COVID-19 URGES FOR INSOLVENCY LEGISLATION CHANGES

COVID-19 URGES FOR INSOLVENCY LEGISLATION CHANGES

Many governments have been adopting extraordinary measures because of the COVID-19 pandemic, which have devastating effects on businesses.

The Executive of Conference on European Restructuring and Insolvency Law (CERIL) is deeply concerned with the ability of insolvency legislation to provide adequate responses to this situation.

CERIL is an independent non-profit organisation of lawyers and other restructuring and insolvency practitioners, law professors and (insolvency) judges committed to the improvement of restructuring and insolvency laws and practices in the European Union and in its Member States and their operation.

In an Executive Statement, that organization calls upon EU and European national legislators to take immediate action and adapt insolvency legislations to prevent unnecessary bankruptcies of entrepreneurs.

So, the Executive of CERIL recommends two steps to be taken immediately by European national legislators:

1. Suspend the duty to file for insolvency proceedings based on over-indebtedness;
2. Respond to the illiquidity of businesses.

In addition, the EU and national legislators are urged to consider measures regarding:

1. Interim financing;
2. Suspending the duty to file based on the inability to pay;
3. “Hibernation” for (small) businesses; and
4. Supporting the livelihood of entrepreneurs and their employees.

Thereby, some countries of EU and Europe have already put forward some insolvency measures, but they still very recent and fragile. We still have a long way to go.

 

TRACKER OF INSOLVENCY REFORMS GLOBALLY (AS AT 3^rd of APRIL of 2020)

 Various countries are expediting reforms to their restructuring and insolvency laws, suspending, temporarily, onerous insolvency law provisions, increasing limits for statutory demands, suspending enforcement powers and introducing other measures to deal with the coronavirus (COVID—19) crisis.

Thus, it is worth mentioning, in a comparative law note, some of the measures that have been taken worldwide.

 

Australia

On 23rd of March of 2020, the Australian Parliament passed the Coronavirus Economic Response Package Omnibus Act Nº22 of 2020 (the Act), which resulted in the following:

a.Temporary relief for financially distressed individuals and businesses:

To avoid unnecessary bankruptcies and insolvencies, the Act provides a safety net to help businesses to continue to operate during a temporary period of illiquidity, rather than enter voluntary administration or liquidation and a safety net to individuals to assist them with managing debt and avoiding bankruptcy.

The amendments temporarily increase the minimum amount of debt required to be owed before a creditor can initiate involuntary bankruptcy proceedings against a debtor from $5,000 to $20,000. The amendments also temporarily provide debtors more time to respond to a bankruptcy notice – the period is extended from 21 days to six months; and temporarily extends the timeframe in which a debtor is protected from enforcement action by a creditor following presentation of a declaration of intention to present a debtor’s petition – the period is extended from 21 days to six months.

The amendments increase the statutory minimum for a creditor to issue a statutory demand to a debtor from $2,000 to $20,000. This raises the thresholds for creditor demands that can push businesses into insolvency. The amendments also temporarily provide debtors more time to respond to a statutory demand – the period is extended from 21 days to six months.

b.Temporary relief for directors from duty to prevent insolvent trading:

The Act provides temporary relief, achieved by the suspension of the obligation on the directors to prevent insolvent trading, during the period from 24^th of March to 23^rd of September of 2020 if:

• the debt is incurred in the ordinary course of the company’s business;
• the debt is incurred during the six-month period starting on the day the new law come into force; and
• the debt is incurred before any appointment of an administrator or liquidator of the company during this period.

So, a director is taken to incur a debt in the ordinary course of business if it is necessary to facilitate the continuation of the business during the six-month period that begins on commencement of the law. This could include, for example, taking out a loan to move some business operations online or debts incurred through continuing to pay employees during the Coronavirus pandemic. It probably will not apply to debt incurred, for example, to refinance the company.

