legal trends magazine


TRENDS Legal Magazine – Insolvency & Restructuring No 2 (March-April 2021)

It is almost one year since the pandemic enter our lives to stay for longer than we initially thought. The World Bank in its initial report dated April outlined what it is now a reality: “The COVID-19 pandemic has impacted firms by reducing demand for their products and services, disrupting the supply of inputs and tightening the provision of credit”.

It already resulted in a shock to the financial system in the form of increases in non-performing loans, insolvency filings, unnecessary liquidations, and asset fire-sales. In the own words of the World Bank: Government responses so far have been a mix of regulatory forbearance, higher barriers to entry into formal insolvency proceedings and the extension of procedural deadlines. So far, the Governments response has been in the form of short-term measure mainly focus on preventing viable firms from prematurely being pushed into insolvency. The result in most of the countries has been the increase of what is called “zombie companies”. Companies that while unable to cover debt servicing costs from current profits over an extended period, are now unable to resort to insolvency proceedings while its situation does not improve. The pandemic is adding a long list of companies to those already in existence.

According to the Financial Times (December 2020, Robin Wigglesworth) quoting the Bank for International Settlements, calculation of the share of zombie companies across the 14 big economies it studied had climbed from 2 per cent in the late 1980s to 12 per cent by 2016, companies neither recovering nor dying out. The most likely reasons for this according to the FT and the BIS were the falls in interest rates that reduced debt repayments and banks being “reluctant to pull the plug”. The recent pandemic measures adopted by Governments across the Glove do not help to reduce and endemic problem, quite the contrary. A mix of some lack of creative legislative capacity, not enough funding in the court system and an absence of long-term measures simply proroguing every six months or so, the short-term measures, are only rocketing the number of zombie companies in some jurisdictions.

At the LFN, the Insolvency and Restructuring Practice Group is closely monitoring legislation reforms and insolvency related measures aiming to complement the legislative changes by the publication of the Insolvency and Restructuring TRENDS magazine that you have in your computer now. This issue touches on legislations enacted in Denmark, Colombia, Ireland, Italy and The Netherlands as well as some UK case law. But the Group is also following up these changes in other formats. The LFN is launching “A Matter of Law” a series of podcast on a variety of legal issues affecting industry sectors, commencing with the retail sector, on of the most severely affected economy sectors by the pandemic. The Podcast “Boom or Bust in the retail sector – Covid perspectives from some of our European partners” will open the way to an analysis on the impact of Covid in the retail industry in different parts of the world.

Contact our Insolvency and Restructuring Practice Group co-chairs Monika Lorenzo-Perez in the UK and Peter Krarup in Denmark for more detailed information.

Rafael Truan Blanco, LFN Executive Director

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