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How does the Insolvency law address the interaction between the Covid 19 pandemic and financial performance of UK companies?
Abstract stating your thesis or research question in no more than 300 words
COVID-19 outbreak has disrupted the entire function of the society at large. It has affected the entire social, political, economic and financial system across the world. The disruption of social life has impacted the behaviour of the consumers or customers. As such, it has also impacted the functioning of businesses. The pandemic outbreak has created slowdown of economic activities and a threat to businesses in their survival. This has presented the businesses with challenges to implement emergency short-term measures in order to meet severe difficulties to meet their financial obligations.
The liquidity constraint and the threat of becoming insolvent has led to the debate about mitigation measures in the form of tweaking insolvency laws allowing companies to take necessary measures of restructuring or other financial arrangements that could help them from becoming insolvent.
This research will explore measures in terms of implementation of insolvency laws that could help overcome any financing hurdles to survive and ensure companies build productive capacity in order to financially recover. This research will, therefore, explore, from on one hand, the legislative insolvency regime to discuss the approaches of authorities and agencies in implementing insolvency laws in context to the impact of and challenges imposed by COVID 19 pandemic outbreak and on the other hand, the challenges faced by businesses in complying with the approaches
This research will therefore attempt to answer the following research question
Whether the approaches of insolvency law effectively enable businesses to delay and avoid insolvency proceedings and facilitate restructuring and arrangements?
Whether state intervention measures, if any, are effective to enable businesses to explore opportunities of capital markets sustainability.
Outline of Proposed Contents with numbered section headings and aims and objectives of each section
Background of the COVID-19 pandemic outbreak and its impact on business.
This section will give a background about the impact of the pandemic outbreak on the business. It will discuss how the pandemic outbreak has disrupted the financial operation of the businesses and how it has pushed them to insolvency. This section will present insolvency law as the means to address the issues related to business at the brink of insolvency and the permanent and temporary measures in the context of insolvency law that could be taken to address the issues.
Insolvency law regime in context to challenges posed by COVID 19.
section will discuss the insolvency law and how it is structured, including the current COVID-19-based regulations and measures, designed to address insolvency issues including restructuring and arrangements. This section will thus explore the effect and their limitation of relevant laws, including the Corporate Insolvency and Governance Act 2020, the Corporate Insolvency and Governance Act 2020 (Coronavirus) (Extension of the Relevant Period) Regulations 2021, and The Corporate Insolvency and Governance Act 2020 (Coronavirus) (Early Termination of Certain Temporary Provisions) Regulations 2020.
State intervention measures
This section will explore whether or not measures implemented by states to help business in the pandemic crisis are being utilised effectively by businesses or are effective in delivering their desired objectives. This section will explore the government measures that intend to enabling private opportunities to companies, including measures such as providing sufficient liquidity for companies in order ensure continuity of business activity. This section will assess the measures of the government in terms of direct and indirect support to businesses to prevent any immediate insolvencies. It will discussed measures concerning tax, penalties, or enforcement that could indirectly financially support any distressed businesses or companies.
COVID-19 pandemic has caused severe economic consequences across all the countries. It has also affected the society at large. Because of this large scale impact, there has been dramatic changes in the behaviour of the businesses and consumers. Donthu and Gustafsson (2020) observed that because of COVID-19 pandemic outbreak, many of the businesses have closed and there has been an unprecedented disruption of industrial commerce. They also observed that the outbreak may likely cause bankruptcy for well-known brands. The World Bank also observed sharp increases in both personal and corporate insolvency. It observed that several countries are now implementing short-term insolvency-focused measures in order that firms and consumers have more breathing space until the time the markets stabilised and the assessment of business viability assessments is made. The UK also published its Corporate Insolvency and Governance Bill (the “CIGB”) on 20 March 2020 in address restructuring and insolvency regime. It gave effect to the Corporate Insolvency and Governance Act 2020 on 26 June 2020 in order to help provide for temporary and permanent changes to insolvency law, which aims to helping businesses manage the economic implications of the COVID-19 pandemic. For example, Schedule 7 of CIGA provides for Part 26A into the Companies Act 2006, titled ‘Arrangements and Reconstructions: Companies in Financial Difficulty.’ This Part 26A provides for arrangement of compromise between a company and its creditors or members in case of financial difficulty that is affecting the company’s ability to carry on its business as a going concern.
