Inter-Dependency
Many corporate groups are structured in tax-efficient ways.
Tax-planning may dictate how goods and services are provided between members of the group in different jurisdictions and in which entities valuable assets are held.
In addition, “treasury” arrangements may apply which involve pooling and re-distribution of revenues.
Consequently, there can be substantial inter-dependency between companies in a group, and a loss of control of one element can threaten the integrity and value of the whole.
Coronavirus is threatening to disrupt these arrangements.
The commencement of insolvency proceedings in relation to one group entity can, unless sufficiently controllable, lead to substantial value-destruction.
Rescue Regimes
Most, but not all, European jurisdictions have procedures allowing for and facilitating a company to be rescued.
These regimes will feature (a) a moratorium preventing creditors taking action against the company and (b) a reorganisation plan or proposal featuring restructuring of financial creditors or operational suppliers, or both.
In some but not all European jurisdictions, it is possible to transfer the business (or a part of it) from its existing corporate entity to another in a relatively seamless transaction, leaving most of the debts behind.
While some company or business rescue processes are rapid and cheap, others can be slow, expensive and uncertain in outcome.
Diverse Outcomes
Outcomes are often a function of decisions of local management, responding to perception of personal risk.
In some European jurisdictions, it is a criminal offence (as well as potentially leading to personal liability) to cause a company to continue to trade when unable to pay debts; in others, criminal liability applies only cases of dishonesty and adequately seeking to minimise creditor losses is sufficient to avoid personal liability.
In some but not other European jurisdictions, a holder of security over a company’s assets has a high degree of influence when deciding whether or not to continue to support its borrower, although this is likely to be as much a function of contractual arrangements as local law.
Governments are responding in a variety of ways to Coronavirus, impacting the behaviour of both management, secured creditors and those advising them.
Consequently, it is essential to understand the drivers of outcome (be those management or creditors) in order to predict, manage or control it.
Holistic Approach
The Coronavirus epidemic is challenging our existing laws; governments are taking measures to prevent systemic breakdown.
The measures taken vary from jurisdiction to jurisdiction. For example, in the UK we are seeing a relaxation in “wrongful trading” but (as yet) no enhanced availability of a moratorium, and no attempt to prevent the enforcement of security.
Accordingly, in order to preserve investor value, an holistic approach is needed. Issues to be considered include:
- Where are the critically-valuable assets?
- Does the business depend on the continuation of all group companies?
- Are there cross-guarantees by an otherwise solvent company or group tax responsibilities?
- Is the participation of management critical to the viability of the business?
- Are there critical contractual counterparties with a right to terminate in the event of a change of control?
- Are there critical regulatory permissions which could be revoked?
- What impact is Coronavirus having on the rights and remedies of critical actors?
Solutions
Time is inevitably short. With the possibility of increasing personal risk for management and losses accumulating, there is a risk of value being destroyed to a point beyond which the business is not worth having.
Steps which may be required include:
- Equity cures
- Balance sheet restructuring to avoid covenant breach and security enforcement opportunity
- Identifying and addressing local management concerns or replacing local management
- Embarking on corporate or business rescue strategies before it is too late