Sector-Specific Pandemic Economic Effects

Chapter 1 - Introduction

Background

The World Bank (2020) states that Covid-19 pandemic has negatively impacted the firms and the productive capacities and restricted the mobility and economic activity. It collected a data set from April through August 2020 covering more than 100,000 businesses across 51 countries and most of the sectors of the economy. The data analysis generally revealed that the pandemic has led to closure firms or reduction of operations, which has reduced sales and employment rate. In terms of sales, 84% of firms reported a reduction in sales on an average of 49% compared to the same period in the previous year. The pandemic also led to predominantly, adjustments involving leaves or reducing working hours or wages, and a small percentage of firms laid off workers. The data set collected by World Bank also found a significant degree of heterogeneity in liquidity constraints. 88% of firms in South Africa and 13% report in Indonesia have fallen or expect to fall into debt. These constraints were found to be more serious in countries with lower financial development. The NYFED (2020) also reported that the liquidity constraints were also found in smaller firms even in advanced countries, such as the United States where 50% of small firms have fewer than 15 days in buffer cash and some healthy SMEs with less than two months of cash reserves. Similar constraints were also found by the OECD, which states that solvent SMEs may be exposed to the risk going bankrupt. According to the World Bank data, there is a lower probability among the larger firms to fall into arrears. However, micro and small firms are exposed to a probability of 53% and 50% respectively of falling into arrears. Not only this, firm with larger reduction demand, such as accommodation and food preparation service, may also fall into arrears, but financial services and information and communication technology services have lower probability. Like other countries, the UK is also impacted by the pandemic. The UK Office for National Statistics (ONS) (2020) states that the overall UK economy, when measured by gross domestic product, recorded a reduction of 19.8% in the second quarter of 2020 after the first lockdown starting March 2020. In September 2020, it was still down at 8.2% when compared with February 2020. However, ONS also found that the economic downturn is not spread across all the businesses. It is concentrated among certain types of business. For example, the services sector such as recorded nearly no output in April and May in 2020. Similar impact is found in the information and communication industry. The consumer-facing services remained significantly smaller when compared with the February month even though it bounced back to some extent. The pandemic impacted different industries in different ways. Online shopping has grown more than it was before the pandemic. The same goes for chemists. Furniture store show rise of customers purchase after the lockdown. Sale of non-specialised food stores and dispensing chemists saw growth. Increase in turnover was seen in the camping segment. 17.2% of micro businesses were found to suspend or close their trade as of late October 2020. However, larger services firms outperformed SMEs regarding turnover since March 2020. While music publishing segment was trading at pre-pandemic levels, the cinemas were not. The pandemic has caused severe economic consequences affecting the society at large. It has dramatically affected the businesses. The data presented above demonstrate that the negative affect of the pandemic is certainly more in certain segments or industries. This implication certainly applies to many of the businesses, as Donthu and Gustafsson (2020) argue, which have closed and there has been an unprecedented disruption of industrial commerce. They argue that the pandemic may likely cause bankruptcy for established brands. The issues of liquidity constraint and the threat of becoming insolvent have resulted to the debate about mitigation measures through insolvency laws to allow the affected firms restructuring or seek alternatively financial arrangements to escape insolvency.

In context of the business disruption and the economic downturn, it is necessary to review the existing insolvency law framework whether or not it provides provisions for firms to revive their businesses. The Corporate Insolvency and Governance Act 2020 (the “CIGA”) provides guidelines governing companies in financial distress caused by the pandemic. CIGA provides for restructuring and insolvency provisions in this context providing for both temporary and permanent changes to insolvency law. Schedule 7 of CIGA has introduced Part 26A into the Companies Act 2006. This Part provides for arrangements and reconstructions governing companies in financial difficulty. As a part of the permanent measure, this Part provides for cross-class cram down allowing restructuring as sanctioned by the court when a restructuring plan is fair and equitable; a free-standing moratorium during no creditor could take action against the company without a court’s permission; and a prohibition on termination (or “ipso facto”) that prevents suppliers from stopping their supply during the restructuring phase. There are the temporary insolvency measures such as suspension of serving statutory demands, winding-up petitions, or wrongful trading rules. These measures are stated to be phase out. The measures are subject to debates. For instance, Paterson (2020) observed that the reorganisation tools do not offer any explicit financial tools. This gap is filled by the borrowers and creditors through a negotiation employing a maintenance financial covenant breach while the business operates liquidity. Another argument is regarding the suspension of wrongful trading where Vaccari (2020) argues that it does not facilitate the rescue of businesses or to enable viable companies to survive the crisis due to the pandemic. Vaccari argues that the suspension of personal liability actions against the directors would defer the laws and restrict the exercise of civil liability remedies in absence of apparent justifications. In this light, this research will explore the impact of the pandemic on the businesses and particularly, the measures through insolvency law that aim to address the economic stress and sustainability issues faced by businesses.

Aims and Objectives

Based on background of this research discussed, the aim of this research is to explore the insolvency law framework and to determine whether it provides an effective solution to companies in financials distress. Thus, by the end of this research, the following objectives would be achieved:

An understanding of the approaches of insolvency law regarding solutions to the crisis due to the pandemic

A determination of the extent of effectiveness of these solutions regarding whether their protection of companies from insolvency and whether they effectively facilitate restructuring and arrangements

An understanding of the policy intervention measures in regard to whether they provide effective opportunities of sustainability.

Research Questions

Based on research background discussed above, this research will therefore attempt to answer the following research question

Whether the approaches of insolvency law effectively enable businesses to delay and avoid insolvency proceedings and facilitate restructuring and arrangements?

Whether state intervention measures, if any, are effective to enable businesses to explore opportunities of capital markets sustainability.

Research methodology

This research has explored the insolvency law regime in response to the financial and economic crises caused by the Covid 19 pandemic. The subject area of this research has multiple aspects to it. Firstly, it dealt with the economic downturn and the financial performance of businesses. Secondly, it dealt with the insolvency laws brought into effect seeking to address the issues of financing and operational sustainability of businesses. Thus, the research dealt with the legislative approaches and policy measures of the authorities and agencies while at the same time dealt with the business practices in dealing with the challenges caused by the pandemic. Thus, the research background and the problem statement present a multi-layered approach to the subject of research. Hence, this research has adopted a qualitative research method to deal with the research questions. The qualitative method has employed a deductive approach, which involves starting the research with a theory that is initially identified by the researcher. Hence, the researcher has applied a general theory in context of this research, which is that the pandemic has pushed businesses to the brink of insolvency. Not only that the pandemic has disrupted social, economic, financial and political structure across the countries. This scenario has forced the government to make urgent response in the form of laws, regulation and policy measures. For instance, in regard to the UK, it adopted the CIGA to help companies sustain and operate its business and to protect them to escape insolvency. Based on this background, the research questions were formulated. The research questions formulated helped the researcher explore the effectively of the insolvency law in existence and/or introduced to address the implication of the pandemic upon financial performance of the businesses. In order to do thus, this research has adopted a qualitative method where the research design does not need formulation of a hypothesis, but requires the research questions to explore their answers. Thus, this research has adopted doctrinal methods to identify, analyse and synthesise the contents of the insolvency law with the objective of making coherent or justifying a segment of insolvency law as a part of a larger legal regime. Richard A Posner says that the doctrinal analysis is the traditional method of legal scholarship that involves legal analysis reviewing classroom instructions, published articles, law books, casebooks and treaties and also a careful reading and comparison of appellate opinions in order to identify ambiguities and inconsistencies among cases. Applying the doctrinal method, the researcher examined the core relevant features of the existing insolvency law regime and relevant case law principle in context to the research question. The doctrinal method helped in analysing the content in a critical and interpretative manner, of the applicable insolvency laws, precedent as well as other sources of law related with the subject matter of research. Case laws and principles were organised in a coherent fashion; settled legal principles were differentiated from emerging law; and popular practices were identified with their rationales. This research has collected data and observations related to the theory and attempted to confirm the theory analysing the data. In this regard, the data collected are of non-numerical nature, which characterises the qualitative research. The data collected are secondary data. Secondary data include previous research findings, which give insight into the relevant aspects of insolvency laws with respect to the economic crisis faced by businesses. To this effect, this research focused on a systematic literature review to identify and gather secondary data. For example, the research not only dealt with the aspects of insolvency laws regarding the economic crisis caused by the pandemic, but also on the policy reforms and measures in order to understand the patterns of policy practices, business behaviours and the outcomes. This method allowed collating relevant empirical evidence in addressing the research question. A thematic analysis method was adopted to organise and analyse the data. For instance, this research found themes such as overemphasis on creditor protection or alternatively the debtor protection; balancing interest of the relevant parties or stakeholders; demarcation of businesses as to the level of protection they could access; and regulating or monitoring the protection measures and their implementation. Thus, this method help analyse the data under major themes or key message. Consequently, recurrent data and key messages were identified from analysing the data, which helped in arriving to meaningful and useful results.

