Michael Reid: Can insolvency legislation save struggling fishing industry firms?
Michael Reid, managing partner at Meston Reid & Co, gives his take on how changes to insolvency law could come into play for one key industry sector – the fishing industry.
Whether it is the continuing impact of COVID-19 or the more recently reported effects of Brexit, media comments proliferate about the financial distress faced by numerous businesses in Scotland who are involved with fish catching, processing and selling.
Although a fund has been established by the UK Government to try to help businesses survive in the short term, it may be insufficient to deal with all applicants.
Last June, the Corporate Insolvency and Governance Act 2020 “the Act” received Royal Assent. A key focus was to try to protect otherwise economically viable businesses who are experiencing significant trading difficulties brought about by the impact of Covid-19. Indeed, the all-pervasive impact of Covid-19 has meant that virtually every business activity in the UK could legitimately claim to have been affected: mostly adversely.
In September 2020, the UK Government announced that it would extend the duration of some of the Act’s temporary measures and, for example, continued the company moratorium process which was introduced in June. Corporate insolvency is a matter reserved for Westminster, while the Scottish Government legislates for the insolvency aspects relating to sole traders and partnerships. Accordingly, although different in underlying nature and in order to maintain a level playing field for all business types, the Scottish Government enacted the Coronavirus (Scotland) Act 2020 which introduced a six-month moratorium for such businesses.
In terms of the corporate position, which is perhaps more relevant to the vast majority of fish-related business activity in Scotland, a company which uses the moratorium process is protected from creditor action (unless permission has been obtained by a creditor from court beforehand to pursue a company e.g. by seeking to appoint a liquidator).
A moratorium must be overseen by a monitor (a licensed insolvency practitioner) although responsibility for the day-to-day running of the company remains with the directors. This approach is a departure from standard UK insolvency procedures which envisages a liquidator being in control rather than leave the directors in possession of the business activity.
The legislation was not designed to deal with the type of export challenges that we read about as a result of Brexit but it might not be unreasonable to suggest that trading difficulties had already been in existence for many months e.g. hotels, restaurants and other fish purchasers had either closed or were greatly reduced in volume which restricted sales. Hence, the Covid-19 view remains appropriate when looking at a fishing business that is struggling at the moment.
A debt moratorium under the Act is for an initial period of 20 business days,but can be extended upon just cause being shown for a period of up to one year. The intention is to rescue the entire company rather than just parts of the underlying business and the monitor must remain of the view throughout the process that the moratorium is likely to save the company. The protection under the Act includes a prohibition on suppliers ceasing to supply product and, as a quid pro quo, incorporates safeguards to ensure that ongoing supplies are paid for as part of the rescue plan.
In any insolvency procedure, a strategic plan must be prepared/agreed beforehand and clearly, considerable trust requires to be placed in the directors that the plan to guide the company through current financial difficulties is capable of being achieved. Accordingly, where the licensed insolvency practitioner has agreed to act, creditors can take solace from the fact that the plan has been scrutinised and adjusted as necessary in order to focus upon business survival, and the trust in the directors is shared by an independent third party. Equally, the directors know that they must continue to act responsibly because if the monitor forms the view, at any time, that the plan is unlikely to succeed or the directors are not cooperating, he can cease the moratorium immediately.
On the basis that there has been a suspension of serving statutory demands and a restriction on winding-up petitions where an unpaid debt is due to Covid-19, a business has an opportunity to act promptly but without undue haste in order to consider whether a moratorium is feasible. The costs of a moratorium process are somewhat akin to a standard administration i.e. not cheap, but if it allows a fishing business to be protected and create a basis for long term survival, perhaps it is a process worthy of consideration.
Of course, the Act applies to all sorts of businesses. The fishing industry has been selected for the purposes of this article as one that might benefit.