Bankruptcy Experts Call for Looser Rules to Save U.K. Firms

(Bloomberg) -- Some of the world’s largest accounting firms are calling for the U.K. government to adopt looser bankruptcy rules to help save companies and preserve jobs amid the economic fallout from the coronavirus outbreak.

KPMG, Deloitte and others are pushing for a short-term potential softening in insolvency legislation, Blair Nimmo, U.K. head of restructuring at KPMG, said.

“The ideal situation would be to freeze businesses until this time passes,” he said. “These are unprecedented times so there are some temporary measures that could be considered.”

The government is responding to industry demands. Ministers are looking at how to relax insolvency laws to enable companies that are in trouble to access government-backed loans through commercial banks, according to people familiar with the matter.

The U.K.’s Insolvency Service didn’t push back against the idea, saying in an emailed reply to questions: “We are listening to our stakeholders in the insolvency industry about what additional measures could be taken to help businesses during Covid-19.”

Fearing mass unemployment and a collapse in tax revenues, governments around the world have launched huge rescue packages to curb business failure amid nationwide lockdowns. Central banks have also slashed interest rates and pumped cash into the economy by buying up bonds. In the U.K., the Bank of England has given banks flexibility on accounting rules for bad loans in a bid to keep credit flowing.

But applications for unemployment benefits have already begun to surge as companies lay off workers. The U.K. government’s rescue plan for companies is also attracting criticism that it won’t stave off a wave of bankruptcies.

Amid these mounting concerns, KPMG has put forward potential changes to legislation including the option for directors to waive their duty to declare a company insolvent, according to Nimmo.

A temporary opt-out would mean that many companies could avoid filing for bankruptcy, he said. Another option could be a moratorium where companies are temporarily protected from paying creditors and suppliers.

Deloitte echoes the sentiment, calling for businesses to be given “breathing space” to assess options, quantify liquidity needs and work with stakeholders to access funds.

“This process would be greatly improved if certain rules around insolvency filing could be relaxed and we would welcome this being considered at pace,” said Jarek Golebiowski, restructuring partner at the firm.

Borrowers’ Strain

At the same time, bankruptcy lawyers are joining forces to form a legal triage service to help small companies weather the administration process. On Thursday night, about 50 insolvency attorneys held a conference call to hash out the effort, said Mark Phillips, a barrister with South Square Chambers in London, who helped coordinate the meeting. The key, he said, is ensuring businesses make full use of English law to reorganize and eventually relaunch once the crisis abates. He and his colleagues plan to offer their services pro bono.

“In a few months there will be thousands of businesses up and down the country in administration with a debt hole,” Phillips said. “The country is going to need insolvency to manage and work through the financial process.”

The U.K. would follow other European countries that are taking similar measures to ease the strain on borrowers that have been forced to shut their businesses to prevent the pandemic from spreading. In Germany, for example, companies that are hit by the Covid-19 pandemic could be exempt from having to file for insolvency until September, with the option to extend the measure to March 2021.

Restructuring experts warn that in the U.K. government measures to date have focused more on large and small firms, with little assistance for mid-sized companies.

While creditors are likely to offer significant leeway for those with a good story to tell, the crisis may hasten the end of many other firms, according to Bevis Metcalfe, a partner on Baker & McKenzie’s restructuring team.

“For companies limping along already, coronavirus will probably be the last straw,” he said.

©2020 Bloomberg L.P.

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