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?
Insolvency law requires companies to file for bankruptcy in due time. Once a company has ceased to pay its debts in a sustainable way and the credit is ‘shocked’, they need to file for bankruptcy because at that moment the company is no longer able to meet his financial obligations. So, there are 2 tests in article XX.99 of the Code of Economic Law to be carried out:
- Suspension of payments is where the company is unable to pay its expired, due and payable debts, regardless of the cause. It is only required that the unpaid debts must represent a significant part of the debts.
- Shocked credit is the lack of confidence the entrepreneur enjoys from its creditors. So when your suppliers or banks no longer want to provide credit, the company has shocked credit.
When these conditions have been met, the company will be obliged to file a declaration of bankruptcy within one month after its suspension of payment.
As a director in the company, you are responsible for filing for bankruptcy in due time and so you can be held personally liable for late reporting, for example on the basis of article XX.227 of the Code of Economic Law and article 489bis, 2° of the Criminal Code.
What steps could and should companies take to survive the pandemic crisis and the economic downturn?
Companies can rely on the procedure of judicial reorganisation (the former WCO) and as a result of its suspension there is a period of protection offered. They can apply for a judicial reorganisation in which the company will then be assisted further under the assistance of the court. It is important to note that the request for this judicial protection can suspend payment schemes of government and bank debts who will become claimable again and will be the subject of a total suspension of debts for a maximum period of five years and an increase of debts of max 80% if half of the creditors and their debts amounts agree to do so.
During the lockdown, companies have the option to suspend bank and government debt until October 31, 2020. So de facto because of the existing legal initiatives (such as deferral of bank and government debts and the possibility of suspension of payment) and because of the practical consequences of the lockdown (quasi closed courts and tribunals), companies have the possibility to enjoy an actual suspension of payment and that way they can also check their cash reserves.
But should the reserves be affected or even exhausted after the lockdown period, then our current legislation provides sufficient guarantees to support these companies in those situations.
Landlords are also being asked to suspend the payment of rents (because they can also rely on the possibility of suspending bank debts). Furthermore, co-contractors can invoke force majeure among themselves and there is always the license to execute contracts in good faith as a basic principle in our contract law.
Under the Code of Economic Law, all entrepreneurs can effectively be protected against economic problems. Meanwhile, the adapted procedures have been fully digitised. In 2018, the legislator also created the possibility of concluding amicable agreements and improved the procedure for the homologation of these agreements by corporate courts.
What business sector will need the most support during and after the global pandemic?
In the present circumstances, companies should be more careful because the effects of the COVID-19 pandemic will have a direct impact on the financial situation of a company and, at least indirectly, on its strategic and corporate planning.
The effects and the rules different countries implement as a result of COVID-19 create an extra burden for companies. Because IR Global and its partners can rely on the expertise of trusted partners, other members will be more able to help their clients / companies in surviving this crisis and get a head start when the COVID-19 crisis is finally over.