Businesses are bracing for the impacts of the lockdown. Whether it is for a small enterprise, financial institution or a multinational the concerns and uncertainties are extensive. Analogous to the effects of virus, some business operators have mild symptoms whilst others are on life support. Many will simply not survive. Although it is difficult at this stage to make empirical economic analysis that would underspin policy decisions, many countries have already opted to adopt legislative measures in order to help companies deal with looming insolvency issues. The survival kit may be timed in two phases. The first is the upcoming post-confinement period. Then will come the post-Covid-19 period.
During post-confinement, enterprises will face immediate insolvency issues and will have difficulties to pay their debts in the normal course of business. In Mauritius, the Insolvency Act and connected legislations require urgent reviews. Our law, like in most countries, does not provide for formal moratorium that would favour the rescue of a viable business, and a structured protection from creditors. There are no specific provisions that are akin to a formal protection as provided for in the United States under the Chapter 11.
However, during the hearing of a petition, the Bankruptcy Court may adjourn proceedings conditionally or unconditionally. The judge holds the discretion to appreciate special circumstances and make such orders on a case to case basis. The struggling business may, where it is faced with pending court proceedings, apply to court to stay and/or restrain further proceedings. Our Civil Code also provides a general provision that where an action lies against the defaulting business to honour its debts, the Court may, in its own discretion, carry out a balancing exercise to consider the financial situation of the business and grant extension delays to the business during which stay of proceedings may also be granted.
Furthermore, the voluntary appointment of an administrator triggers a moratorium for the period of the administration, during which no commencement or continuation of proceedings, execution of judgments or enforcement of charges may occur against the business without the consent in writing of the administrator or with leave of the court.
Right after the confinement, creditors and debtors will need a more structured legal regime that would favour their survival. That is why various countries have encouraged banks and lenders to enter into payment deferral schemes and relief. Simultaneously, the corporate insolvency laws and regulations have been reviewed in various jurisdictions in order to make triggers, thresholders and timelines more flexible. It is worth considering the measures adopted by countries with similar insolvency and company law regime, such as New Zealand, Australia and the United Kingdom.
In the UK, there is a new company voluntary arrangement scheme. It would allow for restructuring plans similar to those seen in the United States Chapter 11 proceedings. Creditors and shareholders would be given the opportunity to submit counter proposals. A new moratorium period is also in place. Companies with “legitimate reasons” would be able to benefit from a moratorium on a creditor action for an initial period of 28 days, while they may seek a rescue or restructure. Such a rescue or restructure would be effected out of Court although creditors may of course challenge this moratorium.
The tax authority in the UK, the HMRC, has suspended insolvency activities for now. The new regime also provides for greater leniency for insolvency practitioners, who are entitled to wait for the market to recover. As directors are fully exposed, the new laws in UK provide for suspension of wrongful trading provisions for directors. Prior to this change, directors could be personally liable if they continue to trade when they knew that there was no reasonable prospect of their company avoiding insolvency and failed to take steps to minimise loss to creditors.
Australia and New Zealand have also revised the obligations of directors. New Zealand has provided for a temporary safe harbor for directors as regards insolvency trading. Directors’ decisions to keep on trading over the six months will not result in breach of duties if “in the good faith opinion of the directors” the company is facing liquidity problems as a result of the Covid-19 pandemic. The voidable transaction regime has been reviewed in order to reduce the period of vulnerability from two years to six months.
Monetary threshold and timeline
The Financial Services regulations and listing rules in those comparable commonwealth jurisdictions have been made more flexible so as to alleviate pressure on market infrastructure. In New Zealand, the take-over panel has granted some exemptions to its rules. A contrario, India has adopted a more defensive approach to block opportunistic take overs.
Pre-insolvency measures have also been adopted as regards insolvency triggers, timelines and thresholds. The statutory demand process has been revised so as to encourage work out attempts, outside a formal insolvency process. In Australia, the monetary threshold for a creditor to issue a statutory demand has been increased from $ 2,000 to $ 20,000. The time for a company to respond to a statutory demand has been extended from 21 days to 6 months. The aim of those changes in monetary threshold and timeline is a reduction in court appointments of liquidators in the months ahead, during the post-confinement period. Without the appropriate laws and regulations, a substantial hype in insolvency proceedings should be anticipated.
Right after the confinement period, there will be a type of temporary period of debts deferrals, restructuring and risk allocations. Business debts would seem to go into hibernation. Most players, creditors and debtors alike, will most likely make allowances for flexibility. It would be in the interests of one and all and also the public interest at large. This will be until and unless lenders feel too exposed.
Assuming the coronavirus is eradicated, by way of cure, vaccine, or further controls, we will then enter the post-Covid-19 period. It is still unknown territory as to what the world will be like and how businesses will be conducted. Various comfort zones will disappear. Our business and professional habitat will most certainly change. What is for sure is that the temporary and immediate measures to provide temporary relief for financially distressed companies cannot continue on a long term basis. The banks will be willing to support immediate cash flow needs and will play their role in the wake of public interest needs.
Lending financial institutions fundamentally remain commercial enterprises and in the long run a balancing exercise will have to be carried as regards the role to provide temporary relief and also other factors such as risks, exposure, and profitability. The post-Covid-19 will therefore attract a substantial debate around the world as regards the regulatory framework for financial institutions and the balance act between profitability and public interest issues. The debate as regards the future landscape cannot wait.
As a small island nation with limited resources, Mauritius is geared towards the exports of goods and services. It must therefore follow closely the trend towards nationalism in the nations such as the United States and India. The main markets will be more inward looking and therefore it is likely that the global geopolitical landscape will never be the same.
Mauritius is now experienced in cross border investments and structure. It is a positive note that the Cross Border Insolvency provisions have been promulgated in 2019. As there are substantial foreign investments and joint ventures organized from Mauritius, a hype in restructuring, mergers and acquisitions, insolvency and disputes can be anticipated during the post-Covid-19 period. The new schedule 9 of the Insolvency Act provides that a foreign representative, appointed by a foreign court to administer or liquidate a debtor’s assets may now intervene during insolvency proceedings in Mauritius. Concurrent proceedings and co-operation with foreign courts are now structured. Such proceedings can now efficiently take place online.
The post-Covid landscape will not necessarily be a prism for corporate failure. Proactive organisations may capture opportunities. Some are already re-aligning their approach to the right mix of technology, products, services, infrastructure and delivery channel. Same products and services may be delivered through different channel with more digitisation of physical products. As for services, the trend is likely to be through more technology-mediated delivery. The crisis may catalyse changes in order to function at a distance. Matters such as artificial intelligence, fintech, e-money and payment systems are priorities on the agenda of the fittest. The legal framework for such items may also be revamped.
Businesses cannot afford to wait for government to lead the recovery although it will require substantial consensus, and appropriate legal reviews to overcome the crisis. Temporary measures should also not become permanent, like Milton Friedman said “Nothing is so permanent as a temporary government program”. Without the right strategies and approach we will have to brace for a hard landing. The times to come will show that the line between a collapse and a successful resurgence is a fine one. This stress test is not a drill.
Gilbert Noël, Senior Partner
Published: 30 April 2020