Chapter 2 – Interaction of insolvency law and crisis caused by Covid 19 pandemic

Introduction

The outbreak of the Covid-19 pandemic has disrupted the financial operation of the businesses. This pandemic has opened up a crisis that exposes companies to the potential risk of insolvency. Diez and his colleagues (2021) argue that these risks will be more likely found with the small and medium enterprises. Thus, without government intervention, these businesses even those that are viable may be pushed to liquidation, particularly those businesses characterised by labour-intensive technologies. This may threaten microeconomics. Dowling (2021) states that government across the globe are taking steps to prevent companies from falling into insolvency. Such steps include measures to prevent mass unemployment, economic stress and poverty. Further, the policy measures also see the companies as active agents that could maintain the social system. For instance, the companies serve as a mechanism to distribute wealth to its employees and suppliers and goods and services to the customers or the society at large. In this context, this section of literature review will discuss insolvency law framework as the mechanism to address the crisis due to the pandemic that is pushing businesses at the brink of insolvency.

Insolvency law regime

The background of this research has shown that pandemic has caused liquidity constraints particularly affecting micro and small firms and SMEs, with the possibility of insolvency challenges. At the same time, it has also shown economic downturn is not spread across all the businesses, affecting particularly certain types of business including the services sector such as accommodation and food preparation service, or the financial while leaving certain segments such as online shopping, furniture store, non-specialised food stores and dispensing chemists. Diez and his colleagues (2021) state that the advanced economies have announced liquidity support measures such as loan, moratoria, credit guarantees and asset purchases that have benefitted both the SMEs and the larger firms. These steps mitigated the immediate risks regarding liquidity challenges and bankruptcy. However, they argue that many SMEs might still face liquidity pressures particularly when there is a premature withdrawal of public support. In case of continuous curb in sales due to the pandemic while the costs keep running, the SMEs may accumulate these losses placing them in insolvency. Thus, Diez and his colleagues argue that the liquidity support many not address the risks of insolvency and further adding that the firms with weak balance sheet, but large senior-debt claims held by banks or government agencies may discourage new financing caused by the uncertainty regarding recovery prospects associated with many of the firms. This may further delay profitable investments and may lead to staffs layoffs, which collectively undermine the economic recovery opportunities. In this context, there is a need for a broader insolvency support. The pandemic has caused both liquidity and solvency problem where the former represents a delayed income cashflows and the latter represents a lack of long-term viability. Liquidity is important for businesses to meet their working capital needs and financial obligations and to sustain. The reduction in balance sheet has caused credit risk for lenders to lend to businesses when they themselves are facing funding constraints and higher funding costs. In such a situation, countries may use their financial reserves to give temporary support to businesses. For instance, the UK government through the central banks have provided term funding to banks to further lend to firms and households using schemes such as the Recovery Loan Scheme with further support by government or public credit guarantees. Diez and colleagues argue that the liquidity support may not address the liquidity problems. In such a case, the support approach shift from the conventional policy involving providing liquidity support, restricting solvency support to only large, systemic or strategic firms; and restructuring viable firms to a broader solvency support. The shift is necessary to address the large gap between the social cost to the economy and the private cost to the individual creditors and debtors; or the gap in support caused by investors’ failure to support viable firms due to the economic risks caused by pandemic and by the judiciary failure to restructure the firms. In this context, the following sections will explore whether the CIGA 2020 and other policy measures also provide appropriate liquidity and solvency support to provide businesses with necessary flexibility and breathing space to sustain business and provide more opportunities to survival. The sections will address the short and long-term measures provided by CIGA. While former aim to address immediate challenges, the latter provide for greater protection for companies against insolvency.

A new ‘restructuring plan’ – Cross cross-class cram down

Part 26A to the Companies Act 2006 as introduced under Schedule 9 of CIGA provides for arrangements and reconstruction. This part provides for the cross-class cram-down provisions permitting the court to sanction a restructuring plan. To be eligible, the requirements of Sections 901A and 901B must be met. Thus, according to Section 901A, the company must show financial difficulties that are affecting or may affect its business as a going concern. Further, there must be a proposed compromise or arrangement between the company and its creditors or members, which aim is to ‘eliminate, reduce or prevent, or mitigate the effect of, any of the financial difficulties’. Section 901F and 901G provide that the restructuring plan must be approved by 75% in value of each class. Further conditions are that regarding requirement of financial difficulties, the court must be satisfied that when a compromise of an arrangement is sanctioned, none of the creditors or members would be worse off under the plan than under the ‘relevant alternative’. and that the plan is approved by at least one class of creditors or members ‘which would receive a payment or have a ‘genuine economic interest in the company’ in the event of the ‘relevant alternative’. Thus, even where the plan is not approved by one or more classes, the court can still sanction the plan. The cross cross-class cram down was first used in the early 2021 where the High Court sanction the plan of DeepOcean Group Holding BV. The restructuring plan is the first case of the use of cross-class cram since it was introduced. Trower J in this case laid some insights regarding this mechanism. Trower J held that the court will not exercise its discretion to determine whether or not justice and equity requires the restructuring plan to be sanctioned. It could sanction a plan irrespective of the required voting and conditions being. It would determine whether or not the distribution of the benefits of the restructuring is fair as between the classes who consented to the plan and those who did not. The court could also bind the bind on those stakeholders excluded from voting on a plan if they do not have any genuine economic interest in the company. Even more, the court could override the decision of a dissenting class irrespective of the value of their votes against the plan. Based on the cross cross-class cram mechanism, the court will determine whether or not the plan serves the best interest of the dissenting creditor class or whether a class of creditor has a genuine economic interest in the company in distress. Alfino Eu (2021) argues that for such determination the court should conduct valuation of the companies based on the alternative scenario where the plan is not sanctioned. This valuation would comprise the determination that the failure of the plan would push the company into a winding up process or administration. The valuation in such a case would comprise a piecemeal sale or a going concern sale of the company’s assets. Alfino also argues that there may be other scenarios not falling in this alternative scenario of liquidation or administration. For example, the company may be sufficiently healthy financial wise where the failure of the plan may not affect its rehabilitative prospects or going concerns in the short to medium-term. Alfino argues that Part 26A, however, does not prescribe the manner of addressing the valuation issues, and that courts have not definitively addressed them as well. For instance, in terms of defining ‘genuine economic interest’, There is no legislative guidance as to the meaning of the term ‘genuine economic interest’. It seems to be derived from the principle of ‘economic interest’ as ruled in Re Bluebrook Ltd, regarding a scheme that do not require debtor to consult any class of creditors with no economic interest. For determining the economic interest, it should be determined based on the hypothesis of insolvency where the only alternative to a consensual scheme is an insolvency proceeding. In this context, large debt restructurings have often been carried out using a scheme paired with a transfer scheme that transfers the company’s assets and business to a new company or corporate group. The ‘economic interest’ principle in such scenario enables the cross-class cram down. However, the claims of the creditor are compromised as the company does not have any assets to satisfy the creditors’ claims. In regard to the new restructuring plan, based on the above discussion, as the legislation does not provide sufficient guidance as to it implementation, the court is left with an absolute discretion in regard to sanctioning the plan. It uses the principle of ‘just and equitable’ or of ‘best interest’ to determine the feasibility of the plan. For instance, in the matter of Hurricane Energy Plc the restructuring plan was opposed by one of the two largest shareholders and a large number of individual shareholders. The directors allegedly failed to engaged the shareholder, but agreed to a deal with the bondholders, who were interested in reducing the shareholders interest from 100% to 5%. The court with its absolute discretionary power to sanction the plan on a dissenting class, as provided under S901G of CIGA, rejected the plan. It ruled that the directors could not pass the ‘no worse off condition’ test and failed to show that the concerned shareholders had no better alternative prospects. There was no 'realistic prospect' of the shareholders to be better off under a relevant alternative. Particular care was provided to the cross-class cram-down application where the plan was to permanently deprive the concerned shareholders of any meaningful return on their investment and there is no imminent liquidity crisis. The discretion of the court allows it to consider a range of factors considering particularly whether the plan provided for a fair allocation of value between different stakeholders. This also means that there is a broad range of protection extended to the companies.

