Insolvency laws in the U.K. were changed last June to grant extensions and more breathing room for struggling businesses, including hotels.
LONDON—United Kingdom laws on insolvency have been changed, including extensions on moratoriums, to help businesses struggling due to lost trading during the pandemic.
With the Corporate Insolvency & Governance Act at the end of 2020, restrictions on the use of statutory demands were extended to the end of March, granting more time to settle petitions put in place in June.
Further extensions may occur.
Sources said the changes are necessary to provide breathing room for businesses, including hotels.
Now, for insolvency processes to take place, creditors must show that the pandemic did not have an effect and that debts would have occurred despite the coronavirus.
Also under the act, companies looking to undergo restructuring must show that trading has been affected by COVID-19, and ipso-facto clauses cannot be invoked that allow suppliers to terminate contracts with companies facing insolvency.
Speaking at a recent HVS London webinar titled “Hotel insolvency: Why is it so different this time?” Joss Hargrave, partner at law firm Bird & Bird, said the extension is necessary to “account for the huge swing in business fortune resulting from COVID-19.”
Before CIGA, insolvency law was outlined in such acts as the Insolvency Act 1986, Enterprise Act 2003 and Companies Act 2006.
“This new procedure enables a company to avail itself of a moratorium similar in scope to an administration moratorium, including preferred secured creditor enforcement and forfeiture by landlords,” Hargrave said.
One additional major change is that directors of firms entering administration remain in control of the firms, albeit with licensed oversight, whereas before those powers would have ceased, he added.
The U.K. does not have the same structure as the U.S., with its Chapter 11 and Chapter 13 legislation, sources said.
“A company can avail itself of the procedure simply by filing notices at court, save where there is an outstanding winding-up petition against the company or it is an overseas company when a court application is required,” Hargrave said.
Another change that aligns U.K. and U.S. law is concerned with what is known “cram down,” a court-imposed reorganization of a company, despite provided objections by certain classes of creditor, if that reorganization does not leave creditors financially worse off.
Hotel business are well protected by the legislation, which comes in addition to extensions to furlough payments for employees through March 2021.
Andrew Robb, chief business development officer at hotel firm RBH, said the largest concern for ongoing trading is around payroll.
“That is the biggest cost in the P&L. We must make sure cost creep does not come back in, and we have to justify costs in terms of revenue and make that clear to owners,” he said.
CIGA legislation states that for the duration of the moratorium, companies will still need to continue paying for salaries and wages, all payments due under loan agreements or other financial contracts and for any goods and services, including rents.
Some hotel companies are struggling to pay rent.
The controversial restructuring of economy hotel firm Travelodge (U.K.), via a company voluntary arrangement (CVA), ended in late November with the retention of a majority of its landlords.
Its main competitor, Whitbread PLC, which owns the Premier Inn brand, wrote to its landlords stating it would only pay 50% of its fourth-quarter 2020 rent.
Hotels and chains in urban locations have been most dramatically affected by the pandemic.
David Kellett, senior director of hotel transactions at owner Invesco Real Estate, said big-box hotels could recover faster than predicted, but that might not stop all the pain.
“We are looking at alternative use, residential or sheltered apartments. What is the right use for the real estate to create some development value, as we have lost so much?” he said.
Alternative use will play a part in everyone’s thinking over the next year or two, sources said.
Hargrave said the shift in CIGA policy is to aid business recovery, something needed even more due to the U.K. entering a second lockdown on 5 January that is expected to continue to mid-February or beyond.