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 June 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 recently been extended, and demonstrates that a proactive and consensual 30 JUNE 2021 • The suspension previously expired • Are boards engaging with all
may potentially be again, but others have now begun approach, with early engagement, presents the on 30 September 2020 but was stakeholders in order to stave off
to lapse or taper off. The breathing space afforded to best prospect of a successful resolution of financial subsequently reinstated for the period insolvency – who will fund liquidity
Wrongful trading
companies will inevitably end at some point, therefore distress, protecting directors and preserving value for beginning 26 November 2020 to need now and in future?
suspension lifted
directors will need to be cognisant of the key dates stakeholders. Boards should therefore not delay in 30 June 2021. It has not been further
• Some boards will inevitably need
and be making preparations for these. Balance sheets seeking to address any balance sheet issues especially extended beyond this date.
to consider insolvency processes,
have been and will continue to be damaged and lender where debt levels have started to look insurmountable.
• Basis for criticism of directors. consensual debt write downs and
and investor appetite for risk has diminished against a
financial restructuring.
backdrop of a recession and the challenges to accurate In this note we explore the key dates which all boards • Potential personal liability to contribute
business forecasting which COVID-19 presents. and financial stakeholders must be cognisant of. We also to assets upon an insolvency. • Might a non-consensual insolvency
identify some of the tools which are available to address process be planned?
• Consider cash flow solvency and longer
Boards will need to consider not just how to survive overburdened balance sheets.
term balance sheet sustainability.
on a short term liquidity basis but whether they have
longer term balance sheet and liquidity issues which All key dates identified below are correct as at • Board may need to consider
need to be addressed. Secured creditors will usually 30 June 2021. However, this is obviously an area that commencing insolvency proceedings
favour turnaround over insolvency, but will only is subject to change at short notice, and some of the themselves so as not to worsen the
be able to do so if balance sheets and longer term deadlines below may subsequently be extended by net liabilities to creditors if insolvency
financial commitments can be right-sized to reflect further measures. We will be updating our website is inevitable.
prudent valuation and forecasting. version of this note to reflect any further changes,
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.June 2021 July 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 JUNE 2021 • During the final months of the CJRS, 19 JULY 2021 • Absent a further deferral, the
the contribution employers are government “hopes to be in a position
required to make is changing: to remove all legal limits on social
Support under the Step 4 of lockdown easing
contact” on this date.
Coronavirus Job Retention • from 1 July 2021, the government in England
Scheme (CJRS) begins will pay 70% of a worker’s salary,
to taper and employers will pay 10%, up to
the same monthly limit as before -
GBP2,500; and 29 SEPTEMBER 2021 • The government has indicated that • Has the company properly planned for
• in August and September, the businesses which are able to pay rent this in its cashflows?
government will pay 60% and must do so as soon as the restrictions
Rent quarter day
employers 20%, up to the same which apply to them are relaxed and
GBP2,500 limit. they are allowed to re-open.
• As discussed further below, CJRS support
• Consider whether the business is
will end on 30 September 2021.
now in a position to pay its rent as it
falls due, given imminent return of a
landlord’s right to issue a statutory
30 JUNE 2021 • 100% business rates relief for the • Is the end of the relief fully budgeted? demand and/or a winding-up petition
2020/21 tax year for certain sectors (see below) in respect of unpaid rent
Reduction of business extended to cover the first three (notwithstanding the restrictions on
rates relief for retail, months of the 2021/22 tax year. other landlord rights which remain in
hospitality and leisure place until March 2022).
• Between 1 July 2021 and
31 March 2022 the level of available
relief will depend on whether or
not a business is permitted to
open in January 2021 (with closed
businesses benefitting from a 2/3rds
discount up to a value of GBP2m).
• In addition, the government is creating
a GBP1.5 billion fund which will enable
local authorities to award rates relief
on a discretionary basis to businesses
which have not benefitted from the
COVID-related business rates reliefs.
• For businesses in retail, leisure and
hospitality, there is a need to budget
for the revised liability from this point.
