1. Coronavirus Large Business Interruption Loan Scheme
On April 3, 2020, the Chancellor announced further action to make government-backed and guaranteed loans available to larger companies not currently benefiting from CBILS (the April 3 Announcement).
Under CLBILS, banks will be able offer loans of up to £25 million to firms with an annual turnover of between £45 million and £500 million and receive a government guarantee for 80 percent of the loan. These loans will be offered at commercial rates of interest.
The April 3 Announcement stated that further details about CLBILS will be given later this month.
2. Coronavirus Business Interruption Loan Scheme
The April 3 Announcement also announced various updates and changes to CBILS, intended to ease access to finance under the scheme.
2.1 CBILS Available to All Viable Businesses
Previously, if a lender could offer financing to a business under normal commercial terms, instead of under CBILS, it was obliged to do so. However, this has been altered by the April 3 Announcement; CBILS is now available to all viable small businesses, not just to those unable to secure regular commercial financing.
2.2 Personal guarantees
Banks are now prohibited from requesting personal guarantees for loans under £250,000. For loans over £250,000, personal guarantees will now be limited to just 20 percent of any amount outstanding on the loan after any other recoveries from businesses assets. These rules will apply to loans already offered under CBILS, to ensure parity of government protection for all business owners.
2.3 Update on Progress of Loan Approvals
The April 3 Announcement noted that 983 businesses have had finance approved under CBILS, for loans totalling £90 million, and that banks are processing “thousands” of loan applications.
March 24, 2020
In our previous Update, below, we examined (i) the legislation that gives the UK government and regulators emergency powers and (ii) the action the UK had taken so far. We will now examine further steps and measures taken by the government since that Update was published, and some of the steps industry has taken in response to the COVID-19 outbreak.
1. Coronavirus Bill 2019-2021
The government announced on March 8, 2020, that it intended to introduce the Coronavirus Bill 2019-2021 (the Bill).
For a summary of the proposed provisions, please refer to our previous Update, below. By way of reminder, the Bill focused on five key areas: increasing the available health and social care workforce; easing the burden on frontline staff; containing and slowing the virus; managing the deceased with respect and dignity; and supporting people.
The Bill was laid before Parliament on March 19 2020 and had its second reading on March 23, 2020. The House of Lords is currently considering the Bill.
The powers contained in the Bill will not all come into force immediately; rather, the Bill allows the government to introduce the new powers when it is deemed they are required.
The Bill will be time-limited and was initially to expire after two years. There was criticism that this time limit was too long, given the extensive powers contained in the Bill. The government subsequently introduced an amendment, and the Bill must now be renewed every six months.
1.1 Protection for commercial tenants from eviction
As part of the measures introduced under the Bill, the government has announced that commercial tenants unable to pay rent because of the effects of COVID-19 will be protected from eviction. This temporary ban will operate for three months, and commercial tenants will still be liable for their rent after this period.
2. Steps Taken to Support Businesses Affected by the COVID-19 Outbreak
On March 20, 2020, the Chancellor announced additions and amendments to those economic support measures already announced (the Further Announcement) in both the government’s budget announced on March 11, 2020 (the Budget) and the announcement by the Chancellor on March 17, 2020 (the Announcement).
2.1 Government-backed and guaranteed loans
It had been previously announced that there would be an initial £330 billion of government-backed and guaranteed loans made available to businesses. These facilities are now available for businesses to draw on.
COVID Corporate Financing Facility (the Facility)
This Facility is to support larger firms that can demonstrate they were in sound financial health prior to the impact of COVID-19 and that they make a “material contribution” to the UK economy. It is designed to support liquidity and to assist in bridging cash flows. Use of the Facility will be confidential.
The Facility will operate through the purchase of short-term debt, issued by companies in the form of commercial paper. To be eligible for purchase by the Facility, the commercial paper must have a maturity of one week to 12 months; have a credit rating of A-3/P-3/F-3/R3 from at least one of Standard & Poor’s, Moody’s, Fitch and DBRS Morningstar (or equivalent); and be issued directly into Euroclear and/or Clearstream.
Commercial paper issued by banks, building societies, insurance companies, entities regulated by either the Bank of England or the Financial Conduct Authority, leveraged investment vehicles or companies within groups predominately active in businesses subject to financial sector regulation will not be eligible.
The minimum size of an individual security that the Facility will purchase from a participant is £1 million nominal, and the Facility “will offer financing on terms comparable to those prevailing in markets in the period before the Covid-19 economic shock.”
Further information on the Facility is available on the Bank of England’s website.1 To determine their eligibility, companies are first advised to speak to their bank.
Coronavirus Business Interruption Loan Scheme (CBILS)
CBILS is to support lending to small and medium-size businesses (those with a turnover of up to £45 million). To be eligible, the borrower must have a borrowing proposal that would, were it not for the pandemic, be considered viable. Banks, building societies, insurers, reinsurers, public sector bodies, employer/professional/religious or political membership organizations and trade unions are not eligible.
As explained in our previous Update, below, CBILS will provide loans of up to £5 million, available through more than 40 accredited lenders, who will receive government-backed guarantees. Such loans were initially to be interest-free and fee-free for six months, but the government stated in the Further Announcement that this period would be extended to 12 months. (However, note that this period may be shorter for fishery, aquaculture and agriculture businesses.)
Finance terms are up to six years for term loans and asset finance facilities and up to three years for overdrafts and invoice finance facilities. The scheme may be used for unsecured lending for facilities of £250,000 and under.
