Enacted March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) places short-term obligations and restrictions on lenders and servicers of federally backed loans. As part of these limitations due to Coronavirus Disease 2019 (COVID-19), lenders and servicers are temporarily subject to moratoriums on foreclosures, mandatory forbearance obligations, and revised credit reporting obligations.
During the Global Financial Crisis, borrowers who needed to refinance their maturing debts faced difficulty. Lenders had neither the appetite nor the ability to lend, save in limited circumstances. The income generated by commercial real estate assets often did not change, however.
On 28 March, UK Business Secretary Alok Sharma announced that the rules relating to ‘wrongful trading’ will be suspended on account of the issues that Coronavirus Disease 2019 (COVID-19) presents.
Both the COVID-19 pandemic and the measures taken by governments have led to unprecedented legal questions that require immediate attention and solutions. These are challenging times. We have therefore prepared the following overview of some of the pertinent legal questions and the answers to consider, in the hope they provide useful preliminary guidance.
Topic | Main issues in relation to the risk of director liability |
Question |
The Government's temporary suspension of the rules surrounding wrongful trading, to apply retrospectively from 1 March 2020 for three months, will temporarily protect directors from actions for wrongful trading (and so encourage them to continue trading in circumstances where otherwise they may have feared to).
The UK Government has announced that:
It will temporarily suspend the offence of wrongful trading by directors of English companies for 3 months Amend insolvency laws to bring in more debtor friendly style processes where English companies can continue to trade while negotiating a restructuring solution with their creditors.
As ever, we await full details and legislation.
Wrongful Trading Suspension
On 23 March 2020, the German Federal Cabinet adopted further urgent measures to mitigate the economic consequences of the COVID-19 pandemic. The package of measures includes an emergency aid programme for micro-enterprises, self-employed persons and freelancers of up to EUR 50 billion and an economic stabilisation fund of EUR 600 billion as well as a Law to mitigate the consequences of the COVID-19 pandemic in civil law, insolvency law and criminal proceedings.
In a unanimous decision written by Justice Neil Gorsuch (Rodriquez v. FDIC No 18-12690), the Supreme Court vacated a decision by the U.S. Court of Appeals for the Tenth Circuit (In reUnited Western Bancorp, Inc., 914 F. 3d 1262 (10th Cir, 2019)) that awarded a federal income tax refund of a failed bank to the Federal Deposit Insurance Corporation as receiver.
A decision this month out of the Bankruptcy Court in Manhattan (SDNY) could have a significant impact on the market for student loan securitizations. Student loan asset-backed securities (SLABS) are unsecured, but market participants typically assume that the underlying student loans are not dischargeable in bankruptcy. A new ruling by the chief judge of the SDNY’s Bankruptcy Court challenges this assumption.
On November 12, 2019, the United States Court of Appeals for the First Circuit reversed a decision of the Bankruptcy Court for the District of Massachusetts in a case that illustrates fraudulent transfer risk for colleges and universities that receive tuition payments from a student’s insolvent parents.
Constructive Fraudulent Transfer Claims and College Tuition Payments