A new free-standing company moratorium process

The CIGA introduces Part A1 of the Insolvency Act 1986, which provides for a new free-standing moratorium procedure. According to Section A6(1)(d), this moratorium can be used by a company that is or is likely unable to pay its debts. Further, According to Section A6(1)(e), it will allow the company to be rescued as a going concern. McCormack (2021) states that the moratorium provision focuses on rescuing the company in concerned and is not an insolvency process. This process seeks to protect the company from any legal and other enforcement action while the moratorium is in place. It is ‘debtor-in-possession’ process where the company controls the day-to-day operation, but the process is supervised by a licenced insolvency practitioner appointed by the court in regard to the rescue goals. The moratorium period can be for an initial 20 business days, and may be further extended to another 20 business days, or indefinitely by the court. The moratorium will preclude creditors from starting insolvency proceedings against the company; will prevent enforcement of security; will prevent steps to repossess hire purchase goods; will prevent litigation or legal processes; or will prevent crystallisation of floating charges (SS A20-23). Moratoria could provide two benefits. Firstly, it addresses the ‘common pool’ problem. In the absence of a stay, creditors may seize the assets useful or essential for the operating the business thereby damaging the prospects of restructuring. The rationale lies with the better worth of collective assets than assets that are dissipated. Secondly, it address the ‘anti-commons’ problem by prohibiting individual creditors actions that aim to frustrate majority wishes. Payne (2022), however, argues that although Moratoria may provide for the rescue of a business, it may require a balance between the benefits to the company and the creditors and the rights of the individual creditors. While assessing the newly introduced provision for moratorium, Payne argues that it does not seem to have achieved the balance. She argues that the constraints and limitations placed on the moratorium in order to protect the creditor has limited the potential value of the moratorium. Because of this, companies may seek for other alternative protection from creditors. Further, the CIGA allows the lenders under a contractual right to accelerate loans in the moratorium. This accelerated debt is not a ‘priority pre-moratorium debt’ in respect to the super priority concerning a subsequent insolvency or restructuring procedure. In this regard, Payne (2021) argues that for an effective moratorium, the debtor will need lender’s support and may also likely require some form of waiver or agreement to that effect. Because of this aspect, the use and benefits of the moratorium may be constraint. The limitation of the use of restructuring moratorium is found in relation to a cloud service provider. Parry (2021) states that the process for a moratorium concerning a cloud service provider that is not subject to a winding up petition will require the filing through: a) a statement that the service provider is insolvent or approaching insolvency; and b) a statement from a proposed monitor that the service provider has likely prospects of being rescued as a going concern. Parry argues that the latter requirement would prevent the use of the moratorium regarding a managed closedown of the service provider. Thus, Parry argues that the moratorium route could only be used by a cloud service provider that is subject to a winding up petition after a court order. Parry further adds that this would provide a better result for the creditors collectively than if the service provider were to wind up without the initial moratorium protection. At the same time, as a managed closedown is for the primary benefit of the customers, there may be a challenge to show that it would benefit the creditors collectively. Hence, Parry argues that the route of moratorium may benefit those viable business with the intent of ongoing operations. The issues argued by Parry presents the route as a doubtful mechanism to effectively address economic downturn and risks of insolvency regarding the cloud computing sector. Further potential issues are also highlight by Payne (2020). She argues that the moratorium seeks to protect companies from enforcement action by all types of creditors. This means that the protection through the moratorium limits the action of even the smaller creditors, who or which may themselves be in a financial stress. In addition, she argues that the moratorium route does not consider a debt restructuring plan that could be applied specifically for a subset of creditors. Hence, Payne presents the restructuring moratorium as rather an inflexible route limiting its use by companies in financial distress. She, therefore, suggests that a negotiating standstill arrangements with only a subset of sophisticated creditors may be a better option. The potential challenge may lie in balancing the interests of all the parties concerned, which otherwise would be deter the use of the moratorium.

Extension of statutory controls on termination clauses in supply contracts

Section 233A of the Insolvency Act 1986 restricts ipso facto clauses in contracts preventing suppliers from terminating essential supplies when the company is under administration or enters a voluntary arrangement. However, this section also provides conditions where the supply can be terminated in the absence of office-holder personal guarantee for payment of charges relating to the continuation of the supply after the company has entered administration or the voluntary arrangement, and the guarantee is not provided within 14 days from the notice. Section 233B further provides broader protection regarding the supply of goods or services. The provision is triggered where the non-supplier counterparty enters into a relevant insolvency procedure, including a moratorium process, administration, appointment of an administrative receiver, voluntary arrangement, liquidation, appointment of a provisional liquidator or a court order regarding a compromise or an arrangement. Although the prohibition of termination provisions provides a broad protection, termination may be allowed in certain circumstances. When an insolvency-related term of a contract ceases to have effect, the supplier may terminate the contract with a consent from the insolvency office-holder, a court’s permission, or a charge after an administration or a voluntary arrangement. The challenge with these provisions may lie with the lack of definitive guidance from the legislation. For example, the termination with the court’s order or permission is allowed where the continuation of the contract would cause hardship to the supplier. The notion of ‘hardship’ is not defined within CIGA, and therefore the court has the discretion to establish this threshold. In this regard, it should be noted that there is no recognition of a general concept of economic hardship although there are cases that may help determine the concept. Economic hardship is invoked in international trade, just as Force Majeure, when there are unforeseen events making the performance of the contract impossible or impracticable. There are cases where attempts were made to define economic hardship that could make the performance of the contract impossible or impracticable. For example, in Davis Contractors Ltd v. Fareham Urban District Council, parties affected by economic hardship attempted to claim frustration. The court held that the unexpected deficiency in labour supplies after World War II making the contract more onerous to perform with the increase in the contractor's costs cannot be the ground for frustration. The court in Superior Overseas Development Corporation and Phillips Petroleum (U.K.) Co. Ltd. v. British Gas Corporation brought some clarity on the concept of economic hardship by stating that it should be substantial or serious that do not occur today and get over tomorrow. Further the ruling in Associated British Ports v Tata Steel UK Limited added ‘major physical or financial change’ that affects the operation and could require parties to renegotiate. Economic hardship is also found in the form of contract clauses, which may define it as altering the equilibrium of the contract such that the alteration is significant expressed in the language ‘substantial economic hardship’, ‘substantial and disproportionate prejudice to either party’, obvious hardship to either party’, or ‘undue hardship’. Such clauses may also provide for specific terms to define the required level of hardship. It could be in a threshold associated with annual costs. Challenges may arise in case where the clause may not provide for renegotiation but termination or may not provide for consequences in case of failure by the parties to agree to revised terms. Thus, the court in exercise of its discretion to determine the extent of economic hardship that would qualify a termination should strive to find a balance in respect to the challenges and benefits of the creditors, hardship to individual creditors, and the protection extended to the businesses. For instance, while striving this balance, it could consider situations where the suppliers continue supplying regardless of the intention or ability of the office holder to pay; or the uncertainty faced by the suppliers where the debtors or business do not require to assume or reject contracts within a specified time period. CIGA intends to broaden the protection and opportunities of businesses. However, there seems to be more focussed on protecting the businesses while being detrimental to the creditors and suppliers. This risk may be further expanded by the undefined terms in CIGA leaving a wide discretion to the court.

