulty, including as a direct result of Covid-19, formal breathing space to pursue a rescue plan. During the moratorium, legal action cannot be taken against a company without court approval. The moratorium lasts up to 20 days with possible extension to 40 days. It is monitored by an IP and there are super priority provisions regarding the payment of moratorium debt. This is an out of court process unless there is an existing winding up petition in which case court approval is required.
Ipso facto (termination) clauses - the ipso facto clauses will prevent suppliers from stopping or threatening to stop supplying businesses going through an insolvency or restructuring procedure. There will be a safeguard to ensure that continuing supplies are paid for. However, if the supply process causes hardship to their business, suppliers will be relieved of this requirement should the court agree. Small company suppliers will be temporarily exempt during the Covid-19 response situation.
Restructuring plan - firms that are viable but experiencing difficulty with debt liabilities will be able to restructure under a new procedure. The courts will sanction this procedure based on whether it is fair, equitable and in the interest of creditors. Creditors vote on the plan, but the courts will also have the power to impose it. The process has similarities to the existing Companies Act Scheme of Arrangement procedure and allows for creditor cram down.
Suspension of wrongful trading - the threat of directors’ personal liability from wrongful trading will be removed (temporarily). While this suspension is in place, action will not be able to be taken by liquidators and administrators against directors of insolvent companies for creditor losses as a result of continued trading. All the other checks and balances on directors will remain in place. This provision ensures that between 1 March 2020 and 30 June 2020 a director shall not be liable for a worsening liability to creditors.
Statutory demands and winding up petitions (two measures) - the promised 'prohibition' on statutory demands and winding up petitions is NOT restricted to rent or to a defined sector. The Shorts Garden case and the judgment of Snowden J was not a guide to the forthcoming legislation.
Instead a creditor can only proceed if there are reasonable grounds to believe that Covid-19 had no financial effect on the company and/or the company would have been insolvent/unable to pay its debts irrespective of Covid-19. Coronavirus having a 'financial effect' on a debtor if the debtor’s financial position worsens in consequence of, or for reasons relating to, coronavirus. There is an interesting provision which states that in respect of petitions issued, the court may make such order as it thinks fit. We consider that the court is likely to dismiss recently issued petitions giving the petitioning creditor a short window to appeal (and rely on the 'nothing to do with Covid-19' argument).
These provisions apply to petitions issued after 27 April 2020 and until 30 June 2020. Time periods within the Bill may be extended by the Secretary of State without further legislation for a period of up to 12 months. As a result this prohibition is likely to be extended if the economic conditions do not improve, as the restrictions are gradually lifted.
There is a immediate question. When and how will it be assessed whether the creditor is permitted to petition for the winding up on grounds that 'it has nothing to do with Covid'? As the mere fact of petitioning has severe consequences on the debtor company, my best guess is that there will be accompanying rules which will set out how the 'threshold test' will be assessed e.g. whether prior Court approval is required before a petition can be issued and/or whether there will be an urgent hearing on the preliminary point post petition. As a result further details will be awaited.
AGMs - with gatherings of multiple individuals not currently permitted, the Bill allows companies that must legally hold an AGM or GM to do so by other means, such as electronic means – even if company protocol does not normally allow this – and extends the period within which companies and other bodies must hold an AGM.
Filing requirements - Companies House has made changes to filing requirements during the Covid-19 emergency, including extending deadlines and therefore countering the threat of penalties for late submissions. More flexibility may be required, so the Bill gives the Secretary of State the power to implement further extensions.
Our lawyers will be publishing further analysis and updates on the Bill in the coming days and weeks.
QUESTION: WHAT STEPS CAN I TAKE TO POSITION MY BUSINESS TO TAKE ADVANTAGE OF THE RECOVERY, WHEN IT COMES?
- Optimise staff numbers now. Be realistic and ensure you base your decisions on facts, not emotions. Above all, don't cut staff and expenditure so drastically that you damage the fabric of your business - keep the core of your business intact so that you can take advantage of the recovery. For example, if activity in a particular area of your business has dropped so low that the amount of work available can only sustain a handful of employees, you may need to furlough a number of staff. Make sure you keep a core team that can preserve the business. How to decide who to keep? In many sectors, relationships are key to winning new business, so look at who are your experienced people with a track record of building strong relationships – and keep those people. You may be able to claim for furloughed employees' wages through the Coronavirus Job Retention Scheme. If a reduction in headcount is unavoidable, redundancies may be required. If you are concerned about how to pay for redundancies you may be able to claim financial assistance from the Redundancy Payments Service (part of DBEIS). This is effectively a loan which allows you to spread the costs over 12 to 24 months. It is not a coronavirus-specific scheme, and has been around for quite some time but is not well publicised. Contact Vernon Dennis (Vernon.email@example.com ) or your usual Howard Kennedy contact to find out more about the criteria and how to apply.
