Will the end of the moratorium on evicting commercial tenants in March prompt more CVAs?

With the moratorium on forfeiture of commercial leases for non-payment of rent set to expire on 31 March, many tenants will be working out how to pay their rents. Using a company voluntary arrangement (CVA) may offer one way of compromising rents if landlords decline to negotiate a rent reduction.

But the road towards a CVA is not without its potholes, and there are two key signs that landlords are growing increasingly savvy when reacting to them.

On 29 January 2020, the Insolvency Service published its quarterly insolvency statistics for October to December 2020 (Q3 2020).

On December 27, 2020, the Consolidated Appropriations Act, 2021 became law. In addition to funding the government and providing coronavirus relief, the Act contains several intriguing amendments to the Bankruptcy Code. The changes discussed below are intended to make restructuring under subchapter V of chapter 11 more attractive for small businesses.

Rent Abatement for Small Business Tenants

The United Kingdom formally left the European Union (EU) at 11pm on the 31 January 2020 (Exit Day) and entered into a period of transition. This transition period largely maintained the “status quo” with regards to restructuring and insolvency law and practice, primarily due to the UK having secured ratification of the withdrawal agreement. This made the arrangements between the UK and the EU fully reciprocal post-Exit Day and avoided the no-deal “cliff edge” Brexit, which many had initially feared.

The coronavirus pandemic has been particularly cruel to brick-and-mortar retail establishments. As rising infection rates force municipalities to roll back reopening plans, retail and hospitality businesses that rely on in-person sales to generate revenue are finding it impossible to manage fixed costs, especially rent. Many have sought shelter in chapter 11, only to discover that even the federal bankruptcy laws cannot always solve their rent problems.

What Does the Chapter 11 Tenant Owe its Landlord During the Bankruptcy Case?

After a year in which numerous businesses have relied on various forms of government support to stay afloat, many will be hoping that 2021 offers the chance to emerge from this period and resume some degree of normal trading. Certainly, the coming year will be make-or-break time for those businesses that have been most impacted by the pandemic – and as government assistance is wound back, the demand for working capital funding is likely to be high.

The Court of Appeal judgment handed down on 9 November 2020 in the case of HH Aluminium & Building Products Ltd and another v Bell and another (Joint Trustees In Bankruptcy of Ide) [2020] EWCA Civ 1469 provides a clear warning to applicants: serve your application notice without delay, particularly if a limitation period is close to expiry.

Factual background:

This guide provides directors of UK incorporated companies with a general overview of the statutory and other duties and obligations which should be complied with in that role. We also offer practical guidance on safeguarding directors from personal liability and on considerations should insolvency of a director’s company become a concern.

With over a third of hospitality businesses currently at moderate to severe risk of insolvency (according to the most recent ONS survey), many in the sector are urgently considering the best way forward. One strategy, which we have recently seen a number of casual dining businesses like Carluccios and Gourmet Burger Kitchen deploy, is a ‘prepack’ administration. However, although the deals involving household names may grab the headlines, pre-packs are also widely used by small and micro businesses.

On 30 October 2020, the Insolvency Service published its quarterly insolvency statistics for July to September 2020 (Q3 20).

What do the stats say?