COVID-19 UK: What next for distressed companies and their stakeholders?
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COVID-19 UK: What next for distressed companies and their stakeholders?
Government support measures have been Timeline
extended but will eventually end – what September 2021
then for companies and their stakeholders?
For financial stakeholders
Key dates For boards/companies including secured creditors
Key dates and issues for companies and their stakeholders
and shareholders
Significant government support measures have been Companies, shareholders and creditors should be
provided in response to the COVID-19 pandemic. working together to agree solutions. Experience
Some measures have been extended on multiple demonstrates that a proactive and consensual 29 SEPTEMBER 2021 • The government has indicated that • Has the company properly planned for
occasions, and may potentially be again, but others approach, with early engagement, presents the businesses which are now able to pay this in its cashflows?
have now begun to lapse or taper off. The breathing best prospect of a successful resolution of financial rent must do so.
Rent quarter day
space afforded to companies will inevitably end distress, protecting directors and preserving value for
• Consider whether the business is now
at some point, therefore directors will need to be stakeholders. Boards should therefore not delay in
in a position to pay its rent as it falls
cognisant of the key dates and be making preparations seeking to address any balance sheet issues especially
due, although note that restrictions
for these. Balance sheets have been and will continue where debt levels have started to look insurmountable.
on landlords issuing winding-up
to be negatively impacted and lender and investor
petitions in respect of unpaid rent have
appetite for risk has diminished in light of the In this note we explore the key dates which all boards
been extended until 31 March 2022
challenges to accurate business forecasting which and financial stakeholders must be cognisant of. We also
(see below).
COVID-19 continues to present. identify some of the tools which are available to address
overburdened balance sheets.
Boards will need to consider not just how to survive
on a short term liquidity basis but whether they have All key dates identified below are correct as at
longer term balance sheet and liquidity issues which 30 September 2021. However, this is obviously an area
need to be addressed. Secured creditors will usually that is subject to change at short notice, and some
favour turnaround over insolvency, but will only of the deadlines below may subsequently be extended
be able to do so if balance sheets and longer term by further measures. We will be updating our website
financial commitments can be right-sized to reflect version of this note to reflect any further changes,
prudent valuation and forecasting. and this can be found here.
Key contacts
NEIL RILEY SARAH ARCHER
Partner Legal Director
London London
T +44 (0) 20 7796 6260 T +44 (0) 20 7153 7727
neil.riley@dlapiper.com sarah.archer@dlapiper.com
TOM HITCHCOCK
Associate
London
T +44 (0) 20 7796 6112
tom.hitchcock@dlapiper.com
This article focusses on the position in England, there are some differences for Scotland which are not covered
here. Our colleagues in Scotland would be pleased to discuss the Scottish position, please contact the authors
or your usual DLA Piper contact to be put in touch with one of our team in Scotland.September 2021 September 2021
For financial stakeholders For financial stakeholders
Key dates For boards/companies including secured creditors Key dates For boards/companies including secured creditors
and shareholders and shareholders
30 SEPTEMBER 2021 • It was announced on 9 September • Subject to compliance with these 30 SEPTEMBER 2021 • Consider overall strategy and whether • Impact of downsizing workforce/
2021 that the existing restrictions on requirements, creditors can petition to further cost cutting measures business on company’s trading
statutory demands and winding-up wind up debtors if unpaid. are required. potential – is it a smaller business
Restrictions on winding-up End of the Coronavirus Job
petitions would be allowed to expire. with lower EBITDA now?
petitions and statutory • Creditors may be asked to fund Retention Scheme (CJRS). • Will employees return to work or
demands lifted • From 1 October 2021, winding- emergency payments to stave off will the employer need to make • Impact on valuation and need for
up petitions may be presented by unplanned insolvency. redundancies/alter employment a financial restructuring?
creditors, provided the following contracts? Has this been budgeted?
• Consider contingency planning.
conditions are met:
• If making redundancies, how many?
• the debt is GBP10,000 or more; Will collective consultation
be required?
• the creditor has made a formal
request to the company seeking • It appears unlikely that anything,
proposals for payment; will replace CJRS from 1 October 2021
onwards. Note, prior to CJRS extension,
• the company has not made a
replacement “Job Support Scheme”
proposal that is to the creditor’s
(JSS) was announced on 24 September
satisfaction within 21 days of
2020 and had been due to take
the request; and
effect from 1 April 2021 – it is
• the debt is not commercial rent currently postponed.
which is unpaid because of a
financial effect of coronavirus.
