COVID-19 impact on restructuring and insolvency

COVID-19 impact on restructuring and insolvency

This article looks at how COVID-19 may affect the restructuring and insolvency arena.

We are already seeing various company failures around the world attributed to the new coronavirus (COVID-19), including Flybe in the UK. We look at how COVID-19 may impact restructuring and insolvency generally over the coming months.


What are the practical implications? 

We have already seen several corporate failures around the world linked to COVID-19, including:


  • UK airline, Flybe: although it was not just COVID-19 that brought down Flybe, the decline in travel demand in reaction to the outbreak was the final straw
  • US diabetes drug technology company, Valeritas Holdings Inc: cited COVID-19’s impact on its Chinese factories for its bankruptcy
  • Chinese-owned oil company, Hontop Energy (Singapore) Pte Ltd: partially suspended trading due to the COVID-19 outbreak and appointed KPMG as receiver
We are likely to see many more corporate failures in areas including:

  • tourism and travel: airlines, travel companies, cruise line operators and hotels
  • manufacturers reliant on parts from China/badly affected countries for their supply chain (eg the automotive sector, which is already stressed)
  • retailers depending on customers/tourists from China and other badly affected areas (eg many high end/luxury retailers)
  • oil producers (oil prices recently dropped by more than a fifth and demand for fuel is expected to fall with COVID-19; see Practice Note: Guide to insolvency in the UK oil and gas industry)

Up to one-fifth of UK employees could end up absent from work during peak weeks of the spread of COVID-19, the UK government said in its action plan last week. The Government’s action plan, second phase (delay phase) could include population-distancing strategies (such as school closures, encouraging greater home working, reducing the number of large scale gatherings) to slow the spread of the disease throughout the population. With the potential of port and travel restrictions, a reduction in consumer spending in China and beyond, a decline in energy demand, and factory, retail and office closures, businesses in almost any sector in many countries could be affected.

A slowdown in M&A deals is predicted and on 9 March 2020, the FTSE saw its worst day since the 2007/2008 financial crisis after it fell 8% in early trade. 

However, companies which produced Brexit No-deal plans to cope with supply chain delays may well benefit from re-purposing them to address COVID-19 supply chain related delays.

Impact on the banking sector

On 3 March 2020, Mark Carney, Bank of England (BoE) Governor advised a House of Commons committee that the effectiveness of UK banks’ contingency plans to prevent their operations being hit by a pandemic is being put to the test given the COVID-19 outbreak. The BoE is in ‘daily, hourly’ contact with banks and other major financial institutions as they bring in their contingency plans, which include requiring staff to work at second sites or remotely.

The BoE’s own Prudential Regulation Committee is assessing the operational risks and ability of banks and financial market infrastructure firms to serve customers and markets with split teams and remote working. Mr Carney said across jurisdictions, there will be differences in form and exact timing. But the response will share a goal, which is to achieve this bridging, support the economy through a potentially challenging period (see News Analysis: Banks’ pandemic contingency plans being tested given coronavirus, BOE's Carney says).

On 4 March 2020, the Financial Conduct Authority (FCA) released its first statement on COVID-19, confirming that it is working alongside the BoE in actively reviewing the contingency plans of a wide range of firms.

Other large non-financial firms are also running similar contingency plan testing throughout the coming weeks and limiting non-essential business travel to affected countries.

Impact on clauses in finance documentation 

Many loan agreements (including the Loan Market Association’s template documents for leveraged finance transactions) contain ‘Material Adverse Change (MAC) events of default, allowing lenders to accelerate the loan if a material adverse change occurs to, for example, the ‘business, operations, property, condition or prospects of the borrower’ or ‘on the ability of the borrower to perform its obligations under the finance documents’. 