Temporary restrictions on winding-up petitions

Part 1, Schedule 10 of CIGA prohibits petitions for winding up on basis of statutory demands. The prohibition of winding up is to protect businesses from creditors that insist on repayment of relatively small debts where it has raised the debt threshold for a winding up petition to £10,000 or more. Further, creditors will need to seek proposals for payment from a company by giving 21 days response period before proceeding with a winding up action. These measures are effective until 31 March 2022. The intent is to protect smaller business to rebuild its balance sheets and reserves. Further, the measures will particularly restrict commercial landlords from presenting the petitions against limited companies to repay commercial rent arrears built up during the pandemic. This prohibition will also continue until 31 March 2022. The government has, however, implemented a rent arbitration scheme to address commercial rent debts accrued during the pandemic. In order to determine whether or the winding petition could be allowed, the court applies the Coronavirus Test as provided by the Insolvency Practice Direction. Accordingly, the test is whether or not the company is not able to pay its debts; or whether or not it the pandemic had not had any financial effect on the company. Theses apply to registered companies. Similar provisions are provided for unregistered companies under Section 6(2) and 6(3) of the Schedule 10 to the 2020 Act. The guidelines associated with the test are found in the case law principles laid in a few cases, including Re A Company, which is the main authority; PGH Investments Ltd v Ewing; Newman v Templar Corp Ltd; Re A Company; Doran v County Rentals Ltd; Petitioner v Company. In PGH Investments, the court held that the company must establish a prima facie case of a ‘financial effect’, which is that its financial position worsened due to the pandemic. Once this low threshold is met, the petitioner must establish that if the financial effect is ignored, the company would still not be able to pay the debts. The court gave a wide interpretation of ‘financial effect’ covering even the indirect financial effects where the pandemic has caused third party failed to fulfil its obligations under a Share Purchase and Loan Assignment Agreement, which in turn triggers the liability of the company as a guarantor in that agreement. These two conditions were applied in the Newman, where the court did not find any financial effect and Deputy ICC Judge Agnello QC ruled that the ‘Company is hopelessly insolvent, the evidence does not satisfy me that coronavirus has a financial effect and in all the circumstances this matter should continue for a hearing of the winding up petition itself.’ Re A Company also considered the two limbs of the test, which is financial effect caused by coronavirus, and the question of inability to pay even if coronavirus had not had a financial effect on it. The development of the test and principles demonstrates the judicial activism to adapt and address the challenges posed by the pandemic.

State intervention measures

The discussion regarding the insolvency law regime discussed above has demonstrated that the regime intends to provide a preventive restructuring mechanism with an improved rehabilitation procedures. Considering that the pandemic has exposed businesses, particularly micro and small firms and certain segments, the regime of insolvency law could be considered a special vehicle that could offer business opportunities to sustain and review. In this regard, governments cross the countries have implemented legislative measures to safeguard businesses from the risk of insolvency and prevent economy downturn at large. The question is whether there are adequate policy measures in place that could effectively implement the rehabilitation, restructuring and protection provisions. The widespread disruption of economy and commerce have led to immediate responses from the government, as is seen with the enactment of CIGA and the new insolvency regime in the Insolvency Act 1986. In this context, Iverson (2018) argues that insolvency frameworks may tend to be less efficient in a time of crisis. This is particularly relevant when the judiciary is congested, which may eventually push a higher number of viable firms to liquidation. Given the magnitude of the pandemic and its resultant crisis, the OECD states it may cause uncertainty in distinguishing viable and non-viable firms with respect to the high levels of uncertainty firms are still facing are likely to make the distinction between viable and non-viable firms more difficult. Further, it noted that there may be a risk of supporting potentially non-viable firms while missing to support viable and productive firms pushing them to premature liquidation. Thus, Adalet and Andrews (2018) argue that there is a complexity of identifying non-viable firms that may undermine recovery mechanism where recovery resources may be locked in less productive firms. The OECD, in this regard, suggests that policy support should be created under the premise of preserving optionality. The viability of the firms should be regularly re-assessed. This may help identify non-viable firms at an early stage. It may follow the stage-financing approach suggested by Hanson and his colleagues (2020). Further, the OECD suggests that the governments could adopt a multidimensional cascading approach to mitigate liquidity shortfalls and the risk of insolvency. Firstly, additional resources could be provided to flatten the curve of insolvencies and to restore equity of affected firms. The next step if required would be to provide debt restructuring to protect their going concern. The UK has followed the temporary and permanent measures to flatten the curve and to restructure the debt. As a temporary measures, the government suspended Section 214 of the Insolvency Act 1986 in context to the economic impact of the Covid-19 outbreak as an emergency fiscal and legislative measures. According to this wrongful trading provision, directors could be personally liable if there is no reasonable prospect of avoiding insolvent liquidation/administration and they have not taken all necessary steps to minimise losses to creditors. To avail this defence, the director must prove that they continued with the trading to reduce the company’s net deficiency and to minimise the risk of loss to individual creditors. This defence is strictly construed to avoid the directors to escape liability. This was seen in Palmer v Tsai, where the where the court did not grant the directors additional time to file their defences since they already failed to comply with orders. It is up to the court to make an order like it was seen in Nicholson where the court did not declare that the directors were wrongfully trading despite being proved of their misconduct and that the defendant failed their defence. The court considered that the debtor was operating in challenging market conditions that significantly affected (the period following the segment in which it was operating. The consideration of the challenging market conditions is relevant with the economic crisis presented by the pandemic. Because it would be a challenging task for a director to prove that the company had "no reasonable prospect" of avoiding insolvency. Vaccari (2020) argues that the pandemic has presented an economic uncertainty where the directors will not know the prospect of operation that would deter assessment of ‘reasonable prospect’. This undermines the claim of wrongful trading against them, and hence, there is little rationality in suspending the provision of wrongful trading. Moreover, directors could be made liable for other reasons such as the breach of duties under Sections 171-177 of the Companies Act 2006;, fraudulent trading Section 213 of the Insurance Act 1986; transacting defrauding creditors under Section 423 of the Insurance Act 1986; or misfeasance under Section 212 of the Insurance Act 1986. Vaccari argues that it is not just the wrongful trading provision that could make directors liable. Thus, the director is still exposed to liability in the difficult and uncertain economic distress caused by the pandemic. Thus, the statutory requirements regarding wrongful trading would still expose the directors to claims. In this light, it could be argued that the insolvency law regime focuses more on the question of protection from creditors or of creditors while exposing directors to multiple risks. A review of CIGA may also present the argument that it provides a limited scope in some areas. For instance, Section 12 states that the suspension of liability for wrongful trading us not applicable to certain businesses, including the insurance companies, banks, payment institutions, and other such institutions with similar functions. This does not seem to have any rational basis, where smaller such institutes could also be affected by the pandemic. Vaccari (2020) assesses the need for such a measure of suspending wrongful trading provision, and argues that the suspension did not bring any changes and did not serve the desired purpose of facilitating the rescue or survival of businesses. Vaccari (2020), instead, suggested that the suspension of personal liability actions against directors may curb the rule of law as civil liability remedies may be restricted without justification. Additional policy measures have also been adopted. One of the financial measures implemented to support companies is the ‘Coronavirus Job Retention Scheme’ or ‘furlough scheme’. Accordingly, payments were made to companies allowing them to place on furlough employees affected by the pandemic while paying them a portion of their salary. Similar scheme was extended to self-employed individuals. The government has spent £73bn in November 2020 making direct payment to the companies and private individuals. However, Dowling (2021) argues that this scheme was not compulsory. The companies had the discretion to choose to receive the payment and the scheme did not compel them to keep the staff employed. Further, the Government was criticised for inadequate payments. Dowling (2021) further argues that major companies were allegedly paying large dividends despite significant furlough payments. This seems like a lack of regulation on the furlough payment. In support, Dowling cites the letter, dated 31 March 2020, sent by Sam Woods, Deputy Governor of the Bank of England and CEO of the Prudential Regulation Authority (PRA) to important banks and insurers. Mr. Woods ask them to suspend dividend payments and not to pay cash bonuses to senior staff. The UK has the Future Fund, Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) all aimed to secure investment for startups affected by the pandemic. Through Future Fund, the government co-invest along with private capitals in startup. They have already invested £250 million into this programme set up as “investor-led process” where the private investor applies along with an eligible company and the Fund matches the investor’s contribution up to £5 million based on a pari passu. These investments are made as convertible debt, which cannot be used to pay other borrowings, bonuses, dividends, or advisory fees. However, this policy intervention seems to have created a distinction between startups as to which firm would have access to which fund. For instance, the criteria for accessing Future Fund could be achieved by venture capital-backed companies as the eligibility requires the firms to have raised a minimum of ‘£250,000 in equity from third-party investors in previous funding rounds in the last five years’. González-Uribe and Paravisini (2020) argues that this eligibility, hence, excludes other startups and scale-up, which is claimed to be 75%. This means that the firms that have not raised up to this much equity cannot access Future Funds.

