There are several factors that may give rise to an economic recession, whether local or global, such as stock market crash, asset bubbles, credit constraints or natural hazards. And while it may be possible for governments and regulators to identify certain factors signaling an imminent recession and act on them early enough to prevent a large-scale recession, other factors cannot be foreseen so easily nor constrained.
With this in mind, upon an imminent or ongoing recession, governments focus on measures that can lead to a recovery of all businesses, households and the economy at large. An essential element of such measures is, in most cases, reforming national insolvency frameworks to suit the times needs.
Thus, during the great depression of the 1930s, that followed the stock market crash of October 29th 1929, Roosevelt’s government introduced measures on relief of the unemployed, recovery of the economy and reform of the financial system, which included a new Bankruptcy Act that restricted the ability of banks to repossess farms. Similarly, prompted by the effects of the recession of the early 1980s the British government introduced the Insolvency Act and the Directors’ Disqualification Act, both of 1986. Also, in 2002 that was amidst Argentina’s financial crisis, amendments to the Argentine Bankruptcy Law were introduced in order to boost the use of the existing prepackaged reorganization plan by corporations facing financial difficulties.
In more recent times, which saw the recession of the 2000s, the recovery proved to be slower due to global integration of markets. Further this recession was initiated and prolonged by a banking crisis, so regulators at first turned to measures to support banks, such as the bank rescue package issued by the British Government in 2008 and the Troubled Assets Relief Program enforced in the U.S by the Emergency Economic Stabilization Act also of 2008. In its climax however, several European countries then looked to reform their insolvency regimes in terms of providing new restructuring tools and better regulation of the insolvency practitioners professions, to ensure higher level of expertise.
Today, governments around the globe are contemplating to take on measures to constrain and recover from the Covid-19 forthcoming recession, an unforeseen global recession caused by a pandemic the impact of which has been compared to World War II. Whether we have learned our lesson on the measures to be taken for a quick recovery, remains to be seen in the next decade. Yet, the swift and determinative response on the financial impacts of the pandemic of several countries has been remarkable. Some of them have identified from the outset the need to introduce preliminary and long-term reforms to their insolvency regime with a view to stabilize businesses.
Weeks after they have been hit by the coronavirus, countries such as Germany, Luxembourg, Portugal and Spain suspended or relaxed with immediate effect the statutory obligation of directors to file for insolvency of an over indebted company. In the Czech Republic, Hungary, Italy, Latvia, Ukraine and Finland the temporary measures introduced prevent a creditor from filing for the insolvency of a debtor and suspend the statutory obligation of a debtor to file for insolvency for a certain time, while Armenia, India, Australia and Scotland applied temporary increase in thresholds of debts to initiate insolvency proceedings.
The UK on the other hand, amidst the fiscal instability caused by Covid-19 and Brexit, introduced corporate recovery mechanisms that are in line with the preventive restructuring frameworks provided by European Directive 2019/1023; yet to be enforced by European Union’s member states. In particular, these include (a) a moratorium allowing companies a breathing space from creditors’ claims, (b) protection of supplies in order to secure continuity of trading, (c) a new restructuring plan binding creditors and (d) temporary suspension of wrongful trading provisions to allow some flexibility to directors to take measures for the companies’ recovery.
In Cyprus, as per the current insolvency legislations, one or more creditors may file for the bankruptcy of an individual if they are owed collectively €15.000 or more. This applies to all natural persons, including entrepreneurs trading in their own capacity and all self-employed individuals, irrespective of the size or budget of their business or the number of people they employ. A company, on the other hand, may be wound up by a creditor for a debt of just €5.000 that’s been due for three weeks.
With thοse provisions in place, a large number of businesses whose operations have been suspended or restricted as a result of the Covid-19 contingency measures, may be wound up by their creditors at any time. In view of this imminent danger of liquidation, which results in the immediate close down of the business, the temporary suspension of a landlord’s right to evict a statutory tenant introduced in the Rents Control Act as a measure for the financial relief of these businesses, is immaterial.
Also some insolvency law provisions on transactions avoidance, although rarely implemented by liquidators and trustees in bankruptcy, may prove to be burdensome on directors and entrepreneurs in the case of a liquidation of their business in the near future, since now they shall look to liquidate assets or mortgage property in order to get credit and continue trading. An example of this is the provisions of section 303 of the Companies Law by which a floating charge created up to 12 months prior to the commencement of liquidation of a company may be deemed a voidable transaction.
In view of the ongoing reduction in operations of several businesses impacted by the Covid-19 related contingency measures, such as those working in the hospitality and tourism industry, perhaps it’s not too late to introduce some reforms to the Cyprus insolvency law that will limit their risk of insolvency.