Sarah Paterson (2020) observed that the UK government published in 2018 proposals to reform corporate bankruptcy law. However, it did not include a rescue finance regime. The CIGB of 20 March 2020 also did not also include a new regime. Hence, Paterson (2020) observed that the reorganisation tools do not offer any
explicit financial tools. This, however, has not been much problematic as both the borrowers and creditors have been driven to negotiation using a maintenance financial covenant breach while the business operates liquidity. The observation here shows less employment of tools or provisions of insolvency laws, but parties’ exercise of contractual rights and liabilities. This research will explore circumstances such as this in order to assess the reason whether or not insolvency legal regime serves its objective in the light of the outbreak of the pandemic. In relevance to such kind of circumstance, Eugenio Vaccari (2020) cited the example of Section 214 of the Insolvency Act 1986 in context to the economic impact of the Covid-19 outbreak. As one of the emergency fiscal and legislative measures in order to address liquidity and legal problems, the UK government announced suspension of Section 214 that governs wrongful trading provision. This measure will applies retrospectively from 1 March 2020 for a period of three (3) months period or one (1) month after the CIGA 2020 comes into effect. Vaccari (2020) assesses the need for such a measure, and suggests suspension measures did not bring any changes and did not serve the desired. It did not do anything to facilitate the rescue of businesses or their survival. Vaccari (2020), instead, suggested that the suspension of personal liability actions against directors may curb the rule of law as civil liability remedies may be restricted without justification.
Considering the circumstances as above, this research will explore the research questions in hand and focus on determining whether or not the insolvency law regime and state intervention have brought relief to the businesses in distress due to the pandemic crisis.
The background of this research and the research questions show that the research will include multi-layered subject and will require in depth research. As such, this research will adopt qualitative research method.
This research will involve collection of data that are of non-numerical nature, which is a characteristic of qualitative research. In qualitative research, the research design does not need formulation of a hypothesis. It requires the researchers to use research questions in order to explore their answers. Thus, this research will use the research questions laid down above to explore how insolvency law addresses the interaction between the Covid 19 pandemic and financial performance of UK companies. This research will probe the legislative insolvency regime to understand whether or not it is conducive for businesses in the pandemic crisis to facilitate restructuring and arrangements in order to meet challenges of insolvency proceedings. It will also probe whether businesses could access opportunities provided by state intervention measures in order to sustain capital markets. Thus, there are multiple aspects to the research questions that present a complex area of research. The qualitative research method will, therefore, be useful as it will allow the researcher to explore these different aspects involved.
The qualitative method will employ a deductive approach where the researcher will apply a general theory to the specific case or context involved in this research. In this method, the researcher will start with a theory that is initially identified by the researcher. A pandemic like COVID 19 has disrupted social, economic and political structure of the world. It has disrupted the economic and financial structure and operation of companies pushing the government to make laws, including insolvency laws, to help companies sustain and operate its finances. Based on this theory, the researcher has developed the research questions. Accordingly, the researcher will
collect data and observations related to the theory and will attempt to confirm the theory analysing the data.
Creswell JW, Qualitative Inquiry and Research Design: Choosing Among Five Approaches (Sage 2013)
Green S, JPT Higgins, P Alderson, M Clarke, CD Mulrow, AD Oxman, ‘Introduction’ in Julian P. T. Higgins and Green Sally, Cochrane Handbook for Systematic Reviews of Interventions (John Wiley and Sons 2011)
Paterson S, Corporate Reorganisation Law and Forces of Change (Oxford University Press 2020) Vaccari E, 'Changes to UK Insolvency Rules in the Wake of Covid-19: A Much-Needed Help for Businesses or an Unjustified Harm to the Rule of Law?' in Carla Ferstman and Andrew, Fagan (eds.), Covid-19, Law and Human Rights : Essex Dialogues. A Project of the School of Law and Human Rights Centre (University of Essex 2020)
Perrin K, Principles of Evaluation and Research for Health Care Programs (Jones and Bartlett 2015). Willis JW, Mukthta Jost, Foundations of Qualitative Research: Interpretive and Critical Approaches (Sage 2007)
Donthu N and Anders Gustafsson, ‘Effects of COVID-19 on business and research’ (2020) (117) Journal of business research 284-289
The World Bank Group, ‘COVID-19 Outbreak: Implications on Corporate and Individual Insolvency’ (2020) accessed on 27 March 2021
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