The Future Funds may have created a divide among the firms where its eligibility only serves firms that are VC backed. It may create the impression that firms with VC backing represents quality. In addition, the government has majority stake in VC as a limited partner in over one third of the VC funds. However, VC backed firms may not necessary represent quality. This is supported by González-Uribe and Paravisini (2020) who show that there has been a dramatic growth in startups after they raise angel financing using SEIS. During the pandemic, it proved beneficial for many companies. SEIS enabled some 2,090 companies to raise funds over £170 millions during 2019 and 2020. During 2019 and 2020, some 4,215 companies raised funds over £1,905 millions under the scheme. Likewise, Similar other tax incentives schemes, such as Social Investment Tax Relief and Advance assurance requests also extended help to the companies. González-Uribe and Paravisini further argue that the Future Funds is not compatible with the tax reliefs for individual investors, such as provided under EIS and SEIS. Firms that have raised SEIS/EIS rounds from angels by using advanced security agreements, which had not been converted into shares prior to Covid-19, cannot access Future Funds. Thus, any angel investment alongside the Future Fund will not qualify for Future Funds and SEIS/EIS. Thus, it may be argued that the Future Fund excludes ambitious firms due to its high qualifying threshold. In this light, González-Uribe and Paravisini suggest that to save ambitious firms who would potentially be future winners, the threshold should be lower to £100K (the maximum SEIS investment), to cover angel-backed startups as well. Though there may be compatibility challenges with full SEIS and EIS extended, the revised Future Fund could target a cohort of startups just like the SEIS. The current insolvency law may be stated to have partially succeeded in providing a rescue regime. It is argued that the insolvency policy is both value-based and debtor-friendly that aims to promote rehabilitation of affected firms. However, it should shift the focus on the debtors and rehabilitation as it seems to be overtly focussed on the interest of creditors. It is argued that the measures by the new laws have failed to strike a balance between the rights and interests of the affected parties. While ordinary circumstances would allow creditors access to several remedies against debtors including writ of execution, garnishment orders, creditors’ composition agreements and foreclosure measures, CIGA in an attempt to rescue businesses has overtly emphasised on the rights and interests of debtors. This may frustrate the lenders with financial overburden. Drawing reference to the Italian experience, Italy also blocked bankruptcy petition. Mari (2020) argues that such prohibition also applies to those self-represented bankruptcy of enterprises that are beyond recovery, which may be considered drastic and irrational that may force over-indebted firms to continue their business activity. However, her argument would have been justified if her suggestions of moratorium, prohibition to open bankruptcy proceedings, blocking enforcement actions, or measures for capitalisation, financing and corporate continuity would not have been found in the CIGA that provides for restructuring plan, moratorium and prohibition of enforcement actions. At the same time, it could not be denied that CIGA has provided limited safeguards for creditors where they have to exercise patience that may reduce their chances of survival. The prohibition of enforcement action or the termination of supply contract may not be sustainable for the creditors. It may potentially create a situation for the creditor companies to run into debt while complying with statutory requirements. Based on the discussion above, it is seen that policy intervention could promote or compromise resource reallocation and business liquidation. It has a direct and immediate consequences on businesses, particularly smaller businesses. In this context, the insolvency law regime characterised by liquidation and reorganisation processes plays a crucial role in determining the growth and sustainability of businesses and economy. The design of the regime seems to have favoured growth of entrepreneurship considering the tax incentives and other programmes are availed by the firms. However, the question of equality and distributive justice as discussed earlier regarding the accessibility to funds, such as the Future Funds or the question of balance between the rights and liabilities of the debtors and those of the creditors or the question of determining viable businesses could also create adverse results. The question of whether the policy measures are adequate may not be answered with certainty given the uncertainty in the economy exposed by the pandemic. The impact of such uncertainty is found in the challenges in distinguishing between viable and non-viable firms. While attempting the viability of giving access to policy intervention measures, some gaps seem to have been created as for instance in the argument regarding suspension of wrongful trading. This measure still exposed directors to risks while they are facing uncertainties as to the economy of the business that affects their decision of trading. Similar lack of monitoring the implication of the implemented measures is also found with regard to lack of regulation on the furlough payment, and to a certain the Future Fund when reviewed with the SEIS/EIS scheme that raises the question of justice or equality. However, the measures in place, including restructuring plan, provision regarding enforcement actions or the funding, with the aid of the role of the judiciary may be argued to have managed the sustainability and rescuing issues.