• These measures will apply until
31 March 2022. 30 SEPTEMBER 2021 • 5% VAT rate has applied to hospitality • Is the end of the reduced rate
businesses since July 2020. fully budgeted?
• Consider how the relaxation of
restrictions may impact the business Expiry of 5% VAT rate • Interim rate of 12.5% will apply from
and whether any creditors are likely to for hospitality 1 October 2021 to 31 March 2022
present a winding-up petition. (see below).
• Need to budget for the revised rate
from this point.December 2021/March 2022 March 2022
For financial stakeholders For financial stakeholders
Key dates For boards/companies including secured creditors Key dates For boards/companies including secured creditors
and shareholders and shareholders
31 DECEMBER 2021 • Recovery Loan Scheme launched • Will this deadline prompt engagement 25 MARCH 2022 • Return of ability to forfeit lease for • Has the company properly planned for
on 6 April 2021 and will run until from company around a new non-payment of rent. this in its cashflows?
31 December 2021. funding requirement?
End of Recovery Loan Scheme Return of certain • As well as being able to forfeit leases
• Replaced CBILS/CLBILS schemes • Consider impact of being a sponsor landlord rights for the non-payment of rent from
which closed to new applicants on backed business. 25 March 2022, landlords will also
31 March 2021. be able to exercise commercial rent
• Consider initiating discussions early
arrears recovery (CRAR) when 7 days’
• Loans and other types of finance to avoid last minute requests.
of rent is overdue from that date.
available up to GBP10 million
However, when the period of the
per business, with an 80%
CRAR restrictions was extended to
government guarantee.
25 March 2022, the minimum number
of days arrears was not. This means,
broadly, that a tenant who failed to pay
rent from the March 2020 quarter day
25 MARCH 2022 • Consider impact on cashflow (and • Has the company properly planned to the June 2021 quarter day will be
balance sheet if deferred), given for how to deal with accrued rental protected (if the net arrears are less
imminent return of landlord rights liabilities, given imminent return of than the required 554 days) but if they
Rent quarter day
(see below). landlord rights (see below)? fail to pay the September quarter’s
rent (and future quarters’ rents) CRAR
• Absent further government measures • Usual liquidity considerations apply.
may be exercised. This is believed
(see below regarding proposed
to reflect the Government’s aim to
ringfencing of arrears) and/or
ringfence Covid arrears and treat them
agreement with landlords, or forcible
differently from future rents.
compromise of landlord arrears via
CVA or Restructuring Plan, leases will • The government has indicated that
be payable in full in accordance with legislation will be introduced to
their terms. ringfence the accrued rent arrears of
businesses that have had to remain
• Usual liquidity considerations apply.
closed during the COVID-19 pandemic.
If a consensual agreement cannot
be reached between landlord and
tenant as to the treatment of such
arrears, the issue will be determined
by an arbitration process between the
two parties. Details of the arbitration
process are still to be announced.
• Note also the return of a landlord’s
ability to present a winding-up petition
from 1 April 2022 onwards (see below).March 2022
For financial stakeholders
Key dates For boards/companies including secured creditors
and shareholders
31 MARCH 2022 • Expiry of the interim 12.5% VAT rate • Has the end of these reliefs been
applicable to hospitality businesses fully budgeted?
from 1 October 2021.
End of the 12.5% VAT rate and
2/3rds business rates relief • Expiry of the 2/3rds business rates
discount applicable to businesses that
were forced to close in January 2021.
• Need to budget for the revised rates
from this point.
31 MARCH 2022 • The prohibition on winding-up • Has the company properly planned
petitions in respect of commercial rent for how to deal with accrued
that is unpaid because of a financial rental liabilities?
Expiry of prohibition on
effect of coronavirus will expire on
winding-up petitions in • Consider contingency planning.
31 March 2022.
respect of commercial
rent arrears • Note also:
• the return of landlord rights of
forfeiture and exercising CRAR from
25 March 2022 onwards; and
• the proposed arbitration process to
be introduced for rent arrears.
• Landlords may look to present
winding-up petitions in respect of
unpaid rent.Restructuring tools available
We have set out below a number of the restructuring tools available to companies whose balance sheets are overburdened. Strategies
involving one or more of these tools can assist right-sizing a balance sheet by cramming down creditors, converting debt into equity,
writing off debt or amending its terms or, if none of the above can be done consensually, leaving certain liabilities behind via an
insolvency process. At DLA Piper we regularly advise on strategies involving one or more of these options.
