A Bumpy Road To Normality After UK Pandemic Support Ends

By Richard Tett, Nick Cooper and Kelley Macpherson
Law360 is providing free access to its coronavirus coverage to make sure all members of the legal community have accurate information in this time of uncertainty and change. Use the form below to sign up for any of our weekly newsletters. Signing up for any of our section newsletters will opt you in to the weekly Coronavirus briefing.

Sign up for our Bankruptcy newsletter

You must correct or enter the following before you can sign up:

Select more newsletters to receive for free [+] Show less [-]

Thank You!

Law360 (April 7, 2021, 1:23 PM EDT) --
Richard Tett
Richard Tett
Nick Cooper
Nick Cooper
Kelley Macpherson
Kelley Macpherson
Following the budget statement on March 3 by the United Kingdom chancellor, it is clear that the tide is beginning to turn on government support. Relief measures will continue in the short term to shore up businesses, but support will gradually taper off as the country begins to navigate its way out of the COVID-19 pandemic.

This withdrawal of U.K. government support not only has implications for the likely number of insolvencies in the coming months and years, but it is also likely to influence the matters appearing before the courts.

The temporary measures under the Coronavirus Act 2020 prevent, among other things, landlords from taking action to forfeit for nonpayment of rent or other sums payable under the lease. These measures are paired with a temporary moratorium under the Corporate Insolvency and Governance Act 2020 on the presentation of statutory demands or winding-up petitions.

Presenting a winding-up petition is not prohibited in itself, but the petition must be voided by the court after review if the court is satisfied that the tenant's inability to pay rent — or any other debt — stems from COVID-19. The burden of proof lies with the landlord — or other creditor — to show that COVID-19 has not had a financial effect on the tenant. After a year of the pandemic, that is a high hurdle to clear and in most sectors, is likely to be quite a challenge for a petitioning landlord.

In line with the U.K. government's measured approach to withdrawal of support generally, the ban on forfeiture of commercial leases has already been extended several times, most recently to June 30, and restrictions on the issuance of statutory demands and winding-up petitions — along with suspension of wrongful trading liability — have also been extended through to June 30 by statutory instrument, which came into effect on March 26 having been due to expire on March 31.

These further extensions seek to provide businesses with breathing space as the economy reopens under the U.K. government's road map and to ward off the cliff-edge that could be caused by the overly swift removal of government relief leading to aggressive creditor enforcement action.

But of course, the government's protections cannot continue indefinitely — however cautiously and thoughtfully the support is withdrawn, at some point it will have to end entirely.

When that day comes, it is inevitable that a large number of companies will be carrying substantial accumulated arrears. The temporary measures have held back the tide; debt has clearly been accumulating in the meantime.

While accrued rent is the most talked about, there are other categories of debt too, such as other outstanding lease obligations or deferred tax liabilities. The chief executive of the British Property Foundation claims commercial property arrears stood at £4.5 billion at the end of 2020.

It is likely then that these indebted companies will see an influx of statutory demands from, amongst others, landlords seeking to be first in line for payment from tenants, potentially followed by the filing of winding-up petitions with the courts from those who are unsuccessful.

So far in the pandemic, the focus has been on liquidity and simply keeping the lights on. As we come out of the pandemic, companies large and small will start — or be forced — to turn to their balance sheets and attempt to address accumulated debt.

In the face of this, the courts can expect to receive an increased number of schemes of arrangement and restructuring plans as companies move from amend-and-extend schemes and plans addressing liquidity, to debt-for-equity schemes and plans addressing leverage.

We may also see an uptick in company voluntary arrangements, or CVAs — which while not a court process in themselves, do come with the possibility of challenges brought to court by compromised creditors.

That said, one development may be that restructuring plans begin to supplant CVAs for leasehold estates restructurings, as a plan can potentially achieve the same or an even broader outcome than a CVA. Early indicators of this include the recently launched Virgin Active restructuring plan, which contemplates cramming down landlords who will be asked to write off rent arrears.

A shift from CVAs to plans may be accelerated by the challenge brought by landlords to the New Look Retailers Ltd. CVA. There, the landlords are claiming that aspects of the CVA are unfair and unlawfully compromise proprietary rights — including the move to turnover rent.

The groundwork was laid for this challenge by the recent judgments in the 2019 CVA challenge, Discovery (Northampton) Ltd v. Debenhams Retail Ltd and the 2019 scheme of arrangement judgement, Re Instant Cash Loans Ltd,[1] where the court found respectively that a CVA could not limit or compel the release of a landlord's right to forfeit a lease as to do so was a proprietary right, and that a scheme of arrangement could not compel landlords to accept the surrender of leases, as to do so would interfere with the landlord's proprietary rights.

Favorable judgments for debtors or creditors in these ongoing cases could open the floodgates for others to follow or have a significant impact on the nature of future processes proposed. That said, CVAs are likely to continue to be the restructuring tool of choice for at least some tenants as they are potentially simpler and quicker than a plan.

In conclusion, government support has been effective in providing a period of stability and extensions of relief continue to stabilize the situation for now. These measures cannot continue forever, and at the point they cease, we can expect the burden of those cases that cannot be resolved through commercial bargaining to weigh heavily on the courts.

It seems likely that many debtors and creditors alike will need to turn to formal processes to find a way back to normality. For some that may come quickly, whereas for others — especially given the prevalence of very loose or nonexistent debt covenants — they may be able to hang on until they face significant debt maturities. We expect this story is likely to take several years to unfold fully.

Richard Tett is a partner, Nick Cooper is an associate and Kelley Macpherson is a trainee at Freshfields Bruckhaus Deringer LLP.

Disclosure: Freshfields acted for Debenhams and Instant Cash Loans in the cases discussed here.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] Discovery (Northampton) Ltd v. Debenhams Retail Ltd [2019] EWCH 2441 (Ch); Re Instant Cash Loans Ltd [2019] EWCH 2795 (Ch).

For a reprint of this article, please contact reprints@law360.com.

Hello! I'm Law360's automated support bot.

How can I help you today?

For example, you can type:
  • I forgot my password
  • I took a free trial but didn't get a verification email
  • How do I sign up for a newsletter?
Ask a question!