 

Czech Republic

The changes in Czech insolvency law include:

• a preference for delivering documents by way of their publishing in the insolvency register in order to reduce the administrative burden on insolvency courts;
• the obligation of the insolvency court to remit a procedural deadline, provided that the procedural act is missed for an excusable reason based on the extraordinary measures unless the case has already been decided;
• the application for remission must be submitted to the court together with the missed act within seven days from the date of termination of the relevant emergency measure, but the period for the submission will not end earlier than seven days after the end of the state of emergency;
• abolition of the obligation to file a debtor’s insolvency petition as of the effect of the Act on the Mitigation of the Impact of an Epidemic and until six months after the termination of the emergency measures (however, no later than by 31^st of December of 2020), if the insolvency occurred as a result of such a situation;
• abolition of the obligation to file a debtor’s insolvency petition as of the effect of the Act on the Mitigation of the Impact of an Epidemic and until six months after the termination of the emergency measures (however, no later than by 31^st of December of 2020), if the insolvency occurred as a result of such a situation;
• it will not be possible to effectively file a creditor’s insolvency petition (petitions will have no legal effect) as of the effect of the Act on the Mitigation of the Impact of an Epidemic up to 31^st of August of 2020;
• possibility to apply for a temporary suspension of a reorganisation plan during the effectivity of the Emergency Measures. The application is only possible if a plan has been approved by 12^nd of March of 2020 at the latest and has not yet been fully performed. If granted, the reorganisation cannot be turned into bankruptcy proceedings during this period;
• possibility to apply for a temporary suspension of a reorganisation plan during the effectivity of the Emergency Measures. The application is only possible if a plan has been approved by 12^nd of March of 2020 at the latest and has not yet been fully performed. If granted, the reorganisation cannot be turned into bankruptcy proceedings during this period;
• excluding the duration of the emergency measures and a further six months from their termination to the relevant period with regards to action for the relative ineffectiveness of an act (Actio Pauliana);
• a debtor-business operator who is not insolvent as at 12^nd of March of 2020 will have the opportunity to file a proposal for an extraordinary moratorium which can last (if extended) up to six months (hereinafter the ‘extraordinary moratorium’); the extraordinary moratorium will be newly introduced directly in Act No 182/2006 on insolvency procedures (hereinafter the “Insolvency Act”).

 

Germany

At the end of March, the German Ministry Christine Lambrecht commented: “We want to prevent companies from having to file for insolvency for the only reason that the aid provided by the federal government does not reach them in time. The regular three-week period of the Insolvency Statute is too short for these cases. [….] With this step, we are helping to cushion the consequences of the Corona outbreak for the real economy”.

It is in this context that the following measures are being implemented.

a.Temporary suspension of obligation to file for insolvency and of creditor’s right to request opening of insolvency proceedings:

On 25^th of March of 2020 the German parliament passed a bill “to mitigate the consequences of the COVID-19 pandemic in civil, bankruptcy and criminal procedure law”, that aims at protecting companies that experience financial difficulties as a result of the COVID-19 pandemic.

It includes a temporary suspension of both, the debtor’s statutory obligation to file for insolvency and the creditor’s right to request the opening of proceedings for insolvency reasons that occurred after 1^st of March of 2020.

b.Suspension of debtor’s obligation and creditors’ right to file for insolvency:

The COVID-19 Bill provides for a temporarily suspension of the filing obligation until 30^th of September of 2020; this deadline can be shifted by the Ministry until 31^st of March of 2021.

For the suspension of the filing obligation two conditions must be fulfilled:

• The reason for insolvency must be based on the effects of the COVID-19 pandemic (and not on other reasons);
• There are prospects for restructuring of the company due to pending procedures for granting public aid to the company and/or pending negotiations with (potential) creditors of the company about additional financing or reorganization of debt.

The COVID-19 Bill provides for a legal presumption that these conditions are fulfilled if the company was not illiquid as of 31 December 2019.

The causality of the COVID-19 pandemic for the financial crisis of the company can be verified by demonstrating that the company was liquid on 31^st of December of 2019, for example, through annual financial statements as of 31^st of December of 2019 with unqualified audit opinion.

For the next three months, creditors’ right to request for opening of insolvency proceedings is cancelled for requests that are based on circumstances that occurred after 1^st of March of 2020. The Ministry can extend this cancellation period until 31^st of March of 2021.

Obviously, the suspension of the filing obligation does not release the company from any of its (contractual) obligations towards business partners, employees etc.

The COVID-19 Bill addresses this issue for some types of contracts (consumer agreements such as agreements for supply with utilities, loan agreements, insurance agreements and commercial lease agreements) and cancelled creditor’s termination right for payment default temporarily id certain conditions are fulfilled.

