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?
During the past few years the legislator has endeavoured to induce, if not force, companies, investors and financiers to anticipate and deal with financial difficulties at an early stage. The general historic tendency in France is to deal with problems when it is too late. This has resulted in the implementation of a progressive scheme of proceedings corresponding to the degree of difficulties encountered by the company: mediation (mandat ad hoc), conciliation (conciliation), safeguard (sauvegarde), accelerated safeguard (sauvegarde accelerée), financial accelerated safeguard (sauvegarde financière accélérée), judicial recovery (redressement judiciaire) and judicial liquidation (liquidation judiciaire).
The key test under French law is the so called state of “suspension/cessation of payments” (cessation de paiement), which is defined, for a company, as the “impossibility to meet its liabilities with its available assets” (article L.631-1 of the Commercial code). A precise assessment of this test is crucial as it conditions the voluntary or mandatory opening of pre-insolvency and insolvency proceedings.
The French Government has declared that the COVID-19 pandemic is a case of force majeure, which on a case-by-case basis must be taken into account for assessing the actual standing of a company vis a vis its creditors and debtors. The containment generates enormous difficulties for all kinds of companies, the most vulnerable ones being the small and medium-size businesses which represent an enormous part of the French economy. In order to limit the increase of insolvency situations due to the COVID-19 pandemic, the Government has promulgated several ordinances (see below).
What steps could and should companies take to survive the pandemic crisis and the economic downturn?
In a “normal” situation, the anticipation of financial difficulties and the selection of the right proceeding are key. Those principles remain advisable, but the suddenness of the COVID-19 crisis puts many companies in a situation where making the right decisions is even more crucial, time being of the essence, and is an element of survival. In order to “give oxygen” to companies, the government has thus promulgated ordinances in order to facilitate the functioning of courts and extend time limits in all proceedings.
The Ordinance 2020-341 dated 27 March 2020 adapts rules applicable to the difficulties of companies to the health emergency situation, promotes the recourse to preventive proceedings (conciliation and safeguard) and extends delays in pre-insolvency and insolvency proceedings.
The main measure is to freeze the assessment of the position of companies on 12 March 2020 regarding the state of “cessation of payments”, resulting in that any worsening of the situation of the companies after that date (i.e. ceasing their payments) will not prevent them from applying for conciliation or safeguard proceedings. This is a very interesting possibility for companies facing heavy financial difficulties and being technically insolvent, which will extend delays and improve their capacity to put in place recovery solutions.
Furthermore, only the debtor will be entitled to apply for pre-insolvency or insolvency proceedings. The ordinance also adapts chronological constraints of the proceedings and ease formalities and
hearings for opening the proceedings. The conciliation proceeding benefits from a full right of extension for the duration of the state of health emergency plus three months. Encouraging conciliation proceedings is supposed to compensate for the risk of inertia in negotiations between companies and their creditors during the period covered by the law establishing the emergency state. A full right of extension of one month is also provided after the date of the termination of the state of health emergency in relation to observation period, reorganization plans, maintenance of the activity and simplified corporate liquidation.
Several other measures facilitate the collection of information and the exchanges between the parties “by any means”.
What business sector will need the most support during and after the global pandemic?
The IR Global network comprises high level specialists in transactional and procedural matters, and provides a unique capacity to deal with all situations with the highest level of expertise and security, for example advice and assistance on actual status of companies, possible measures and implementation, restructurings, negotiations with authorities, officials and courts, addressing comparative law issues etc.The IR Global network comprises high level specialists in transactional and procedural matters, and provides a unique capacity to deal with all situations with the highest level of expertise and security, for example advice and assistance on actual status of companies, possible measures and implementation, restructurings, negotiations with authorities, officials and courts, addressing comparative law issues etc.
In France a particularly important element is the knowledge of the actors involved in the proceedings: courts, officials (mandataire ad hoc, conciliator, administrator, liquidator), juge-commissaire, appointed representative of creditors, controllers, public prosecutor. It is crucial to be advised and assisted by lawyers being recognised as specialists in their jurisdiction and “members of the club”. The level of credibility of the advisors largely contribute to the recovery of the debtors and the success of the proceedings.