David Foster participates in the IR Global Insolvency Virtual Series – Force Majeure: Insolvency and Restructuring in Uncertain Times


Foreward by Andrew Chilvers

Sometimes events can be so unprecedented that even the canniest business people fail to comprehend what’s happening until it’s too late.

The COVID-19 “coronavirus” crisis is one such event. Businesses across the world have been plunged into shock dealing with the fall out of lockdowns, plummeting revenues and sales, unpaid bills and new ways of remote working for staff. And some sectors have been hit harder than others.

The first industry to be swept off its feet was tourism and the airline industry. The UKs regional carrier FlyBe was the first big casualty, while Virgin Atlantic applied for hundreds of millions of pounds in UK state aid to stay afloat. Meanwhile, in the US, United Airlines quickly grounded most of its fleet amid class action brought about by disgruntled passengers and employees. Boeing shut production of its 787 aircraft at its factory in South Carolina and in Germany Lufthansa decommissioned 40 jetliners and ceased operations at its Germanwings discount carrier.

The entire hospitality industry was at risk across North America, Europe and Australia with chains such as British pubs Wetherspoons laying off staff and Italian restaurant chain Carluccio’s going into administration. Countless other famous names were predicted to follow in the next few months. Big and small retail stores across the globe were similarly adversely affected.

But it wasn’t bad news for everyone. Companies that had invested in technology fared better and in some cases business boomed. Companies such as Walmart in the US and Tesco in the UK outpaced European discount chains such as Aldi by investing in online delivery services. Ocado, a UK online grocer, saw such a spike in activity with overloaded servers crashing in early March that the company assumed it was a cyberattack. In reality it was people stocking up for food and drink ahead of the lockdown.

Elsewhere, many firms in all sectors were quick to adopt new technology models for business operations, which included the use of mobile meeting apps, file sharing and using online apps and channels for sales, service delivery and marketing. What would probably have taken years to implement in old-fashioned brick and mortar industries (including the legal sector) suddenly appeared in a matter of days.

To help companies pull through this crisis, governments around the world unveiled packages to help shore up endangered businesses, providing damage limitation to their economies. In the UK, the government unveiled a £330 billion package of loan guarantees and other support for businesses. Meanwhile, the US Federal Reserve was asked by President Donald Trump to provide a $1 trillion economic stimulus package.

Everywhere, however, it was the small and medium-sized companies that were the most exposed. A survey by the US Chamber of Commerce reported 54% of businesses with fewer than 500 employees were closed or expected to close in the coming weeks and months. In the UK the corporate finance network predicted that one-fifth of small and medium-sized businesses were unlikely to survive the first few months of the lockdown despite promises of government support.

Unsurprisingly, legal professionals working in the insolvency sector in all jurisdictions suddenly had to keep up with new legislations being rushed through by different governments.

What impact has the COVID-19 crisis had on insolvency tests in different jurisdictions?

In the UK there are essentially two main tests; a cash sheet insolvency and a balance sheet insolvency test. Is the company able to pay its debts and what are the liabilities? This also takes into account contingent and prospective liabilities.

With the balance sheet insolvency, we’re looking simply at assets and liabilities. The cash flow test is more akin to what many businesses are experiencing now, which is where cash flow is going to be more difficult and as a result companies struggle to pay their suppliers and creditors.

One of the interesting things is just watching debt to equity ratios in companies. For instance, in the UK we’ve had the airlines sector taking a bit of a pasting during the COVID-19 crisis, but they’ve got good cash supplies built up. Consequently, companies like EasyJet have got a debt to equity ratio of 0.64. Meanwhile, we have a pub chain like Wetherspoons that runs a lot of cheap pubs with a ratio of 4.6 so that company will be in much more difficulty. Obviously, then there’s the issue of whether the company will be insolvent and the company directors suddenly find themselves personally liable if they’re trading insolvent.

What steps could and should companies take to survive the pandemic crisis and the economic downturn?

In the UK there’s still a general duty on every director to act in a way they consider that in good faith would most likely promote the success of a company for the benefit of its shareholders. This is section 172 of the Companies Act 2006. What is interesting about that is there will be a focus on the particular actions of the directors, not just on the whole period of trading. Also, there’s a moratorium to enable companies to undergo financial rescue or restructuring, which means that creditors’ claims and winding up petitions are on hold or dismissed. But what has to be understood is that there are many businesses that happened to be in a financial mess before this COVID-19 pandemic, and they’re able to take advantage of this new legislation coming through.

In previous recessions businesses that had been driven by private equity firms tended to fare better because they could get their hands on cash in the difficult times. But during this time I think those more decentralised firms will fare better because they’re able to react better. There’s always a danger that if you centralise too much, you hoard decisions in a downturn and that can be bad.

In addition, it’s important that however unwelcome, there are layoffs that can be done. The government has introduced a furlough job retention scheme. This is open to all UK employers for at least three months, starting from the March 1. It’s designed to support them during this period and means that employers can claim 80 percent of furloughed employees’ usual monthly salary up to £2,500.00 per month, plus the Associated Employer National Insurance contributions and the minimum automatic enrolment employer pension contributions on that wage. There’s also the possibility of deferred VAT payments for three months and then there’s deferred self-assessment payments.

What business sector will need the most support during and after the global pandemic?

I think we are really well-positioned to look after SMEs because of the fact that, 1. they will get a partner-led service and we will understand their business as it is, 2. we have teams that have got extensive experience – I’ve been through recessions before and can give them the best advice that you can get anywhere, 3. from an international point of view, our scope is really good and we’ve worked together with each other for a number of years. That’s helpful in terms of the fact that we’ve got the relationships already there which our clients can benefit from.

I also think it depends very much on the area that they’re operating in. If you’ve got an offering for a company in a highly distressed sector, then clearly they will need more help, certainly in the short term, and we could provide that. Most businesses will want help.

Above all, people want to get going again, even now. I can sense it. And talking to the business people I speak to no one wants to be where we are at the moment. So, businesses will start again and many will survive, but it’s just really unfortunate at the moment.

The truth is that we’re all hoping it’s just a short, sharp shock and nothing more. Most businesses will probably be able to get on their feet again and get going. They’ll have more debt than they would otherwise have had, but again as we have said it largely depends on the sector.

We also have to address how far should we keep on with locking everyone down. There may be less adverse medical and commercial effects if we carefully loosen restrictions now.