• Maria Polycarpou

Restructuring and Insolvency Law (R&I): A ‘winner’ of 2020

The global pandemic has disrupted the majority of the world’s industries, the legal industry being no exception; this disruption has changed the trajectory of demand for certain types of legal services. Notably, law firms have reported a substantial increase in demand in their insolvency and debt restructuring sectors. In this article, we will explore the reason behind this increase in light of recent developments in the law surrounding this area, and how law firms are adapting to this increase.


Typically, a company becomes insolvent if its assets are insufficient to discharge its debts. The role of a restructuring lawyer is to advise the client and negotiate agreements on how to repay debts without going insolvent. If a company then becomes insolvent, an insolvency lawyer, acting for either debtors or creditors, undertakes contentious work in all stages of the insolvency process; this involves negotiating company voluntary arrangement, administration, and receivership as well as the liquidation stage where company assets are used to pay off outstanding debts.


As the government-imposed lockdown measures came into effect in the UK, it was believed that the negative effect of the recession would push many companies into insolvency. However, according to The Insolvency Service statistics, there was a 34% decrease in company insolvencies in July 2020, compared to the same month of the previous year. This is likely driven by Government measures put in place in response to this very concern, namely through the Corporate Insolvency and Governance Act, which received royal assent on the 25th of June.


The Act's most notable amendment concerning the pandemic is a temporary suspension of wrongful trading provisions for company directors. These changes allow directors to run their businesses, without fear of incurring personal liability if the company goes into liquidation. These changes have decreased insolvencies by mitigating the possibility of voluntary insolvency, triggered by directors to avoid fears of wrongful trading. Another major change is the extension of a moratorium of up to 90 days in duration that will grant companies facing COVID-19-related liquidity issues the time and "breathing space" to seek a rescue or to restructure and prevent creditors from enforcing debts during that period.


The implementation of these measures under the Act have increased demand for insolvency and restructuring legal services as companies seek legal counsel to navigate these changes. Increased demand also likely stems from company creditors concerned by the lack of wrongful trading provisions. The loss of compensation from directors if they minimise the pool of assets available to creditors in liquidation, raises fears for potential abuse by reckless directors during the pandemic.


Despite the decrease in overall insolvencies, there has been an increase in corporate restructurings during the pandemic. The rise in counter-cyclical work is owed to month-long business closures in the course of the UK lockdown. Several high street businesses have not survived its detrimental effects. A recent example is the high street Italian restaurant Carluccio’s going into administration with 73 stores across the UK. The end of the government furlough scheme also plays a significant role as, now, struggling businesses seek advice for possible redundancies.


How are law firms dealing with this rise in countercyclical work? Some firms, such as CMS, have relocated lawyers from across the firm to their restructuring and insolvency practice in order to manage the increasing workload. Others, such as Hogan Lovells have considered lawyer restructuring secondments to cover their restructuring work boom.


The effects of COVID-19 on this sector of the law will continue to be felt in the foreseeable future, as the world has been plunged into yet another recession. But as in every recession, there are “winners” and there are “losers”. In this case, the losers are innumerable businesses surrounded by uncertainty. Whereas one of the (only) winners are law firms with established restructuring and insolvency practices.



#law #blog #insolvency #restructuring #legalservices

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