Through Richard Tett, Nick Cooper and Kelley Macpherson
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Law360 (April 7, 2021, 1:23 p.m. EDT) –
Following the British Chancellor’s March 3 budget statement, it is clear that the tide is starting to turn on government support. Relief measures will continue in the short term to support businesses, but support will gradually decline as the country begins to emerge from the COVID-19 pandemic.
This withdrawal of UK government support not only has implications for the likely number of insolvencies in the months and years to come, but it is also likely to influence cases brought to court.
Temporary measures under the 2020 coronavirus law prevent, among other things, landlords from taking steps to forfeit rent or other amounts payable under the lease for non-payment. These measures are accompanied by a temporary moratorium under the Insolvency and Corporate Governance Act 2020 on the presentation of statutory or liquidation petitions.
The presentation of a liquidation petition is not prohibited per se, but the petition must be quashed by the court after consideration if the court is satisfied that the tenant’s inability to pay rent – or any other debt – arises from COVID-19. The burden of proof is on the landlord – or another creditor – to show that COVID-19 did not have a financial effect on the tenant. After a year of a pandemic, this is a significant hurdle to overcome and in most industries it will likely be quite a challenge for an applicant homeowner.
In line with the UK government’s measured approach to aid withdrawal in general, the ban on confiscation of commercial leases has already been extended on several occasions, the most recent to June 30, and restrictions on issuance of statutory requests and liquidation petitions – as well as suspension of liability for illicit transactions – were also extended until June 30 by a regulatory text, which entered into force on March 26 and was due to expire on March 31.
These new extensions aim to provide businesses with a breathing space as the economy reopens in line with the UK government’s roadmap and to avoid the cliff edge that could be caused by removing government relief too quickly leading to action. aggressive coercion of creditors.
But of course, government protections cannot continue indefinitely – even if support is withdrawn with caution and thought, it will at some point have to come to an end altogether.
When that day comes, it is inevitable that a large number of businesses will carry substantial accumulated arrears. The temporary measures held back the tide; the debt has obviously accumulated in the meantime.
While accrued rents are the most talked about, there are also other categories of debt, such as other current rental obligations or deferred tax liabilities. The managing director of the British Property Foundation says commercial property arrears stood at £ 4.5bn at the end of 2020.
It is then likely that these indebted companies will see an influx of statutory claims from, among others, landlords seeking to be the first to pay tenants, eventually followed by the filing of liquidation petitions with the courts on the part of those seeking to be the first to pay tenants. who did not succeed. .
So far in the pandemic, the focus has been on liquidity and just keeping the lights on. As the pandemic emerges, businesses large and small will begin – or be forced – to look to their balance sheets and attempt to settle the accumulated debt.
In the face of this, courts can expect to receive an increased number of plans of arrangement and restructuring plans as companies move from change and expansion plans and liquidity plans to plans of arrangement. debt for equity and leverage plans.
We may also see an increase in voluntary corporate agreements, or CVAs – which, while not in themselves legal proceedings, come with the possibility of challenges in court by compromised creditors.
That said, one development may be that restructuring plans begin to supplant CVAs for leasehold restructurings, as a plan can potentially achieve the same or an even broader outcome than a CVA. Early indicators of this situation include the restructuring plan recently launched by Virgin Active, which contemplates cramming landlords who will be asked to amortize rent arrears.
The move from CVAs to blueprints could be accelerated by the challenge that owners have posed to the CVA of New Look Retailers Ltd. There, the landlords claim that certain aspects of the CVA are unfair and illegally compromise property rights, including the shift to rent based on turnover.
The foundations for this challenge were laid by recent judgments in CVA 2019 challenge, Discovery (Northampton) Ltd v. Debenhams Retail Ltd and the 2019 Arrangement Plan judgment, Re Instant Cash Loans Ltd, where the court concluded respectively that a CVA could not limit or compel the landlord to waive a landlord’s right to waive a lease, as this was a property right, and an arrangement could not bind the landlord landlords to accept the waiver of leases, as this would infringe the landlord’s property rights.
Favorable judgments for debtors or creditors in these pending cases could open the floodgates for others to follow or have a significant impact on the nature of future processes proposed. That said, CVAs will likely continue to be the restructuring tool of choice for at least some tenants, as they are potentially simpler and faster than a plan.
In conclusion, government support has ensured a period of stability and aid extensions continue to stabilize the situation for the time being. These measures cannot last forever, and when they cease, the burden of those cases which cannot be resolved through trade negotiation can be expected to weigh heavily on the courts.
It seems likely that many debtors and creditors will have to resort to formal processes to find their way back to normalcy. For some this can happen quickly, while for others – especially given the prevalence of very soft or nonexistent covenants – they may be able to hang on until they are faced with large debt maturities. We expect this story to take several years to fully unfold.
Disclosure: Freshfields acted for Debenhams and Instant Cash Loans in the cases discussed here.
The opinions expressed are those of the author (s) and do not necessarily reflect the views of the company, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be construed as legal advice. Discovery (Northampton) Ltd v. Debenhams Retail Ltd  EWCH 2441 (Ch); Re Instant Cash Loans Ltd  EWCH 2795 (chap.).
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