Is coronavirus (COVID-19) a force majeure event that could impact company voluntary agreements, individual voluntary agreements or schemes of arrangement?

Is coronavirus (COVID-19) a force majeure event that could impact company voluntary agreements, individual voluntary agreements or schemes of arrangement?

Produced in partnership with Aman Sehgal of Keystone Law

While the effect of a scheme of arrangement is not exactly the same as a company voluntary agreement (CVA) (as a scheme has binding force by operation of statute), the Companies Act 2006 does not prescribe the subject matter of a scheme, and parties must look to the terms of the scheme to determine its effects. See Practice Note: Effect of schemes of arrangement and release of security.

For CVAs and individual voluntary agreements (IVAs), it is entirely dependent upon the arrangement and how the force majeure clause in the CVA and/or IVA is drafted. It is necessary to review the specific wording of the force majeure provision to determine whether coronavirus (COVID-19) is a force majeure event. The majority of IVAs use either the IVA Protocol or R3’s standard conditions. Neither contains a force majeure clause. There are no industry standard terms for CVAs.

If the scheme, CVA or IVA contains a specific provision, it must still be proven that it affected the performance and the affected party took steps to avoid or mitigate the event. In any event, it is important for the affected party to be upfront with the supervisor of the scheme/IVA/CVA and explain their changed circumstances due to coronavirus.

For further information, see News Analysis: Coronavirus (COVID-19) and triggering force majeure: what, when, how—and what are the alternative options?

Event

A force majeure event is an unexpected and exceptional event outside the reasonable control of the party concerned and prevents that party from performing its obligations under a contract. Force majeure has no recognised meaning in English law and is open to interpretation when not expressly defined. The effect of this clause is to relieve the party unable to perform its obligation for the duration and extent it is affected by the force majeure event.

It must first be determined if a pandemic amounts to a force majeure event under the CVA/IVA/scheme. The provision may provide a specific list of events which fall within the definition of force majeure beyond the control of the parties. If the provision specifically refers to pandemics, it may be easier to rely upon, however other criteria must be also satisfied.

Where the provision does not include specific definitions, it may be necessary to consider whether coronavirus is captured by a different concept such as an ‘act of God’ or alternative catch-all provision. The force majeure event may not be coronavirus itself but the consequence and impact of the pandemic on the party’s ability to fulfil its contractual obligations.

Therefore, every force majeure clause should be interpreted separately and in light of the contract as a whole. In the absence of express wording, the affected party may have to demonstrate how coronavirus falls within the force majeure provision. If left undefined, it can lead to uncertainty and may be deemed void. However, where the wording of the contract allows, it may cover matters including legislative or administrative interference such as epidemics/pandemics.

Performance

It is necessary for the affected party to show the degree of impairment of its ability to perform its contractual obligations under the CVA/IVA/scheme. It should establish the causal link between the event and its inability to perform. This will depend on the wording of the clause, it may need to show coronavirus ‘prevented’ (physically or legally impossible to perform), ‘impeded’ or ‘hindered’ (substantially more difficult to perform) the performance of its obligations, prevention being more difficult to rely upon. If an individual under an IVA is struggling to meet payments due to coronavirus, an example of ‘inability to perform’ could be because they are self-isolating and unable to work from home.

Mitigate

The affected party usually must show it has taken reasonable steps to avoid or mitigate the event and its consequences, showing there are no alternative means for performing its obligations. This is fact-specific and dependant upon the nature of the CVA/IVA/scheme. Due to the continued spread of coronavirus and its effect on businesses and its employees, there may be fewer alternative measures available. For example, a debtor subject to an IVA may show they are mitigating the consequences of the event (ie thecoronvirus pandemic) by working from home. A business subject to a CVA may show they are mitigating the consequences by limiting the spread of the virus in the workplace.

Practical steps

Coronavirus has the potential to be a force majeure event under an IVA, CVA, scheme or alternative arrangement depending upon the wording of the provision(s). If force majeure is not available to the debtor, they should contact their supervisor and explain their changed circumstances due to coronavirus. There may be alternative options under the arrangement which allow a payment break or short-term reduction in payments. If there is not an alternative provision, the creditors may consider whether to make necessary short-term adjustments to the arrangement, in light of coronavirus , to avoid breach. Similarly, under a CVA or scheme, it may be better for the company to discuss with creditors its options under the current circumstances.

On 27 March 2020, HMRC issued guidance to the effect that HMRC will support a minimum three month break from contributions from customers impacted by coronavirus and where the terms of a [voluntary] arrangement allow the supervisor discretion, we would expect that discretion to be exercised to its maximum, with reference to creditors only if essential. After the deferral period, from 1 July 2020, the supervisor or trustee representing a business or individual should be able to resume payments per the terms of any IVA, CVA and Trust Deed or contact Enforcement and Insolvency Service (EIS) to discuss a recovery Time to Pay arrangement depending on the circumstances (see LNB News 30/03/2020 118).

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