Over the past few weeks, the UK government, regulators and other bodies have moved to help businesses navigate the unprecedented disruption caused by the COVID-19 pandemic. We start this briefing with a round-up of key changes in the areas of company law and corporate finance regulation.
Filing accounts
It is an unfortunate reality that the current pandemic and associated recession will result in the collapse of many businesses, with sectors including retail, hospitality and travel likely to be particularly hard hit. One report by a leading consultancy estimates that half a million UK companies are at risk.
Recent emergency motions from Modell’s Sporting Goods, Inc. (“Modell’s) and Pier 1 Imports, Inc. (“Pier 1”) to put their chapter 11 cases on ice may signal a growing trend. As the economic consequences of efforts to contain and respond to COVID-19 infections render deal-making difficult or impossible, what were the best-laid plans a few weeks ago often no longer make sense.
On 28 March 2020 the UK government announced that emergency measures will be implemented to provide protection to directors of companies which continue to trade notwithstanding the threat of insolvency, and to prevent, where possible, companies entering into insolvency due to COVID-19.
The proposed measures are as follows:
To assist businesses dealing with the economic impact of the coronavirus (COVID-19) pandemic, on March 28, 2020, the UK government followed in the footsteps of countries including Spain, Germany and Australia and announced certain changes to UK insolvency law.
This article summarises the key changes the UK government is proposing to existing insolvency laws, and considers the key restructuring tools available to assist companies during this unprecedented and challenging time.
Wrongful Trading Suspension
Barely a month after Bankruptcy Code amendments providing a cheaper, more efficient path to chapter 11 relief for small businesses took effect under the Small Business Reorganization Act of 2019 (“SBRA”), Congress has nearly tripled the debt-eligibility threshold from roughly $2.7 to $7.5 million in response to economic fallout from the COVID-19 shutdown.
A Texas bankruptcy court recently ruled that dedication clauses in gas-gathering agreements run with the land and cannot be rejected by a debtor. That decision, In re Alta Mesa Resources, Inc., affirms an industrywide practice that faced an uncertain future following the ruling in In re Sabine Oil & Gas Corp. from the Southern District of New York, which was upheld by the 2nd U.S. Circuit Court of Appeals in 2018.
On 4 December 2019, the UK Supreme Court issued its decision in MacDonald and another as joint liquidators of Grampian MacLennan's Distribution Services Ltd v. Carnbroe Estates Ltd [2019] UKSC 57, a Scottish case involving insolvency and "gratuitous alienations" (sales at undervalue).
The bankruptcy court in Delaware recently ordered the Centers for Medicare & Medicaid Services (CMS) to resume making post-petition Medicare payments to chapter 11 debtor True Health Diagnostics LLC. CMS had been withholding payments in light of a pre-petition fraud investigation.
Gurbinder Grewal and Michael Wright in the UK Construction Team explain the knock on effects of insolvencies and the mitigating steps that can be taken. Early warning signs of looming insolvency can be spotted.
Key points