Theoretical framework with respect to insolvency responses to crisis

Economics primarily seeks to understand the implications of the assumption that human beings are rational maximisers of their ends in life and their self-interest. Richard Posner, thus, treats individuals as a rational maximiser with respect to all the areas of their life including their economic affairs. This notion is particularly relevant with understanding whether or not the law or policy makers have been able to act as a rational maximiser in enacting and implementing the relevant laws and policies to rescue firms from insolvency challenges caused by the pandemic. Posner, in regard to the economic analysis of law , states that such an analysis applies economic theory while seeking to understand legal problems and concepts. In order to attain this understand it may necessary to understand the concept of labour. According to Foucault (2002), the formulation of the concept of labour had led to the modern science of economics. The concept has separated value from its representativity. It has treated value with respect to the processes of labour, force and fatigue. He further states that labour rather than trade or exchange formed the basis for the economy. Thus, the conceptualisation of labour leads to wealth relocation of wealth. Such conceptualisation and its application is found in the ‘Coronavirus Job Retention Scheme’ or ‘furlough scheme’ and other measures aimed to prevent mass unemployment, economic stress and poverty and to enable companies to act active agents in wealth distribution benefiting the employees and suppliers or the society at large. Posner proposed an economic analysis of legal system that focuses on the functioning of the legal system. Economic just like the natural law has independent mechanisms uninfluenced by any kind of external forces. It is also immutable and unaffected by human will and functions within its own sphere. This was seen, as discussed earlier, in the judicial principles of ‘just and equitable’ or of ‘best interest’ in determining the feasibility of a restructuring plan; the test of ‘no worse off condition’ 'or realistic prospect'; or the concept of economic hardship including the concept of ‘substantial’, ‘serious’, or ‘major physical or financial change’. Posner states that uncertainty or non-calculable risks preclude rational choices. Hayek (1945), in this regard, states that state should develop legal institutions in order to absorbing the adverse effects of economic uncertainty. The concept of economic uncertainty could be related to the complexity of the economic downturn or crisis due to the pandemic. It has been seen earlier that the pandemic has cause widespread disruption of business affecting more severely certain business segment and small and micro companies. This has caused uncertainty about the economic sustainability of the business and at large the economy of the country. In this regard, the discussion regarding the research questions has been whether the insolvency laws (the CIGA) and the policy decisions have been a rational choice enabling the protection of businesses from the adverse effects of economic uncertainty caused by the pandemic. Based on Hayek, a rational economic order cannot be complete when the data that enables economic calculus is never completely disclosed for the society. However, Keynes on the other hand stated that a scientific method could address the economic uncertainties based on the standardisation of the growth cycles of production, reproduction and capital accumulation. In this regard, the question would be whether insolvency laws and decision making have so far addressed the economic uncertainties in terms of the risks of insolvency. It may be relevant to note Posner here. Posner states that the economic approach to analysing law is criticised for ignoring justice, which may be distributive as to the proper degree of economic equality and efficiency. This may not be so if one considers the tax incentives schemes (SEIS, the Future Fund and EIS) that cater to all kinds of firms with protection, while on the other hand, it may be so to a certain extent where the threshold of Future Funds excludes other ambitious startups indicating equality questions or where the protection measures do not concern protection of smaller creditors indicating justice question. Regarding the question of whether insolvency laws and decision making have addressed the economic uncertainties, it could be argued that to a certain extent, they have not if considering the arguments presented in regard to a) cross-class cram down that allegedly compromise the claims of the creditor in case of deficient debtor’s assets; b) moratorium that allegedly is constrained and limited in its use affecting the creditor or is limited to be used with respect to a cloud service provider; or c) prohibition on termination of supply contract that exposes the suppliers to uncertainty regarding the terms of supply. However, on the other hand, the temporary and the permanent measures cannot be undermined. This is seen with the volume of use of SEIS, the Future Fund, EIS and other schemes such as the Coronavirus Job Retention Scheme. Further. This is also seen with the exercise of judicial discretion that has develop the tests in regard to the restructuring plan. These examples demonstrate that economics is applied in responding to the uncertainty in the complex economic systems such as now caused by the pandemic. The economic intervention through the insolvency laws and policies is required to safeguard affected businesses from risks associated with investments given the fear of the future caused by the pandemic. CIGA has provide discretion to the court in respect to questions regarding the restructuring plan, moratorium, and such protection plan. The court has applied tests principles to adapt and address the challenges posed by the pandemic. In a manner, it could be stated that the court have also conducted an economic analysis of the law. This has been found in cases decided by the courts where relevant tests and principles were developed. It uses the principle of ‘just and equitable’, ‘best interest’, or the Coronavirus Test. At the same time, it could also be stated an economic analysis of law could support the courts in shaping norms that could address the economic complexities and questions regarding the crisis. This is particular relevant to the argument of Payne (2022), who stated that Moratoria should strike a balance between the benefits to the company and the creditors and the rights of the individual creditors; and the argument of Payne (2022) who stated that while determining economic hardship, there should be a balance between the challenges and benefits of the creditors, hardship to individual creditors, and the protection extended to the businesses. These instances show that in case of uncertainties, courts have the role to exercise its discretion to balance relevant interests rather than merely determining rights of parties.

Conclusion

The pandemic has caused widespread economic downturn and liquidity constraints particularly affecting micro and small firms and SMEs. Liquidity support measures are taken up across the globe to address immediate risks. However, the question is regarding solvency problem that may need long-term measures. In this regard, the CIGA 2020 and other policy measures brings liquidity and solvency support to protect affected firms. In the scheme of things, the court is granted with discretionary power to address the question of restructuring and other protection measures. The court aims to strike a balance between parties possessing different level of stakes by relying on principle of fairness, ‘genuine’, ‘just and equitable’ and ‘best interest’ among others. This discretion is applied to the question of reviving firms with respect to the solvency measures in CIGA. The aim is to find the balance between the benefits to the company and the creditors and the rights of the individual creditors. Certain slippage may occur, as for instance the threshold of Future Funds excluding firms that have angel investors; the inability of a cloud service provider to use the moratorium route; risk of uncertainties faced by suppliers; or lenders’ stress to continue supporting a distress firm that may not have enough assets to satisfy lender’s claims. The aim to strike the balance seems to be more focussed on determining the economic hardship of the debtors. While this may appear so, it also tends to exclude certain firms from available the government incentives, such as seen with argument regarding Future Fund that it has created a divide between firms due to its high threshold. However, this also cannot undermine the funds allocation through the policy intervention. Many firms have availed funds and schemes provided through the government-private institute programmes, as is seen with the Coronavirus Job Retention Scheme, EIS and SEIS. The only area of further improve in the insolvency regime would be a better regulation of the laws and the policies or in other words, the monitoring the implication of the implemented measures a explained earlier. Given the complexities created by the pandemic, it seems like the measures have so far created a regime, which may not be completely adequate, but sufficient as of now considering the new uncertainties that challenge policy makers.

Chapter 3 - Findings and Discussion

This research has focused on the measures in the form of the insolvency law regime, relevant case laws, statistics and academic commentaries to explore the implementation and efficiency of the regime with respect to the risks of insolvency faced by businesses due to economic crise caused by the pandemic. The discussion regarding this subject area of research has touch upon the core solvency measures intended in the CIGA and relevant policy intervention. The relevant discussion and arguments have found a few main themes that could be derived from them, including mostly the question of overemphasise on creditor protection or alternatively the debtor protection; the question of balancing interest of the relevant parties or stakeholders; in consequence, the question of demarcation of businesses as to the level of protection they could access and the question regarding the court’s discretion regarding those question. One distinct viewpoint that could be encompass all these questions is the question of regulating or monitoring the protection measures and their implementation. The following sections will discuss these aspects in detail.

Overemphasis on creditor protection or alternatively the debtor protection

The overall aim of the insolvency regime is on one hand the protection of debtors from enforcement actions of the creditors and on the other hand, the enforceability of action by the creditors or the action of termination by the suppliers. In between these two weighing points, the provision of restructuring serves as the escape route of the debtors from the risks of insolvency. The gap in this approach is the revival mechanism, which is mostly the funding of the firms. Instead of focussing on the amount of funding that a firm would require for revival and sustainable growth, the focus of the insolvency regime is more on the security measures that prohibits creditors from claiming against the debtors and the threshold that must be met for the debtor to avail such measures and for the creditors to take actions against the debtor. Thus, while determining the restructuring plan, the relied principle is that of ‘best interest’ and ‘genuine economic interest’. As Alfino Eu (2021) argued, it does not take into account the amount of funding that is available to the debtor or the extent of opportunity or capability to access the required funding. While this is position, the determination of the restructuring plan does not also take into account the financial position of the creditors in terms of whether the plan could satisfy its claim or the extent the plan takes into consideration creditors’ interest. This is supported by the requirement of ‘worse off’ provision that may ignore to a large extent financial stress of the creditors even more when the determination of this concept is not clearly provided in the regime. While the overemphasis conclusion regarding debtor’s interest may be justifiable, it is also justifiable to state that the insolvency regime overemphasises on protection of creditors. Taking the instance of the moratorium provision, relying on the argument by Payne (2022) it has constraints and limitation that may influence debtor to seek alternative protection from creditors. This means that the moratorium protection is not sufficient for debtors, as it provides more protection to the creditors by increasing their leverage in the bargain. This is supported by the CIGA permitting lenders under a contractual right to accelerate loans in the moratorium. While the bargaining power may be with the creditors in such cases, the inability of smaller creditors, which may also be under a financial stress, to take enforcement actions shifts the focus favouring the argument that the insolvency law regime overemphasises on the protection of the debtors. In this regard, it could be stated that the relevant laws have not achieved an interactive balance between the different level of interests. This could be clearly demonstrated by the prohibition of termination of contracts. While on one hand, it prohibits a supplier from terminating a supply of services of goods to enable debtors to sustain its operation, on the other hand, it does not for certain provide specific guidelines as to the extent of such prohibitions particularly, the financial position of the supplier and the intention of the debtor to cancel or resume the supply and the ability of the debtor to continue its business operation. In the light of the task of weighing the different factors in the form of the interests of the parties, their financial position and capabilities and their intentions, the courts may be under a dauntingly task in seeking to find a balance that seeks to serve the intention of the relevant legislation, which is to survive the economic downturn caused by the pandemic.

