The Co-Vid 19 pandemic has caused consequences beyond the imagination of anyone in the business community. The outbreak of a virus which has brought the world to its knees has basically altered thoughts of growth projection to now a “do or die” battle for survivability.
The impact of business especially the SME sector is of such a great nature that many companies now currently having no revenue because of the forced closure will upon the lifting of the movement of restriction face even tougher challenges of a likely weaker economy and reduced spending power.
Most companies currently facing this predicament are not intentionally trying to run away from meeting their debt commitment but however require time to restructure their business to face this unexpected challenge. There are legal remedies to assist companies to weather such storms;
- Scheme of Arrangement – Section 366 Companies Act 2016
- Judicial Management – Section 404 and 405 Companies Act 2016
- Corporate Voluntary Arrangement – Section 396 and 397 Companies Act 2016
The Company either on its own accord or via the appointment of a scheme advisor tasked to evaluate the company financial position will thereby formulate a proposal that would restructure the outstanding debts of the company. The scheme of arrangement will detail the proposal of the company and how can the debts of the company be repaid.
All the above legal provision have in common that there must exist a Proposal or in legal terms a Scheme of Arrangement between the company and in creditors. There is no fixed form for the Scheme of Arrangement but is subject to the practicality and financial position of the company. It is also common for when Scheme of Arrangement are proposed;
- To request for extension of the repayment of the loan period
- proposed reduction of the repayment of the debt to be paid
- To repay the debtors instead of cash only but by way of shares or warrants
- Sale of Assets of the Company and proceeds utilized for the creditors benefits
- To allow “white-knight” to acquire the company and satisfy debts owed by the Company
- To formulate scheme of arrangement specifically to a certain class of creditors of the company
- To utilize proceeds of new sales order/projects to repay the creditors
All the above Legal Provision provides for statutory protection to Companies either by way of Restraining Order or Moratorium which in essence;
- Restraining Order or Moratorium is a court order or statutory provision which “suspends” all legal proceeding against the company
- Preserves status quo of any pending legal proceeding
- Prohibits the Commencement of new legal proceeding
- Preserve the Assets of the Company
- No Foreclosure/Execution against the assets of the company
- No winding up order to be granted during this period
The purpose of the Restraining Order or Moratorium is to allow companies to call the Court Convened Meeting. During this interim period, it will preserve the assets of the company while providing an opportunity to restructure and rehabilitate the company.
With the Restraining Order or Moratorium, Companies can focus on strategizing their company business instead of focusing on the strain of legal proceeding or the threat of winding-up. This statutory protection provides a breathing space to companies to ultimately work on rehabilitating their Company’s financial position and ultimately benefit the creditors.
Any Successful Scheme of Arrangement with the requisite statutory majority of 75% will bind the creditors of the company including those that disagree or decline to vote. Creditors will have to consider commercial reality and apply commercial sensibility where is it better to approve the scheme of arrangement and make recovery of their monies instead of winding up companies and recover negligible sums especially due to this Co-Vid 19 Virus Outbreak which nobody could have foreseen.
In conclusion the legal remedies provided by the Companies Act 2016 provides an opportunity for the;
- Company not to evade its debts owed but provides a fair proposal to restructure its debt for the ultimate consideration and approval by its creditors AND
- Creditors to ultimately consider the proposed scheme of arrangement and obtain recovery of its debts or achieving success by the financial doom of the company upon winding the Company but not recovering any of its debt.