Ripping up Europe's insolvency rules won't save its companies

European governments are ripping up their insolvency laws to stem the tide of companies set to collapse over the Covid-19 pandemic, but for many businesses it may be too little too late.

As job losses spike across the continent, the UK became the latest nation to propose looser insolvency rules, allowing firms to continue trading even if they can’t pay their debts due to the virus-induced lockdowns.  Germany, Spain and others have also sought to ease the burden on companies.

Still, implementing the new rules - and actually getting state aid into the hands of cash-strapped companies and business owners - will take time that many don’t have.  Of the job-intensive small and medium-sized businesses in the UK around a fifth will struggle to survive. A similar proportion of all German companies fear imminent insolvency. A brutal recession across Europe looks inevitable this year, regardless of government intervention.

“This is Darwinist survival of the fittest compressed into six months,” John Colley, Associate Dean at Warwick Business School, said. “Business will not be the same again.”

Companies are already going under from the impact of the shutdown. In the UK restaurant chain Carluccio rent-to-own retailer Brighthouse and the home furnishing and fashion chain Laura Ashley all collapsed into administration in the past month putting at least 5,000 jobs at risk.

Almost one million people applied for welfare benefits in the UK in the final two weeks of March up from about 100,000 in a normal two-week period according to government figures.  While the new legislation ought to help some viable businesses forced into insolvency proceedings due to the current disruption, it won’t save every company, according to Bevis Metcalfe, a partner on the restructuring team at law firm Baker & McKenzie.

“For some companies the U.K. reforms will come in too late as they could take months to come into law,” said Philip Hertz, global head of restructuring and insolvency at Clifford Chance in London. “There will still be a wave of restructurings and insolvencies.”

No Cash

In Italy, one of the nations worst hit by the virus, law firms are working on ways to ease the burden on borrowers. They’re drawing up a proposal to waive companies’ requirement to file for bankruptcy when assets fall below a certain threshold and capital can’t be raised to offset the shortfall, according to Ernesto Apuzzo, a Rome-based partner at Hogan Lovells.

Prime Minister Giuseppe Conte is also working on a decree that would guarantee liquidity to businesses hit by the lockdown.

Spain has effectively prohibited companies from filing for forced insolvency until after the state of emergency is over. Restructuring practitioners and bankers are bracing for a surge in cases after a period of slowdown or even a complete halt in economic activity.

“Shareholders will need to decide whether to inject new equity or other forms of capital or else engage with lenders,” said Ignacio Gomez-Sancha, managing partner of Latham & Watkins in Spain.

Like Spain, France has made it impossible for companies to be forced to go into insolvency, but managers can still decide to start proceedings to get court protection and trigger payments for their employees.

Meanwhile, Germany has eased insolvency rules partly by exempting virus-hit companies from the standard rules until September, with the option to extend to March 2021.  Still, companies are warning they will have to start proceedings unless they receive urgent help. Restaurant chain Vapiano SE had to do so on Wednesday.

“Many companies will just not have enough money,” said Tillman Peeters, managing partner at Frankfurt-based financial advisory firm Falkensteg. “What’s the point of changing bankruptcy rules if there is physically no cash left? The government still has to fix that.”

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5 April 2020