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Lockdown - Reflections at the end of week 4

It is remarkable how what seemed unimaginable at the end of February has become normal life, so much so, that yesterday’s announcement of the extension of the lockdown for a further 3 week period was met with, in general, an air of calm resignation. There have been good news stories as well, from clapping for key workers, to a surge in neighbourliness, and the extraordinary and unexpected stardom and fundraising success of a dignified and determined 99 year old man.

The pace of new announcements from the government on business support has understandably slowed, but the picture continues to develop, and a few thoughts about our experience of this week follow:

1. The furlough scheme continues to be extensively used as an easily accessible means of mitigating the fixed costs of businesses. There is ongoing commentary about the morality of its use by businesses who are perceived to be using furloughing to protect profits and share value rather than survival - some Premiership football clubs have attracted attention on this basis - which in turn has led to speculation as to whether some forms of means testing will be applied in the future. This seems difficult, because setting that means testing will be complex and applying it will introduce delay, but the debate is likely to continue.

2. Previous notes in this series have commented on the position of landlords of commercial properties who have been precluded, on a temporary basis, from repossessing properties for non-payment of rent. Landlords have their own businesses to run, however, and there are many who have not agreed to defer rent and who have chosen to use other legal processes to force rent payments. One process which appears popular is the use or threat of a statutory demand. The fact that landlords are still able to do this means that the suspension of the right to repossess is significantly undermined. On the other hand, however, it seems unreasonable to expect landlords not to seek to protect their own cashflows and positions with their lenders. This is an area which the government needs to look at further.

3. The government has announced the extension of the Business Interruption Loan Scheme to larger companies. This has been welcomed, but with the reservation that, if the 2% success rate of scheme applications to date which has been suggested by the British Chambers of Commerce is not improved, the support offered by the extension will prove to be more illusory than real.

4. Notwithstanding the government support available, some businesses have failed or are likely to fail, which is leading to some rapid developments in insolvency law and practice. There has already been consideration by a court of how the furlough will operate in the context of a business in administration, and one insolvency profession trade body has taken the step of putting together a template document which will enable directors to continue to run a company in administration under the supervision of the administrator. This indicates the increasingly likely use of light touch administration as a means of sheltering a company against its creditors during the lockdown, but leaving it in a position where its business can start trading quickly as restrictions ease.

5. There is a need for government to consider how it can provide practical help in some areas. For example, produce businesses will need casual labour available to cover their high activity period over the coming months and are unlikely to be able to source enough of the trained workforce from overseas which they have relied on for a number of years. Other food manufacturing businesses may need help in accessing the raw materials that they need from overseas.

6. The question of whether parties can be held to their contractual obligations during these unprecedented events continues to be a live issue. The legal analysis can be complex and is likely to rely heavily on the wording of contractual force majeure clauses which vary substantially from contract to contract, but it is an avenue which many are exploring with their advisers; and

7. In amongst the difficulties, there are opportunities for those with cash, or access to cash, and the courage to invest in turbulent times, and we are seeing investments being both actively considered and actually made.

Ian Waine leads Prettys’ Corporate Services Team and has advised on a large number of corporate recovery and corporate restructuring cases over the last 30 years. He can be contacted on 07979 498817 or iwaine@prettys.co.uk.

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