In the United Kingdom, some of the landmark measures introduced by the UK Government in the wake of the Covid-19 pandemic have recently been extended by the Chancellor of the Exchequer. 

We summarise below key milestones relating to those initiatives which have been put in place to support businesses and note how financial stakeholders are impacted. The package of help for businesses is ever-evolving in response to the changing market, and the key dates identified are correct as at 28 October 2020.

Temporary suspension of wrongful trading expired: amendments to the wrongful trading provisions were introduced to allow directors to operate their business through Covid-19 without the threat of personal liability by creating a presumption that directors were not responsible for any worsening of the financial position of the company during the period 1 March and 30 September 2020. These temporary measures came to an end on 30 September 2020 and the ordinary provisions on wrongful trading shall now apply. As is always critical if there are any concerns around the viability or solvency of a company, the board of directors needs to actively monitor the position and there needs to be a plan of action as well as "light at the end of the tunnel". The board should engage early with key stakeholders (customers, suppliers, lenders, HMRC) relating to liquidity and any funding concerns. Early engagement with financial stakeholders means stakeholders can understand the current position, identify potential issues and, together with the company, can consider whether professional advice is needed, especially if there is a risk of insolvency. Wrongful trading can be used by creditors to assert influence (without, of course, any suggestion of shadow directorship) on a company, particularly in circumstances where there are no defaults under finance or other transactional documents. If you want to know how to protect yourself from challenge of wrongful trading or other breach of duties, or to understand better how these provisions are used tactically by stakeholders in a restructuring context, please contact Michael Fiddy, Amy Jacks or Devi Shah.

CJRS:  the Coronavirus Job Retention Scheme comes to an end on 31 October 2020. In replacement, the Chancellor announced an entirely new scheme to subsidise employees continuing to work part of their normal hours or where a work place is legally required to close due to COVID-19 restrictions – the Job Support Scheme (JSS) - which will operate between 1 November 2020 and 30 April 2021. The Job Support Scheme is less generous than the Coronavirus Job Retention Scheme and there is now a financial impact test for large employers - to claim under JSS they will need to demonstrate that their turnover has remained equal or fallen due to COVID-19. In addition, the JSS will only be available for employees who are working a proportion of their time, and will not benefit those laid off entirely unless an employer is legally required to close its premises due to Government COVID-19 restrictions. Importantly, employees on JSS cannot be made redundant/put on notice by the employer during a period when the employer intends to claim for them. Once employment subsidies come to an end or an employer is no longer able to claim, stakeholders will need to consider the potentially adverse impact on the size of the business workforce and subsequent trading potential to assess whether changes need to be made.

CBILS and CLBILS new applications: new applications deadline has been extended to 30 November 2020 and repayment term of 6 years can be extended to 10 years. These schemes were put in place to support businesses in the short to medium term where they suffer lost revenue and/or cashflow disruption due to Covid-19. The loans are administered by the British Business Bank, with funding being provided by a range of lenders which will have security in the form of a Government guarantee. The updated report published by TheCityUK Recapitalisation Group has suggested that c.£23billion of UK SME's unsustainable debt will relate to Government backed coronavirus loans, and it has called for a state funded agency to handle such unsustainable debt. Financial stakeholders will potentially need to deal with the cost and reputational risk of pursuing recovery for those borrowers who default. Furthermore, with the end of the Government wider support schemes, funding requests under existing or additional facilities are likely to increase.  

For more information on CBILS and CLBILS, please see our blog posts:

Secondary preferential creditor status of HMRC: HMRC will become a secondary preferential creditor for PAYE, VAT and certain other taxes from 1 December 2020. HMRC are often a key creditor in an insolvency, and their new higher ranking status in the insolvency waterfall may impact a financial stakeholder's floating charge realisations. It may also affect the structuring of new lends, including possibly increasing the level of reserves on ABL deals and pushing certain lenders to seek more fixed charge security, assignments or trust arrangements (as opposed to floating charge security) which would elevate them above HMRC in an insolvency scenario. Stakeholders are likely to monitor the level of accrued VAT/PAYE liabilities in corporate borrowers and, where an insolvency appears unavoidable, may consider if insolvency pre-1 December would result in a better outcome. Alternatively, stakeholders may consider alternative restructuring processes such as CVA/the new Restructuring Plan to compromise unsecured debts. Current secured creditors would be well-advised to undertake a security review at an early stage to ascertain any re-characterisation risk (i.e. security which is purported to be "fixed" security being found to be "floating" instead) and the impact on potential recovery.

Restrictions on winding-up petitions and statutory demands: the ability of creditors to present winding up petitions and serve statutory demands, even where Covid-19 is the reason for the worsened position, will be reinstated on 1 January 2021. Lenders may be asked for additional funding to deter any winding up threats. It is worth noting that landlords will also be able to forfeit leases for unpaid rent from this date, as well as exercise commercial rent arrears recovery CRAR. For businesses where the rent has accrued unpaid since the start of the pandemic, this may have significant cashflow impact.

Originally published 30 October, 2020

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