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Mothballing businesses: survival through the lockdown and beyond

As we see more businesses having to close doors or adapt to a new set of rules, we set out a summary of some of the issues we anticipate for those needing to shut down but preserve their businesses at least until the lockdown is over. We will produce a more detailed client alert as matters develop although one message is clear – employers, employees, suppliers and customers are facing unique challenges and the best way to survive is to identify the issue, understand the options, and engage with pragmatism.

Employees

  • Much has been written about what support is available for those who are not needed to work due to the lockdown and developments need to be followed closely – more expected tomorrow.

  • Many employees will be furloughed i.e.  granted temporary leave of absence but kept on the payroll, with the Government paying 80% of salary (capped at £2,500 per month). Note that an employee cannot be partially furloughed e.g. work 3 of 5 days per week. This is available to employees only and only to employees that are not working at all. Wording on the Government website suggests consent is required to designate employees as furloughed although it would appear some employers are treating employees as such, and seeking to rely on implied consent if they do not object. We will need to see how this develops. There may also be lay off provisions in the contract of employment that can be relied upon.

  • Employees will need to be paid before an application can be made to the Coronavirus Job Retention Scheme. Businesses with cash flow issues should apply to the Government loan scheme to cover. Employers can top up the amount employees receive. We imagine the 80% funding is being managed by HMRC in part because it has easy access to PAYE records to ensure only legitimate claims are met.

  • For those businesses where employees can work from home it will be important to ensure that employees have access to as much as possible of the firm’s technology to operate remotely and to try to implement electronic options to deal with things once done easily in the office such as signing, dating, scanning and sending documents.

Supply chain

  • Some businesses might need to take a longer-term view to assist suppliers who may go out of business if they do not receive some payments now, whilst others will need to seek some relief in their own supply chain.

  • Suppliers may want to consider their payment terms- is cash on delivery now appropriate?

  • Businesses will want to think about ways to retain customers and what can be offered to them whilst the business is not operating as usual.

Other Payments

  • The lockdown does not automatically mean payments due under contractual agreements (loans, guarantees, rent etc) are paused. Businesses may risk being in breach of agreements. Many businesses will need to take advantage of the anticipated legislation in the Coronavirus Bill currently going through Parliament which states that any commercial tenant that cannot pay rent due to C19 will not be evicted over the next 3 months.  Rent will still be due so it seems a stay in enforcing collection by eviction Logically one would expect relief from any enforcement measures – we shall see. There are other well publicized loan schemes plus a reasonable expectation that financiers and Government departments will be slow to force due payment

  • Pensions- we understand the Pensions Regulator is insistent that pensions scheme contributions are adhered to which will cause further pressure on businesses.

  • Insurance –businesses should check that premiums can be met and be in dialogue with their insurers- we understand credit insurers are withdrawing cover which will be difficult to replace/re-instate in the current climate.

  • Non-critical payments- Businesses should consider their standing orders and direct debits. Are you paying for a service you are not going to be using? Can payments be stopped, cancelled or suspended?

Environmental and health and safety regulation

  • Businesses who must adhere to existing regulations will need to consider how they deal with it in lockdown. If any workplace is to remain closed for an extended period ensure that there will not be a breach of any environmental legislation or any possible risk due to a shutdown e.g.  how long can a substance safely stay in a tank, are there any places susceptible to leaks, etc.

  • From a health and safely perspective, will sites be left secure? A site with hazards and obstacles may leave a business open to risks not only from vandals and thieves, but could also present a risk to the public who may have an accident on the premises. Consider employing security (for as long as that may be allowed).

  • Licences and authorisations. Do they need renewing or updating in the lockdown and what would the effect of non-compliance.

Filings

  • Consider what filings are due in the lockdown period and seek extensions absent any instruction that filings are suspended.

  • Companies House will a more lenient view on extensions for filing accounts if approached with genuine C19 related reasons. But businesses are asked to plan ahead and make extension applications well ahead of impending deadlines

Insolvency and restructuring

  • Existing legislation applies until any C19 legislation supersedes it.  Directors must remain mindful of this and avoid wrongful trading.

  • It remains important for any struggling business to keep creditors at the forefront of the mind. Whether action or inaction is causing detriment, the message must be to be sensible and realistic. Utilise the financial support or dispensation offered, but as matters stand only if directors have cause to reasonably believe that the business can ultimately survive. A tough question for many businesses right now. In keeping with dispensations on this point being granted by the Australian government we would expect Parliament to clarify how directors can best conduct business in the current climate and stay within the confines of the Law

  • Certain insolvency processes can provide the benefit of a moratorium if creditors are proving aggressive, however right now, a business that is prevented from trading pre a formal insolvency will not be able to do so in insolvency, and it is highly likely there will be little appetite for acquiring businesses at price levels that might have been agreed before the lockdown.

In these uncertain and unprecedented times, those businesses who act quickly to avail themselves of the support they need, and act sensibly and engage with any counterparty with pragmatism, maximise their chances of survival through the lockdown.

© Copyright 2020 Squire Patton Boggs (US) LLP

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About this Author

Susan Kelly, Squire Patton Boggs, Restructuring Lawyer, Insolvency Attorney
Partner

Susan leads the Restructuring & Insolvency practice group in the UK and Europe and is based in our Manchester office.

She worked in London for the first half of her career and although now based in Manchester she spends time in London, Europe and further afield in her capacity as co-chair of the Cross Border Restructuring group.

Susan's expertise covers a broad range of domestic and international insolvency (both contentious and non-contentious), lender security reviews and enhancement, restructuring, turnaround and...

44 161 830 5006
Mark Prior, Squire Patton Boggs, Manchester, Restructuring, Insolvency
Senior Associate

Mark is a senior associate in our Restructuring & Insolvency practice based in our Manchester office. 

His particular expertise covers commercial and legal issues involved in corporate recovery, turnaround and reconstruction, and insolvency law. Mark advises on all formal insolvency processes and has considerable experience in preparing and negotiating legal documentation for the sale or purchase of businesses and assets, and distressed property portfolios. Mark has also advised directors on trading and prepared several cases for court ranging from complex recovery claims to injunctive relief proceedings, as well as advising on cases under the Insolvency Act 1986. In addition, he provides security and restructuring advice to clients.

44 161 830 5266