This is the first in a series of posts being produced under the auspices of the Centre for Commercial Law in response to the coronavirus crisis. These posts are being coordinated by Dr Burcu Yüksel Ripley, Co-Director of the Centre for Commercial Law.
This blog post has been written in the midst of the COVID-19 coronavirus pandemic, against a constantly changing landscape. In addition to the health, social and political implications of the crisis, there are a range of implications for commercial law. As regards the latter, the crisis certainly raises wide-ranging questions in the law of debt and insolvency.
The short-term economic contraction in Western countries, including the UK, arising from the coronavirus outbreak may well be deeper than during the financial crisis of 2008. It is plausible too that economic recovery will be quicker than in the wake of that previous crisis; however, there will still undoubtedly be major macroeconomic and microeconomic consequences, including increased personal, corporate and state debt and an increase in insolvencies.
The crisis has already exposed weaknesses of our credit-based economy. A large proportion of consumers and businesses are highly reliant on debt, and even short-term interruptions to income can be critical. On the business side, Flybe was the first major casualty and epitomises the problem – how little it can take to tip businesses over the edge. Cash flow – or lack of this – and insufficient reserves to weather the storm, albeit a storm of far from normal proportions, are key difficulties for businesses. This is true across a range of sectors, including retail (Laura Ashley has entered administration) and sport (some Scottish football clubs, for example, have indicated that their futures are in jeopardy). Other sectors which are likely to be particularly vulnerable include tourism, hospitality and entertainment.
For consumers, there is a different version of the same problem. Many individuals are finding themselves suddenly with no or reduced work or income, little or no reserves and a mountain of debt. Traditional advice is to have reserves of at least three, and preferably six, months, although recently it has been questioned whether even six months is enough, but the reality is that the vast majority of people do not have such reserves for a combinations of reasons. This is not a judgement of people who find themselves in this position, just a statement of fact. Some could not manage this if they wanted to, others could but choose not to.
The UK Government has announced a range of radical measures to try and ease the pressure on businesses and consumers, including mortgage holidays, paying up to 80% of workers’ wages and providing guaranteed loans for businesses. Yet it may be questioned whether even these measures and others will be sufficient to stave off insolvency for many. Social distancing and self-isolation might also lead to ongoing changed behaviours (including further increased online activity) which impact upon various types of business and mean that some of those businesses are no longer viable, even with significant government support. It should also be pondered how the greatly enhanced government expenditure will be financed. The crisis ought to provoke a broader re-thinking of our basic economic model and, in any event, the level of state interventionism involved, if it persists, represents a sea change.
Assuming there is to be an increase in financial casualties, how are they to be dealt with? While restrictions such as self-isolation and social distancing continue, and may perhaps be extended, there are very practical problems – in the case of businesses, how are insolvency practitioners actually to take control of assets and run businesses in these circumstances? What price the rescue culture now? How can it operate? Who is going to buy or invest in distressed businesses or their assets? In the corporate insolvency context, there may also be issues regarding how, for example, directors ought to have acted in the context of the pandemic so as not to have breached their duties to the company (and indirectly to creditors). For individuals, the ability to take steps to address their problems depends on access to money advice – how will that continue to operate in the circumstances? And if the crisis results in a tsunami of cases even after the worst effects of the disease and its consequent restrictions is past, will these services – and the Accountant in Bankruptcy in Scotland and the Insolvency Service in England and Wales – not simply be overwhelmed? This may suggest it is time for a rethink on this front too.