Pre-pack transaction CVA
PROS CONS PROS CONS
• Speed – mitigates interruption to trading • Sale price accuracy – without a • Less formal/lower cost – • Thresholds – requires 75% by value of all
and detrimental effects on value. marketing process valuation can be no court involvement. unsecured creditors plus majority by value
• Reduced costs associated with the unclear and a discreet M&A process • Debtor in possession – can continue of unconnected creditors.
administration process as compared can leak, while a public one can be trading while discussions are ongoing. • Landlord claims – not as easy to reduce
to a trading administration; better return value destructive. Directors remain in control. rent below market levels or prematurely
for creditors. • Litigation risk – where a valuation or an end leases following recent case law.
• Better PR – preserves business reputation
by only announcing that a deal has been
abridged marketing process is necessary
value can be disputed. Also can be reliant
Restructuring tools • Credit score will be negatively affected.
• Secured creditors will not be bound.
done and it’s business as usual – prevents
loss of confidence associated with
on intercreditor provisions and these can
sometimes be subject to dispute.
available • Not always a cure – may be a precursor
to insolvency proceedings rather than a
trading insolvency. • Reputational risk – if certain types of permanent solution.
• Job preservation – also minimises liabilities (eg pension scheme deficit)
employee claims and maximises return are left behind.
to other creditors.
Debt for equity (consensual restructuring) Scheme of arrangement Restructuring plan
PROS CONS PROS CONS PROS CONS
• Rightsizes debt and preserves • Unanimous consent of affected • Flexibility – can be a compromise or • Cost – process similar to schemes so
• Flexibility – can be a compromise or • Costs – traditionally costly to implement
potential recovery for lenders following stakeholders required albeit may be arrangement about anything as long costs expected to be comparable.
arrangement about anything. as predominately used for complex
debt write off. achieved against backdrop of threatened as it is to deal with the company’s • No moratorium – no breathing space
• Debtor in possession – no insolvency restructurings. However, cost need not be
• Private, out of court process – enforcement via a pre-pack. financial difficulties. to undertake the process (unless
practitioner is appointed. Negative publicity as high for a simpler cap structure.
meaning less negative publicity and • Regulatory issues for banks taking • Debtor in possession – as for a Scheme. combined with administration or
of formal insolvency is avoided. • No cross-class cramdown – all classes must
no stigma associated with insolvency. equity (eg ringfencing). • Binds secured and unsecured creditors statutory moratorium).
• Binds secured and unsecured creditors – vote in favour. ‘Hold-out’ or ransom classes
– as for a Scheme but unlike a CVA. • Post Brexit recognition –
unlike a CVA. can therefore block.
• Cross-class cram down – can be imposed as for a Scheme.
• Full consensus not required – Dissenting • No moratorium – no breathing space to
on dissenting classes or “out of the • Financial difficulties – requirement for
creditors in a class can be crammed down undertake the process (unless combined
money” creditors/members if relevant financial volatility and stress ie cannot
if 75% by value and a majority in number with administration or statutory moratorium).
conditions are met. be utilised by solvent companies.
of each class approve. • Post-Brexit recognition – some
• Thresholds – 75% by value approval • Valuations – required in order to
• Non-UK companies eligible – only requires uncertainty regarding international
(within each class) but no requirement ascertain whether any classes can
a “sufficient connection” to the UK. recognition of English schemes
for a majority in number or unconnected be crammed.
going forward.
creditor approval threshold. • Brand new – somewhat untested in the
• Non-UK companies – as for a Scheme. courts (as yet) and therefore subject to
some uncertainty, though this is changing
as the jurisprudence continues to build.DLA Piper is a global law firm operating through various separate and distinct legal entities. Further details of these entities can be found at www.dlapiper.com. This publication is intended as a general overview and discussion of the subjects dealt with, and does not create a lawyer-client relationship. It is not intended to be, and should not be used as, a substitute for taking legal advice in any specific situation. DLA Piper will accept no responsibility for any actions taken or not taken on the basis of this publication. This may qualify as “Lawyer Advertising” requiring notice in some jurisdictions. Prior results do not guarantee a similar outcome. Copyright © 2021 DLA Piper. All rights reserved. | OCT21 | A08209-24 www.dlapiper.com
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