For other businesses, applying for
discretionary relief could be an option
to explore.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 16 June 2021 that • Unsecured creditors can wind up 30 SEPTEMBER 2021 • Consider overall strategy and whether • Impact of downsizing workforce/
the previous deadline of 30 June 2021 debtors if unpaid. further cost cutting measures business on company’s trading
would be extended. are required. potential – is it a smaller business
Restrictions on winding-up • Creditors may be asked to fund End of the Coronavirus Job
with lower EBITDA now?
petitions and statutory • Return of statutory demands as emergency payments to stave off Retention Scheme (CJRS). • Will employees return to work or
demands lifted grounds for winding-up petitions. unplanned insolvency. will the employer need to make • Impact on valuation and need for
redundancies/alter employment a financial restructuring?
• Winding-up orders possible even • Consider contingency planning.
contracts? Has this been budgeted?
if COVID-19 has caused financial
position to worsen. • If making redundancies, how many?
Will collective consultation
• Temporary suspension means debt
be required?
may have built up. Creditors may
now become “ransom” creditors. • Can this be tied in with the end of the
CJRS? A 45 day collective consultation
• Particularly acute in sectors with
period for 100+ redundancies to
zero/low revenue incurring rent liabilities.
complete on 30 September would
• Unlike previous extensions, the most need to start on/before 16 August.
recent extension to this restriction is
• It is not clear what, if anything, will
shorter than the equivalent restrictions
replace CJRS from 1 October onwards.
on forfeiture and CRAR (which have
Note, prior to CJRS extension,
been extended to March 2022).
replacement “Job Support Scheme”
As such, landlords may look to issue
(JSS) was announced on 24 September
statutory demands and/or winding-up
2020 and had been due to take
petitions in respect of unpaid rent.
effect from 1 April 2021 – it is
It is possible, however, that further
currently postponed.
extensions may be granted.
30 SEPTEMBER 2021 • 5% VAT rate has applied to hospitality • Is the end of the reduced rate
businesses since July 2020. fully budgeted?
• It was announced on 3 March 2021
Expiry of 5% VAT rate
that the previous expiry date of
for hospitality
31 March 2021 would be extended.
• Interim rate of 12.5% will apply from
1 October 2021 to 31 March 2022.
• 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 • It was announced on 16 June 2021 that • Has the company properly planned for
on 6 April 2021 and will run until from company around a new the previous deadline of 30 June 2021 this in its cashflows?
31 December 2021. funding requirement? would be extended until the 2022
End of Recovery Loan Scheme Return of certain
March quarter day.
• Replaced CBILS/CLBILS schemes • Consider impact of being a sponsor landlord rights
which closed to new applicants on backed business. • Return of ability to forfeit lease for
31 March 2021. non-payment of rent.
• Consider initiating discussions early
• Loans and other types of finance to avoid last minute requests. • As well as being able to forfeit leases
available up to GBP10 million for the non-payment of rent from
per business, with an 80% 25 March 2022, landlords will also
government guarantee. be able to exercise commercial rent
arrears recovery (CRAR) when 7 days’
of rent is overdue from that date.
However, when the period of the
CRAR restrictions was extended to
25 MARCH 2022 • Consider impact on cashflow (and • Has the company properly planned
25 March 2022, the minimum number
balance sheet if deferred), given for how to deal with accrued rental
of days arrears was not. This means,
imminent return of landlord rights liabilities, given imminent return of
Rent quarter day broadly, that a tenant who failed to pay
(see below). landlord rights (see below)?
rent from the March 2020 quarter day
• Absent further government measures • Usual liquidity considerations apply. to the June 2021 quarter day will be
(see below regarding proposed protected (if the net arrears are less
ringfencing of arrears) and/or than the required 554 days) but if they
agreement with landlords, or forcible fail to pay the September quarter’s
compromise of landlord arrears via rent (and future quarters’ rents) CRAR
CVA or Restructuring Plan, leases will may be exercised. This is believed
be payable in full in accordance with to reflect the Government’s aim to
their terms. ringfence Covid arrears and treat them
differently from future rents.
• Usual liquidity considerations apply.
• The government has indicated that
legislation will be introduced to
“ringfence” the accrued rent arrears
of businesses that have had to
remain closed during the 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.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.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. | JUL21 | A08209-20 www.dlapiper.com
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