Parties are already starting to specifically carve out COVID-19 from their MAC clauses in corporate transactions. For example, Morgan Stanley and E*Trade Financial Corp’s Agreement and Plan of Merger (20 February 2020), excludes for both buyer and seller: ‘any...epidemic, pandemic or disease outbreak (including the COVID-19 virus)’ from the events, circumstances, developments, changes, or occurrences that constitute, or are reasonably likely to result in, a material adverse effect on ‘the condition (financial or otherwise), assets, liabilities, business or results of operations.’

Parties may also need to review the current wording of any force majeure and event of default clauses as well as the doctrine of frustration to assess the impact of COVID-19:
  • force majeure (unforeseeable circumstances) such as the outbreak of COVID-19 that prevent a party from fulfilling its contractual duties may fall under the force majeure clause of that contract, particularly if it expressly refers to epidemics. Further, if force majeure includes acts of government, that may include any travel bans imposed in the future (see Practice Note: Discharge by force majeure)
  • events of default: cashflow and other typical financial covenants may be breached as income deteriorates. A failure to make an interest or capital repayment on its due date will in most cases constitute an event of default (see Practice Note: Events of default)
  • frustration: essentially where the event: (1) is not reasonably foreseeable and (2) radically changes the contract terms (see Practice Note: Discharge by frustration) 

Lenders may also be considering whether any specific due diligence should be carried out where there is (or potentially could be) a specific COVID-19 related risk. Bespoke conditions precedents may be required, or the deal may be put on hold until this period of uncertainty passes.


Businesses will also need to check the terms of any business interruption insurance; this may cover loss of profits and increased working costs but, traditionally, such policies require that such loss arises from physical damage sustained to insured property, which is not the case as regards COVID-19. Some modern business interruption insurance (sometimes called ‘contingent BI’) is designed to respond when businesses suffer loss indirectly because, for example, of supply chain failure or inability to attend business premises. 

Additionally, following the SARS outbreak, many insurers now exclude business interruption losses arising out of the spread of infectious diseases. Businesses may, however, opt to buy back cover for this by means of infectious diseases extensions.

Further, some insurance policies exclude infectious diseases explicitly, whilst others are conditional upon a public body declaring either that the outbreak amounts to a pandemic or is a notifiable disease (on 4 March 2020, the UK government announced that COVID-19 is now listed as a notifiable disease). However as COVID-19 was declared as notifiable in Scotland, Northern Ireland and England on different days, this may complicate matters for companies with operations in several countries.

Additionally, key man policies should be checked as some may provide cover if critical employees become ill or otherwise unable to work.

The Association of British Insurer’s advice is for policyholders to check their policy and they have reassured the public that all UK insurers are capitalised to withstand a range of severe events, including pandemics, through Solvency II. 

Closure of courts

It has been reported that the Hong Kong Court of First Instance has partially re-opened after closing for several weeks due to the COVID-19 outbreak, handing down various delayed judgments, including a scheme of arrangement. 

Parties needing to restructure in countries where courts are closed or running skeleton services will need to bear this additional factor in mind when choosing venue.

Key takeaways

It is clear that the financial world is far more interconnected these days, meaning financial shocks in one country can cause significant ripple effects in other countries. Here, the effects involve many more factors than simply the financial shocks; increased connectivity means illnesses can travel more rapidly around the world. 

For businesses facing short term cash flow issues (for example, as the result of subdued demand), the Government has flagged that one possible mitigation strategy already exists in HMRC’s Time To Pay system. This is offered on a case-by-case basis if a firm or individual contacts HMRC about falling behind on their tax.

R&I lawyers should be prepared to assemble teams tackling the various trade, health care, employment, insurance and corporate law issues that COVID-19 will likely throw up. The UK R&I market has shown its resilience to dealing with the uncertainties surrounding Brexit and some of that planning may well prove useful in preparing for one likely consequence: supply chain delays arising from COVID-19.

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About the author:
Kathy specialises in restructuring and cross-border insolvency. She qualified as a solicitor in 1995 and has since worked for Weil Gotshal & Manges and Freshfields. Kathy has worked on some of the largest restructuring cases in the last decade, including Worldcom, Parmalat, Enron and Eurotunnel.