Balancing interest of the relevant parties or stakeholders

Based on the arguments presented earlier in this research, there seems to be a gap in between the objectives of the insolvency law regime and the interaction of the interests of the creditors, debtors and the law as such. The court has been provided a wide discretionary power to enforce the intent of the relevant laws, which is to secure and protect businesses from the risk of insolvency. The arguments of gaps in the law and its implementation have found more favour in the discretion of the court. For instance, if the Coronavirus test or the test of ‘worse off’ were not developed by the court, the objectives of protection and securing business from the threat of insolvency would not have been challenging. Sections 901A and 901B provides for the requirement of financial difficulties and compromise or arrangement. Section 901F and 901G provide for approval of restructuring plan. While these are the statutory requirement, the restructuring plan has to strive the balance with the application of principles such as ‘worse off under the plan than under the ‘relevant alternative’; or the threshold of ‘genuine economic interest in the company’. The ruling in DeepOcean Group Holding BV relied upon the principle of fair benefits of the plan as between the classes. As the language in the legislation does not provide sufficient guidance , but the intention is enforced by the court’s principles. However, as Alfino Eu (2021) argued, the court may also face uncertainty in doing this as for instance the absence in Part 26A of the guidance valuation of businesses based on the alternative scenario. This may leave the creditor compromised when the debtor does not have any asset to satisfy the creditors’ claims. In such circumstances, judicial principles such as ‘just and equitable’ or of ‘best interest’ or similar such principles comes into effect to enforce the intention of the legislation, which for instance was done in Hurricane Energy Plc. In order to find the balance, the court has to consider many factors with the purpose that any plan or provision should not deprive stakeholders of their meaningful and justified investment returns and at the same time they do not push the debtor to any imminent liquidity crisis. Similar balancing act may be required for statutory controls on moratorium and the termination clauses in supply contracts. The discussion regarding these two provisions has more or less suggested higher chances of imbalance with respect to the rights and liabilities of the parties concerned. For instance, based on Payne (2022) argument, restructuring moratoria may require a balance as to the debtor’s and creditors’ benefits and the rights of the individual creditors, due to the allegedly inflexibility of the restructuring moratorium. Hence, she suggested for a negotiating standstill arrangement. Similarly, in terms of the prohibition on termination, the court’s discretion should aim for a balanced approach towards determining ‘hardship’. It did with the cases in Davis Contractors, Phillips Petroleum (U.K.) Co. Ltd. and Associated British Ports. The balancing measures are necessary because the focus of the statutory requirement may focus more on protecting the businesses and hence, a balancing approach is necessary to ensure those steps are not detrimental to the creditors and suppliers. Such an approach could be found in the Coronavirus Test. The test provides for a low threshold of ‘financial effect’ in respect to the debtor and a higher threshold for the petitioner to demonstrate that even if there were no financial effect, the debtor would have still failed to clear the debts. The balancing approach, thus, comprises the consideration of the financial effect against the question of the ability to pay the debts. In this context, the question is with respect to the state intervention or policy measures as to whether they aid the debtors in regard to their financial ability or address the issue of financial effect.

Demarcation of businesses as to the level of protection they could access

While the preventive restructuring mechanism and rehabilitation procedures aim to secure business from the insolvency issues, there may still be uncertainties concerning whether they would deliver the result. The discussion of the state policy intervention presents a mix response regarding the measures and procedures. There may be uncertainty regarding the determination of viable and non-viable firms that need the benefit of policy measures. However, would not it be necessary to consider that firms are affected by the pandemic, and even if some firms are non-viable, they would be the ones that are affected more. Thus, the question arises regarding the insolvency regime that meant to secure firms, which is would not it do the least of providing some relief even to the non-viable firms? However, the question of appropriate resource allocation to ensure it is done for the right firms play against this notion. This is where the argument of the risk of missing viable firms while supporting potentially non-viable firms arises. This is where the need to establish a guideline to identify and support viable firms at an early stage arises to avoid locking recovery resources in less productive firms. When it comes to temporary and permanent measures adopted by the UK government, the tax incentive schemes, and other funding schemes seem to have the ability to support firms that are affected by the pandemic. The ‘furlough scheme’ provides for protecting the employees. The EIS and SEIS have helped thousands of companies. However, considering the arguments against these programmes, they are opened to the debate of being a partial success in providing a rescue regime. This is supported by arguments that companies have discretion to still lay off employees with respect to the furlough payment and of alleged payment of large dividends significant furlough payments; and that there is a divide among firms that could or could not access Future Funds, the EIS and SEIS. The policy measures seem to be offering the protection it desired but have left some uncertainties as to regulating the compliance of the agencies and businesses in issuing and availing the policy benefits. Such gaps could only ne addressed with an effective regulation of the policy practices governing the concerned agencies and businesses.

Regulating or monitoring the protection measures and their implementation

From the implementation of the insolvency laws and policy measures to the exercise of the court’s discretion, there is a gap in the form of regulating the policy practices and the compliance of stakeholders, both business and government agencies, to the laws and policy measures. The effectiveness of the insolvency laws and policy measures seems to have relied upon the exercise of discretion by the court, mainly comprising the task of weighing relevant factors and attempting to bring a balance to bring the gap between rights and interests of the parties concerned. The main aim should not be securing businesses from insolvency risks alone. If it were, then the arguments of overemphasis on either the debtor’s protection or creditor’s protection arise. Instead, the focus should be more on the financing or funding that enables firms to survive and equally important grow. There is a level of regulatory monitoring that may be required. For example, the overall UK economy recorded a reduction of 19.8% in the second quarter of 2020 after the first lockdown starting March 2020. It was still down at 8.2% in September 2020. Further, it was found that the economic downturn is not spread across all the businesses. This data does not seem to consider the factor of funding and the question of viability of business considered during funding process. The gap may be in not linking the reduction of economy to the question of whether the funding is able to survive and grow. Further, as certain segments were not affected as much as others, the gap may be in not linking the question of whether business in these segments availed the funding to their ability to grow. In regard to the restructuring plan, based on a fair distribution of rights and interest, the court could reject or approve a plan. Reading with the argument on overemphasis on protection of the debtors, there could be a monitor of the rationale provided by the dissenting creditors. Such monitoring could be in a form of a guideline to avoid the issue of valuation, to address scenarios not falling in this alternative scenario of liquidation or administration; or to determine ‘genuine economic interest’ that could pass some responsibility unto the board and the creditors to that effect. This could help regulate practices, such as those involving large debt restructurings and transfer scheme leaving the creditors dry. Regulating issue is also found with the process of moratorium in respect to constraints and limitations placed on the moratorium and the circumstances under which debts are accelerated under a contract. As such, regulation is necessary to identify the use and limitation of the moratorium to avoid situations such as the limitation of the use of restructuring moratorium in respect to a cloud service provider, which could make the moratorium rigid. Similar issue is found with the termination of supply contract provision. There is a lack of monitoring the position of the creditor in terms of their ability to continue support and a lack of monitoring the position of the debtor in terms of the intention to resume or cancel the supply, which seems to be also linked with the ability to sustain. Thus, a lack of regulating the ‘hardship’ may deter the purpose of this provision. The lack of an assessment standard regarding the hardship may also impact the determination of ‘financial effect’. Creditors invest in the debtor for a return. They are also in a good position to understand the financial position of the debtor. The wide interpretation of financial effect, encompassing indirect effect, does not seem to make sense as the uncertainty created by the pandemic has multiple impact disrupting the balance sheet and the ability to sustain businesses. Similar observation could be made with the provision regarding wrongful trading. The uncertainty and the daunting task of determining which action would mitigate financial risk of their company may subject a director to different and higher level of liabilities given the uncertainties of the prospects of the business. Hence, regulating the claims and actions of the creditors and guidelines for the director of a specific code of conduct may be required. However, it would also be challenging to lay down the monitoring guidelines or the code of conduct. A monitoring guideline may not be challenging when it comes to funding. A standard threshold could be made depending on a viability test. This is regarding the arguments concerning demarcation between the firms touching upon the issue of equality with respect to Future Funds.

