Foreward by Andrew Chilvers
Insolvency and restructuring legislation changed radically in all jurisdictions in the wake of COVID-19. While governments have tried to delay the number of insolvencies in the short term, most experts agree that distressed businesses will start to fail significantly later this year and into 2021.
For insolvency practitioners and lawyers alike, the pandemic has posed problems that have not been seen on a global scale in more than 100 years. Many businesses have faced sudden and catastrophic closures along with the evaporation of their revenue as emergency lockdowns have been implemented across all jurisdictions in an attempt to control the virus.
And now as lockdown measures have eased around the globe, those companies still functioning may well be tipped over the edge into insolvency by the loss of trade during and post the pandemic. No surprise then that later this year, the number of company insolvencies and liquidations is predicted to soar.
This provides the challenge for insolvency professionals; how to retain value and restructure decent businesses that were robust and profitable before March, while allowing zombie businesses to naturally fail?
Are different governments introducing new legislative or country regimes that allow for restructuring over liquidation? There is no legislation that allows restructuring, so how does it preserve its economic value?
In France there are five different procedures which can apply in consideration of the degree of financial difficulties faced by the company.
It starts with a light proceeding, which is just the assistance of specialist for negotiating with creditors when a company starts to face financial difficulties or anticipates them; then there is the conciliation proceeding when the difficulties start to be more serious and could result in insolvency, then the so-called safeguard and judicial recovery proceedings which are heavier and court controlled proceedings, and finally in hopeless situations, the liquidation proceeding. The French system is thus really progressive. It took a long time (decades) for the French legislator to put in place instruments the purpose of which is to maximise the chances of a company to recover after having faced severe financial difficulties. Previous systems were privileging liquidation rather than helping management to anticipate and look for solutions with the creditors.
The intent of the legislature has always been to try to induce people to treat difficulties at an early stage rather than late. For decades, the French system had a reputation for failing to induce people to treat difficulties early, and the insolvency proceedings were often leading immediately to liquidation because the managers and the creditors didn’t really take the difficulties sufficiently early to find solutions.
Consequently, the legislators introduced progressive proceedings, which prove to be fairly efficient. However, it is well known that the ideal system for resolving financial difficulties and preserving a fair balance between the interests of creditors and debtors is a difficult exercise in all countries.
Do “rushed through” insolvency measures address both large enterprises and small and medium-sized companies? Is there legislation pending to address this in your jurisdiction?
“Rushed through” insolvency measures reflect well the position in France and apply to all actors. The French government has reacted promptly and efficiently when the crisis has arisen in order to “give oxygen” to companies and force creditors to grant delays of payment to debtors and extending delays of proceedings. The whole economy is on hold and lenders have accepted the idea of giving extended deadlines. Bank loans have been put in place with a guarantee from the State. Lots of actors have accepted the situation, including the tax authorities and social security, but it will not last forever. The uncertainty maintained by the virus puts a huge question mark on the economy locally and globally. And we have seen that in Australia, in Melbourne for example, in their winter the virus is coming back.
The reality of the legislation is that, yes, it gave time and the capacity for the debtors to ask for exceptional measures, forcing the creditors to be patient. But it will not last forever. Some predict a “tsunami” of insolvency proceedings and litigation cases as from the Autumn, more likely at the beginning of 2021. As a matter of fact, banks are still lending on the basis of 2019 financial statements of companies. But when the 2020 financial statements will be published, their attitude may radically change and credit committees will be reluctant to approve credit facilities or extensions of credit facilities on the then current standing of their clients.
However, one should be cautious with too negative of predictions. It is well known that when a crisis is over, everything happens except what most economists or the so called “specialists” had predicted. French economy was improving before the crisis, and I tend to think that things will not happen the way one thinks they will. In my view, a number of factors should be taken into account in a positive manner. People will adapt. It is certain that many companies will be liquidated, and/or open insolvency proceedings. However, many new businesses will emerge and, in a way, proceedings will have a cleaning effect.
The proceedings in France are reputed to be fairly “debtor protective”, but they do not sacrifice the rights of the creditors. France has the reputation of being a country that gives priority and preference to the debtors rather than the creditors, but the reality is that the proceedings are designed to induce the parties to find solutions in order to preserve the businesses. The COVID crisis and the rushed through measures taken are in line with this.
With the “light touch administration” processes now being implemented in different jurisdictions, does this give too much power back to directors? What are the potential risks for the office holder?
The “light touch administration” concept exists in France and has not been implemented only as a result of the COVID 19 crisis. As I said earlier, the French system with five different proceedings relates to the degrees of difficulties faced by the company. The purpose of this system is to enable the actors to select the right proceeding at the right time. And it is really when a judicial recovery proceeding, which is strictly the first insolvency proceeding per se, is open, that the directors and managers lose an important part of control of the management of the company. Even if the management keeps a certain degree of capacity to manage, the administrator has the final word on the acts of management and disposal of assets.
But all the other preventive proceedings, the pre-insolvency proceedings – you may call it prepack proceedings – the management keeps almost all of its powers of management and is assisted by the administrator. It is the court that decides the actual role of the official who is appointed for assisting or monitoring the activities of the company. So the light touch administration is in a way inherent to the preventive proceedings in France.
It is when an insolvency proceeding strictly speaking, i.e. a judicial recovery or the liquidation proceeding is opened, that we can see the management losing their 100% capacity to manage. It is really up to the debtor to select the right proceeding in order to find solutions. In the current circumstances, the one which should be given preference is the conciliation proceeding, which is flexible and confidential.
In my view, September will be too early before we actually see where companies are going. It is going to take some time before they get visibility on the future of the business and, of course, on the virus itself.