Businesses need liquidity to utilise emergency UK insolvency measures

Financial and Professional Services

Mark Fry | 1 April 2020

The UK government has introduced emergency insolvency measures to protect companies weakened by restrictions on normal trading and freedom of movement, in the wake of the escalating global coronavirus (Covid-19) pandemic.

The three-month temporary suspension of wrongful trading provisions provides company directors with the confidence to continue trading throughout this pandemic without the threat of personal liability if companies fall into insolvency. The wrongful trading regime, introduced in the Insolvency Act 1986, makes it an offence for a company director to continue trading where there is no reasonable expectation that the business can avoid insolvency.

These temporarily loosened directors’ responsibilities, retrospective from 1 March, are intended to support otherwise solvent companies in immediate distress resulting from the impact of COVID-19 and impose a moratorium on creditors enforcing debts for between 28 days and three months. However, to take advantage, companies need to have enough cash to pay their obligations throughout the insolvency moratorium. Directors will be empowered to take decisions to save their companies through a raft of preventative steps, including restructuring or taking on new debt – including from the UK government’s £330 billion guaranteed loan scheme, the COVID-19 Corporate Financing Facility (CCFF) or the Coronavirus Business Interruption Loan Scheme (CBILS), relative to company size and rating. 

While directors’ fiduciary duty to creditors remains during the moratorium on insolvency proceedings, “all of the other checks and balances that help to ensure directors fulfil their duties properly will remain in force,” said Alok Sharma, the UK Secretary of State for Business, Energy and Industrial Strategy, who announced the measures last Saturday. In addition, a new restructuring procedure has been introduced which enables companies to bind dissenting classes of creditors.

The UK government has provided breathing space for directors to make difficult decisions in uncertain times without the risk of personal liability. Businesses affected by COVID-19 should use this time thoughtfully, with professional advice where needed. The market is still processing these radical emergency measures, and more detail from the government is still required to provide viable support for struggling companies. Affected companies may need to undertake a short-term analysis of cash and identify ways to enhance liquidity. Measures may include: 

• Short-term cash flow analysis and reprioritising liabilities;
• Negotiating standstill agreements and interest holidays with creditors; 
• Raising fresh equity through joint venture partners and investors;
• Negotiating refinancing with existing and new lenders; 
• Releasing trapped liquidity across the assets of a businesses; 
• Identifying the realistic timeframe for accessing government support schemes; and 
• Temporarily mothballing certain business lines.

The problem for many businesses most affected by the demand shock – such as those in retail, retail real estate, leisure and hospitality, as well as broader real estate, construction, professional services, aviation and automotive supply chains – will be in the realistic delays before access to government support can be secured. In the interim, struggling companies will be forced to preserve cash and pay liabilities on a strictly prioritised basis. 

In fact, this is already evident. Debenhams, the British department store, has asked landlords for an immediate five-month rent holiday. Superdry and Primark have asked for similar rent holidays. In retail real estate, Intu Properties, the UK and Spanish shopping centre owner and developer, has provided a transparent indication of exactly how retailers are responding to the demand shock: just 29% of its occupiers paid their quarterly rent on March 25, compared with 77% for the same period last year. In the pub sector, JD Wetherspoon has told its suppliers they will be not paid until its 874 nationwide pubs reopen after the coronavirus lockdown, while its 43,000 staff will only be paid 80% of their wages when the government scheme begins. In the automotive manufacturing sector, Nissan has delayed payments within their British supply chain.

More broadly, companies across sectors are furloughing staff. Cash preservation and reprioritising liabilities are exactly what we would expect to happen in the context of an abrupt cessation of trading conditions. Companies are forced into these actions by the necessity to improve liquidity and strengthen their cash position. The government’s insolvency measures are only effective for those companies who have sufficient cash reserves or debt headroom to fall back on until government loans and grants become accessible. Those that do not will either need to consider other immediate options (listed above), or face failure. BrightHouse, the rent-to-own retailer, and restaurant chain Carluccio’s both filed for administration on Monday, with COVID-19 reportedly tipping them into bankruptcy.

The business environment and outlook has rapidly altered in the span of a month, with existing strategies no longer fit for purpose for many solvent and vulnerable companies. In these extreme and unpredictable conditions, BTG Advisory can play a critical role in helping firms across a range of specialist sectors to control risk and navigate the uncertainty. Please get in touch to see how we can lighten the load.

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