Conclusion

Regulating the practices with the support of necessary guideline would create rational maximers making the policy intervention and laws maximise businesses based on rational choices. Labour drives economics and therefore, the purpose of the laws and policy should be to secure labour. This would represent the economic functioning of insolvency law regime, which may protect rational choices from the uncertainty caused by the pandemic.

Chapter 4 - Conclusion

The pandemic has exposed businesses to liquidity constraints and the likelihood of insolvency, particularly affecting smaller firms. Although the crisis caused by the pandemic has disrupted the economy and the society at large, the economic downturn has not affected all the businesses. However, it cannot be denied that economic consequences are severe. With this context, this research started with analysis of the insolvency laws seeking to address the question of whether they help affected firms in restructuring or seeking financial arrangements to escape insolvency. This research, thus, aim to answer whether the insolvency law and the corresponding state intervention measures are effectively in delay or avoiding insolvency proceedings through its mechanism of restructuring and like arrangements. This research focused on the provisions of ‘Cross cross-class cram down’ restructuring plan, the moratorium process, the statutory controls on termination clauses, the temporary restrictions on winding-up petitions and policy intervention to answer the questions.

Two sides

This research has found that two aspects of each of the provisions focussed upon. On one side, this research found the aim of collective revival of economy, focussed on balancing protection of parties involved. On the other hand, this research has found limitation on the measures in place, which in themselves are potential reforms in the exiting law and policy practices. These two aspects are provided below regarding the provisions identified. Collective revival of economy. This research aimed to understand the interaction of the restructuring plan and the crisis caused by the pandemic in terms of the economic stress endured by the debtors and the creditors and institutional agencies including the judiciary in addressing the impact of the crisis. The aim of collective revival is found in the provisions including Sections 901A and 901B and Section 901F and 901G provide that necessary arrangement, restructuring plan and sanction and approval of the plan. Rulings in matters of DeepOcean Group Holding BV., Re Bluebrook Ltd, and Hurricane Energy Plc and corresponding principles laid down including that of ‘best interest’, just and fair plan demonstrate the collective revival of the economic cycle between the businesses including the debtors and the creditors. Similar approach could be stated for provision regarding the moratorium process. It is found in Section A6(1)(d) and Section A6(1)(e) to rescue firms as going concerns; the benefit of addressing the ‘common pool’ problem, and the ‘anti-commons’ problem. Similarly, Section 233A and Section 233B of the Insolvency Act 1986 protect the supply cycle of goods or services ensuring liquidity injection into the cycle. At the same time, it ensures a reasonable cessation of the cycle through the termination when the contract ceases to have effect, consent of the insolvency office-holder, approval of the court, or a voluntary arrangement. The revival framework is also supported by court rulings as in Davis Contractors Ltd, Phillips Petroleum and Associated British Ports that brought certainty as to the identification and definition of economic hardship that could allow or cancel the supply cycle. Part 1, Schedule 10 of CIGA is another mechanism that ensures the revival purpose and to sustain the economic cycle. It allows firms to rebuild cash flows, capital balance and reserves. The Coronavirus Test and the determination of financial effect support the determination of whether the revival purpose is justified for the affected firms. This is seen in case rulings of Re A Company, PGH Investments; Newman; Doran; and Petitioner v Company. The legislative intervention and judicial activism is supported by policy intervention and practices. This is demonstrated by the introduction of the tax incentive schemes, funding of viable firms and programmes to support companies to secure employment, and 214 of the Insolvency Act 1986 that protects directors from liabilities of wrongful trading given the uncertainties of business prospects caused by the pandemic. While the above paragraphs demonstrate temporary and short-term measures and an adoption of a multi-dimensional protection of the economy, this research has also shown the possibility of gaps in this approach. This may be understandable as the crisis faced by the world economy is totally new and countries are trying to put up a system that could address immediate liquidity needs and long-term solvency problems, as is laid down by the UK insolvency law regime. The gaps are shown in the arguments presented in the Findings and Discussion chapters. For example, the finding regarding ‘overemphasis on creditor protection or alternatively the debtor protection’ shows that restructuring plan does not account for the amount of funding available to the debtor, their capability to access the required funding; the financial position of the creditors; or the financial stress of the creditors. Similarly, the finding regarding the ‘balancing interest of the relevant parties or stakeholders’ shows that there is no sufficient guidance regarding ‘genuine economic interest’ or the valuation of businesses. The same gap is found in the finding regarding ‘demarcation of businesses as to the level of protection they could access’ shows a lack of protection mechanism for firms that are considered not viable; a lack of regulating compliance by business regarding the purposes of the schemes, such as found with respect to the furlough scheme; or the divide among firms due to the threshold governing the access to funds, such as found with respect to Future Funds and the incompatibility of tax structure in EIS or EIS and SEIS with Future Funds. The solution may lie with altering the policy framework together with regulating the areas as identified in the section ‘Regulating or monitoring the protection measures and their implementation’.

Limitation

The findings in this research represents the limitation in this research. This research needed more data concerning the areas that indicate the requirement of a balance to be achieved. This would have helped suggest in-depth recommendation on the specific area in the insolvency law regime that need alteration, through an amendment or through new judicial principles. This also means that there is a limitation in the research regarding the specific intent of the laws and the reasons why the language used in the law were not able to justifiably express in the legislation. This is demonstrated by the wide discretion being exercised by the court in enforcing the intent of the legislation. For example, this research argued that there is no specific guideline provided in the legislation regarding hardship, financial effect or the valuation mechanism while leaving it to the court to perform the task. This research would have provided more depth if it extensively explored the legislative process that went into drafting the relevant languages. The limitation identified in this research provides the opportunity for future research. Future research could focus on the legislative intent, including how it intended to secure the economy by giving protection to the debtors and at the same time securing the interest of the creditors. The future research could also explore in detail the judicial reasonings presented in this research and the use of such or similar principles on other cases or past cases. This may help in examining prospects that could facilitate reformation if needed. This leads us to the next paragraph, which would summarise the core findings of this research in the form of recommendation for policy making.

Recommendation

The policy recommendation from this research is derived more or less from the section, ‘Regulating or monitoring the protection measures and their implementation’. Together with content from this section, the recommendation will also draw content from the section, ‘Limitation’ above. The main aim of this recommendation is to facilitate policy decision to create an effective value-maximising system of rules and practices that secures as well as govern organisational and individual actions that promote the collective revival of the economic cycle.

Funding focused on reviving the economic cycle of a business

Drawing from the arguments regarding overemphasis on the creditors or the debtors, the funding programme should ensure both survival and growth. This means that there are two stage process. The first is that it should be available to the non-viable firms to enable them sustain the crisis. This will ensure employment sustainable and a continuous cycle of supply and demand chain. This fund is solely focussed on sustaining business until the market opens up enabling affected firms to revive their business to the position that it was before the pandemic. The second stage is to identify and fund firms that show viability of growing the economy and employment rate. Here the reduction of threshold regarding Future Fund applies here where any deserving firm whether VC or angel investors backed, should have access to higher level of funding depending on their capability to scale up and help the economy grow.

Enforceable code or guidelines governing creditors and debtors

Specific guidelines should be in place. This is a two dimensional. First is governing the debtors, creditors and any institutional agencies that are regulating the compliance of the relevant laws. These guidelines would provide details on financial effect, hardship, viability, or any contractual arrangements between the debtor and the creditors. They serve as a code of conduct that the parties would adhere too and the regulatory agencies could take actions or monitor their compliances. Such guidelines could govern the distribution and allocation of resources, which in turn can serve as a threshold regarding the accessibility of funds. The purpose is to build, implement and enforce a collective mechanism that brings co-ordination across all the parties concerned. The second dimension is regarding the legislative guidelines. Though it may be too early to make alteration to the relevant laws, however, certain legislative guidelines are necessary so as not to rely every determination of the law to the court. This research has identified few areas that need regulation and monitoring. Based on those, specific regulatory, if not an amendment of the law, could be made that could facilitate enforcement in the court.

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