- Manage your cashflow. Preserving cash, and managing your cost base, are absolutely vital. Maximise your cash collection – ensure that everyone who is not furloughed plays their part in this, as employees who have strong relationships with clients and others may be highly effective at chasing invoices. If you have always tended to preserve cash and been proactive in collecting receivables, then hopefully your business is in a strong position to weather the crisis. If you foresee a temporary cash shortfall, you will need to make a plan to fund this. Can you make informal arrangements with key creditors including suppliers, lenders or landlords? Be proactive in approaching them with a sensible plan for extending credit and/or restructuring repayments. In some cases these negotiations might benefit from the involvement of a professional adviser - contact Vernon Dennis (Vernon.firstname.lastname@example.org ) or your usual Howard Kennedy contact if you would like assistance.
- Consider the possible borrowing options – if your existing lender is eligible to provide CBILS funding then this is likely to be your first option to try. The CBILS scheme has now been augmented by the introduction of new support for the smallest businesses through which they will be able to borrow up to £50,000, with the government underwriting the entire loan (referred to as bounceback loans). If CBILS funding is not available for your business, there are a number of alternative lenders who may be able to provide a solution.
- Be on the lookout for potential activity – even if it isn't going to translate into business straight away. Follow up on all enquiries and try to build a potential pipeline for when lockdown ends.
- Social distancing is going to be the new normal for the foreseeable future – how can your business be adapted to operate in the new conditions? Start thinking about it and preparing for this now, if you haven't already. Can you do more business online? Can your bricks-and-mortar premises be adapted for social distancing? Some UK non-food retailers, such as B&Q, are already experimenting with reopening stores complete with social distancing measures, such as limiting the number of customers in store at any one time and keeping shoppers apart with floor markings. Across Europe, Germany is already coming out of lockdown and other countries are likely to open over the coming months so there will be an uptick in activity, albeit not at pre-lockdown levels.
QUESTION: CAN DEBT FOR EQUITY SWAPS HELP IN THE RECOVERY?
Writing in the Financial Times this week, Kate Burgess notes that whilst applying for the new bounceback loans is refreshingly simple compared to the government's coronavirus business interruption loans (CBILS), the biggest headache for all concerned will be the huge debt burden which UK companies are now shouldering.
A suggested way out, floated by Ms Burgess and other commentators, is for banks, assisted by the government, to help companies in danger of going under to swap debt for equity. Ms Burgess reminds us that 3i, the investment house, had its roots in the Industrial and Commercial Finance Corporation which was founded in 1945 by the Bank of England and lenders to fund small businesses in the aftermath of the second world war. Three years later KfW, the German state-owned development bank, was formed as part of the Marshall Plan to help rebuild the region.
Whether the Bank of England and lending banks will devise such an ambitious plan this time remains to be seen. However, debt for equity swaps are certain to feature in the coming recession, as they have in previous economic recessions. Investors in Norwegian Air Shuttle have just agreed to back a large debt for equity swap. This will enable Norwegian to access government-backed loan guarantees and hopefully avoid bankruptcy.
In the UK company context, where the company is in a degree of financial distress, the directors may find that investors who are also lenders may be prepared to convert their debt into further equity in the company. This is likely to be at a discounted price, and/or into a new class of shares which may carry some additional rights. This type of debt for equity swap may go hand in hand with a fundraising exercise. It may usefully be proffered as part of a bigger conversation - for example, a large institutional lender may agree to a refinancing for the company on condition that existing shareholder debt is capitalised.
The boards of both private and publicly-traded companies will need to carefully consider their company's current financial situation, its longer-term strategic objectives and, of course, their directors' duties in relation to any proposed arrangements.
This is a general summary of the position. For tailored advice on your company's situation please email Gillian White or email Vernon Dennis or your usual Howard Kennedy LLP contact.