Small but important steps that might help the economy

WE ARE now at the beginning of coming out of the lockdown. Most hospitality outlets are open together with non-essential shops and services such as hairdressing. Recently the States announced that it would be supporting the recovery of the economy via government-sponsored projects in what might be termed Keynesian orthodoxy. This short article looks at some small but important steps that might be taken to assist the economy.

On 19 June the States announced, interestingly, that in its capacity as landlord of commercial property it would waive, rather than defer, rent owed by tenants who had not been able to open for business during lockdown. In many cases this would cover the period from mid-March to late May/early June.

The press release then adds the rider that it also hopes that where possible this is something that could be replicated by other landlords.

While it is obviously helpful for many businesses not to have to pay rent in respect of their premises where leases are granted by the States, surely this relief could be extended to others by discharging the rent payable to private landlords. Surely fairness dictates an equality of treatment.

This would boost the liquidity of the businesses affected. It has to be remembered that most businesses, regretfully and unfortunately, will not benefit from tourists this financial year. In quantitative terms, rent is often the second most important expense after wages. This would be relatively simple to achieve given the help already given to businesses in respect of labour costs.

In addition, the government in England and Wales has introduced a relieving Corporate Insolvency & Governance Bill which will improve the infrastructure for businesses. This provides a number of reliefs which, if introduced in Guernsey, would facilitate the revival and growth of the economy.

These measures are set out below.

1. Company Moratorium: this bill gives struggling businesses a formal breathing space to pursue a rescue plan. It creates a moratorium during which no legal action can be taken against a company without leave of the court. It is vital to introduce the moratorium now to ensure that companies which are struggling as a direct result of the pandemic are given the opportunity to survive. This is likely to favour only the larger businesses but it is nevertheless useful where applicable.

2. Ipso Facto (Termination) Clauses: when a company enters an insolvency or restructuring procedure, suppliers will often either stop or threaten to stop supplying the company. The supply contract often gives them the right to do this, but it can jeopardise attempts to rescue the business. The bill prevents suppliers from jeopardising a business in this way. The proposals include safeguards to ensure that continued supplies are paid for and suppliers can be relieved of the requirement to supply if it causes hardship to their business. There will also be a temporary exemption for small company suppliers during the emergency which will obviously be very useful to such companies.

3. Restructuring Plan: this will support viable companies struggling with debt obligations to restructure under a new procedure. It allows courts to sanction a plan that binds creditors to a restructuring if it is fair and equitable and in the interests of creditors. Creditors can vote on the plan but the courts can impose it on dissenting creditors. To some extent (1) and (3) are part of the Guernsey insolvency framework.

4. Suspension of Wrongful Trading: the bill will temporarily remove the threat of personal liability arising from wrongful trading for directors who continue to trade a company through the crisis with the uncertainty that the company may not be able to avoid insolvency in the future. Liquidators and administrators will not be able to take an action against an insolvent company’s directors for any losses to creditors resulting from continued trading whilst the wrongful trading rules are suspended. This will remove the pressure on directors to close otherwise viable businesses to avoid potential liability.

5. Statutory Demands and Winding up Petitions (2 measures): The bill helps struggling businesses by temporarily removing the threat of winding-up proceedings where unpaid debt is due to Covid-19. It introduces temporary provisions to void statutory demands issued against companies during the emergency. This gives businesses the opportunity to reach realistic and fair agreements with all creditors. This would be extremely useful.

Conclusion

This article has suggested a measure which would generate liquidity and provide a stimulus to business in the face of adverse trading conditions.

The other aspect is the suggested institutional and intra-structure changes which would facilitate a framework for business to survive and hopefully prosper in these difficult times.

The relief from liability for wrongful trading and statutory demands would be two very helpful areas for both small and bigger businesses.