Rescue, restructure and insolvency post Covid-19
‘The UK has one of the world’s best toolkits for rescuing distressed businesses – and it’s been extended’ Paul Bagon
Of all the subjects that businesses need to get to grips with as they deal with the fallout from Covid-19, perhaps the most dreaded is the prospect of insolvency.
However, there are alternatives to explore before bringing in the insolvency practitioners, as Paul Bagon, Partner in RPC's Restructuring & Insolvency team, explained in our webinar, Restructuring and Insolvency: the post Covid-19 options, on 22 July.
Over his 45-minute presentation, Paul discussed options for when a business becomes unviable – and the key considerations of each.
Paul began by stressing that:
- Restructuring and insolvency aren’t always mutually exclusive. Insolvency can be a mechanism for winding up one part of a business and transferring its profitable activities to another, more viable part; and
- A rescue culture where the emphasis is on identifying what is working as opposed to what isn’t is more rewarding and productive than winding a business up. There are many success stories of businesses that have saved jobs and thrived by following this path.
Alternatives to insolvency include:
- Consensual restructuring, in which the distressed business arrives at an understanding with its creditors. This is a private arrangement outside formal business insolvency structures so is not reported in the public domain;
- Scheme of arrangement, a formal agreement between a business and its creditors. A Scheme of arrangement is drawn up in accordance with The Companies Act 2006 and is approved by a court. As such, it’s legally binding on all parties;
- CVA, (Company Voluntary Agreement) in which unsecured creditors agree to reduced or deferred (or both) payments from the distressed company. Many high street retailers have entered into CVAs with their landlords in recent months;
- Administration and prepacks, where less formal rescue options have failed, an administrator is appointed to identify viable elements of a business with a view to transferring them either elsewhere within the enterprise or by way of an immediate sale. Often used as part of a wider rescue package.
Where insolvency is inevitable, an insolvency practitioner is appointed. From then on, decisions are made in the interests of creditors, not shareholders – an important consideration for anyone considering injecting more cash into the business. The key stakeholders in the event of insolvency are:
- Secured lenders, who will often drive discussions around the company’s future;
- Unsecured lenders, who rank lower than secured lenders;
- Trade creditors, who may be legally required to continue to supply the distressed business if their products or services are vital to its recovery;
- Shareholders, who are no longer priority number one;
- Directors, who may find themselves personally liable for any wrongdoing that contributed to company’s failure. They are advised to take out D&O (directors and officers) liability insurance;
- Pension providers, who may need to seek legal advice;
- Employees, who may be at risk of losing their jobs or having their contracts transferred to a new employer; and
- Regulators, who may wish to scrutinise the conduct of the company.
Paul concluded the webinar by outlining some of the changes to UK insolvency legislation in the light of Covid -19. Among these are:
- A moratorium on creditors taking action against debtors while they seek professional restructuring advice;
- A Monitor role to oversees the above;
- An extension to the suspension of termination clauses when a company enters an insolvency procedure;
- A new restructuring plan binding on creditors; and
- Suspension of winding up petitions from wrongful trading until 30 September 2020 where the company can demonstrate its difficulties arose from Covid-19.