Since the onset of the Covid-19 outbreak and oil price crash, huge amounts of pressure have been heaped on directors of oilfield service (OFS) businesses.
The strain on management teams can be immense and immediate, with concerns around cash flow, the threat of winding up, pressure from suppliers and concerns that directors are not carrying out their duties properly.
There are question marks over whether certain OFS firms will still be trading in the coming months. Some of these businesses do not have the significant cash reserves they had in 2016-17 to weather the storm and are facing the possibility of restructuring or insolvency.
In May 2020, the UK Government (with support from the Scottish Government) announced it wanted to provide businesses with breathing room to help them avoid insolvency.
Fast forward to June 26, when the Corporate Insolvency and Governance Act 2020 was passed.
This act has three significant levers that businesses and directors can pull for support:
1 Businesses can now obtain a free-standing moratorium while they explore rescue and restructuring options. During this time, no legal action can be taken against the company without leave of the court. Directors remain in control of the business while a qualified insolvency practitioner monitors the company’s affairs.
The business initially has 20 working days to establish whether it could be rescued. This period can be extended for a further 20 days with court consent. After that it can – with creditor approval – be extended for up to a year.
Though the moratorium provides room for manoeuvre, ongoing payments will still be due, such as payments to the chosen monitor, rent falling after the commencement date and wages.
There is also the issue of where that leaves suppliers who can’t pursue debts owed to them.
2 In supply contracts, termination clauses that kick in when a company enters an insolvency procedure are prohibited.
It means suppliers will still have to go on supplying struggling customers and not hold them to ransom for historic debts during the moratorium.
There are some temporary exclusions for small suppliers and other measures.
3 The “wrongful trading” provisions of the Insolvency Act are temporarily suspended. Wrongful trading occurs when directors continue to rack up credit, even though there is no reasonable prospect of recovery.
The directors may be personally liable to contribute to the assets of the company in the event of a winding-up situation if wrongdoing is proven.
This can be a big concern for directors who are doing their best in difficult circumstances.
In line with the newly-passed act, the court assumes the director is not responsible for any worsening of the financial position of the business or its creditors which occurred between March 1 and September 30 2020.
In times when businesses are really up against it, there can be limited options available to board members. The new moratorium does give another option to directors who may be in a better position to rescue or restructure their firm, rather than going through other insolvency procedures.
It is hoped this will help businesses, but the act itself is not a panacea.
There are more immediate and challenging problems, not least some of the “bad behaviours” that OFS firms face. Clients have been known to demand large-scale cost reductions without considering what the UKCS or industry really needs, which is a supportive, effective, vibrant and sustainable industry.
If we do not have good behaviours then at least the act may open up other avenues for rescue.
David McEwing is a partner at Addleshaw Goddard.
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