For the rest, the specific contract, any force majeure clauses therein and the statutory right to terminate for good reasons as well as the German rules for adjustment and revocation of contracts for interference with the basis of the transaction (Geschäftsgrundlage) are to be considered to understand the contractual obligations during the crises.

 

India

The Government of OI has increased the threshold of default for filing an application to commence insolvency proceedings against a corporate debtor from Rs. 100,000 (USD 1,300) to Rs. 10,000,000 (USD 131,000). It has also been stated that if economic distress caused by COVID-19 continues beyond 30^th of April of 2020, application of certain provisions of the Insolvency and Bankruptcy Code, 2016 may be suspended for 6 months to prevent companies from being forced into insolvency proceedings.

 

Luxembourg

The Luxembourg Government issued the Grand-Ducal Regulation of 25^th of March of 2020 suspending the statutory requirement for directors to file for bankruptcy proceedings within one month of insolvency.

 

Russia

In Russia, the Duma will be reviewing a draft law (expected to be adopted shortly) granting the RF Government in exceptional cases the right to impose a moratorium on initiation by creditors of bankruptcy proceedings against certain categories of debtors (entities engaged in a particular type of economic activity, or entities which have suffered most from the circumstances which resulted in the imposition of such moratorium, most likely to be airline, tourist, hospitality and catering companies), for a term to be determined by the government.

During the term of the moratorium:

• eligible debtors are no longer obliged to file voluntary bankruptcy petitions in the prescribed circumstances;
• any non-bankruptcy enforcement procedures against eligible debtors, as well as enforcement procedures by secured creditors against collateral pledged by eligible debtors (including out-of-court enforcement procedures) are prohibited; and
• any eligible debtors’ transactions falling out of the scope of their ordinary business with a value exceeding 1% of the debtor’s assets shall be considered void.

 

Scotland

Accountant in Bankruptcy (AiB), Scotland’s insolvency service, has announced that sale and eviction from property in ongoing bankruptcy proceedings will be suspended until further notice due to the coronavirus outbreak. New measures introduced by AiB will simplify procedures to help those seeking debt relief through bankruptcy and extend deadlines for payment of debts through the Debt Arrangement Scheme.

 

Spain

In Spain, one of the countries most affected by COVID-19, some measures were taken regarding insolvency and bankruptcy proceedings. The most relevant is a two-month grace period for the debtor to submit the insolvency petition to the court since the moment in which the state of alarm finishes. There will be no reason for liability when the debtor had the obligation to apply for the insolvency statement, but he did not.

In addition, debtors´ voluntary insolvency application will have preferential processing over creditors´ insolvency request that will be stopped until two months after the state of alarm is over.

 

United Kingdom

On 28^th of March of 2020, the Insolvency Service released plans to reform the UK’s insolvency framework to add new restructuring tools including:

• a moratorium for companies giving them breathing space for from creditors enforcing their debts for a period while they seek a rescue or restructure;
• protection of their supplies to enable them to continue trading during the moratorium;
• a new restructuring plan, binding creditors to that plan.

 The proposals will also include:

• key safeguards for creditors and suppliers to ensure they are paid while a solution is sought; and
• temporarily suspension of the wrongful trading provisions retrospectively from 1^st of March of 2020 for three months for company directors so they can keep their businesses going without the threat of personal liability (NB existing laws for fraudulent trading and the threat of director disqualification will continue to act as an effective deterrent against director misconduct).

 

Portugal

Last but not least, in Portugal,  the obligation to file for insolvency was suspended, whenever, cumulatively, the economic and financial situation of the company results from the effects of COVID-19 on the economy and this company is also able to recover, namely through the negotiation of an agreement with their creditors.

However, insolvency proceedings are currently not suspended.

Anyway, this is not enough, so it is expected to be approved other measures by the Portuguese Government.

So, we can conclude that in all areas of business activity, we will have new challenges resulting from economic difficulties, unexpected positions in the fulfilment of obligations and unacceptable requirements in the exercise of contractual rights, which will require recourse to several institutes, namely, submission to insolvency or revitalization process.

For this reason, the measures will have to be adapted to the situation we are experiencing, and, at the moment, they are not yet. It remains to wait for the various Governments to adapt the legislation to the crisis ahead.