Further information about CBILS is available through the British Business Bank.2
2.2 Coronavirus Job Retention Scheme
The Further Announcement set out the previously unannounced Coronavirus Job Retention Scheme (the Scheme), under which employers will be able to contact Her Majesty’s Revenue and Customs for a grant to cover the majority of the wages of people who are not working but are furloughed and kept on payroll rather than being laid off.
The grants under the Scheme will cover 80 percent of the salary of retained workers up to a total of £2,500 a month. It will cover the cost of wages backdated to March 1, 2020, and will be open initially for three months. The Chancellor stated in the Further Announcement that he will extend the scheme for longer if required.
It is currently anticipated that the grants will be available by the end of April.3
3. Trends in Industry Response
3.1 Covenants in loan agreements
Companies are struggling to comply with covenants in loan agreements, anecdotal evidence suggests — particularly those that relate to borrowing limits, as the COVID-19 outbreak increases the need for borrowing to sustain cash flow.
There have been reports that borrowers are attempting to combat these struggles by introducing clauses that allow them to add estimates of revenues that would have been collected under normal circumstances into their leverage calculations. However, investors are unsurprisingly wary of allowing such language to be included in loan agreements.
3.2 UK regulators
Financial regulators (the Financial Conduct Authority, Bank of England and Prudential Regulatory Authority) have postponed “noncritical” regulatory work. Delays in implementing upcoming reforms are also expected.
1 Covid Corporate Financing Facility (CCFF): information for those seeking to participate in the scheme
2 Coronavirus Business Interruption Loan Scheme
3 Coronavirus - Business support to launch from today, March 23, 2020
March 18, 2020
As the COVID-19 outbreak continues to escalate and the financial markets fall at levels not seen since the 2008 financial crisis, governments are taking increasing steps to try to prevent the spread of the virus and to mitigate the economic fallout. This Update examines the legislation that gives the UK government and regulators emergency powers, and the action that has been taken in the UK so far.
1. Emergency Measures Legislation
1.1 Civil Contingencies Act 2004 (the CCA 2004)
The CCA 2004 is constituted of two parts: local arrangements for civil protection (part 1) and emergency powers (part 2).
(a) Local arrangements for civil protection
Part 1 identifies the roles and responsibilities of local responders and designates those local responders into category 1 (emergency services and local authorities) and category 2 (utility and transport companies).
Each category of responders has certain statutory duties, such as putting in place emergency plans and business continuity management arrangements, cooperating with other local responders and providing advice and assistance to businesses and voluntary organizations about business continuity management.
(b) Emergency powers
Part 2 provides the government with powers to pass emergency regulations to deal with emergencies that threaten “serious damage to human welfare” or that threaten damage to the environment or the security of the UK. Damage to human welfare is defined to include disruption to transport networks or to the supply of food, money, energy or health services.
Such temporary legislation must be approved by both the House of Commons and the House of Lords within seven days, or the regulations will lapse. In any event, all emergency regulations lapse after 30 days.
1.2 Stabilization of the banking sector
The Banking Act 2009 (the BA 2009) provides a special resolution regime (SRR) in the event that a bank fails. The SRR consists of
a) five pre-insolvency stabilisation options:
i. transfer to a private sector purchaser;
ii. transfer to a bridge bank controlled by the Bank of England;
iii. transfer to an asset management vehicle with a view to maximizing its value through an eventual sale or an orderly wind-down;
iv. a bail-in option, where the claims of shareholders and unsecured creditors are written down and/or converted into equity to restore solvency; and
v. as an option of last resort, transfer to temporary public sector ownership;
b) a bank insolvency procedure; and
c) a bank administration procedure.
As the last stabilization option, the BA 2009 gives the government the power to nationalize banks, as it did following the financial crisis in 2008. The Treasury will exercise this power only if its use is necessary either (1) to resolve or reduce a serious threat to the stability of the UK financial systems or (2) to protect the public interest, where the Treasury has provided financial assistance, or the Bank of England has provided extraordinary public support, to the bank.
The BA 2009 provides for the Treasury to make orders to provide compensation to the holders of securities or property that is transferred under the powers. Public funds may only be used if 8 percent of the bank’s total liabilities has already been exposed to loss. The decision to use public funds is also subject to approval from the European Commission under EU state aid rules.
Before the BA 2009 was introduced, the Banking (Special Provisions) Act 2008 (the B(SP)A 2008) granted the Treasury the power to nationalize high-street banks in an emergency. The powers were introduced to nationalize Northern Rock in 2008. The B(SP)A 2008 provides that the powers may not be exercised after the period of one year from the day on which it was passed. They therefore expired on February 21, 2009, when the B(SP)A 2008 was superseded by the Banking Act 2009.
1.3 Short selling
Given the recent falls in the stock market, there may be increased regulatory focus on short selling. This is the practice of selling securities that are not owned by the seller in the hope that the price of the securities subsequently falls so that they can be acquired at a lower price in the future. This practice is regulated by the EU Short Selling Regulation (Regulation 236/2012) (the SSR).
The SSR contains restrictions on entering into “uncovered” short positions, which are those in which sellers do not hold the shares they are selling. It also requires holders of net short positions to make notifications once certain thresholds are breached.
Where the price of a financial instrument falls significantly (in the case of liquid shares, by 10 percent or more) during a single trading day, the Financial Conduct Authority (FCA) may prohibit or restrict investors from short selling that financial instrument. The FCA used this power to prohibit short selling on a number of company’s shares on March 13, 2020.
In the event of adverse events or developments that constitute a serious threat to financial stability or to market confidence, the FCA may also
a) extend the scope of the notification and disclosure regime to include additional financial instruments;
b) require lenders of financial instruments to notify the FCA of any significant change in their fees;
c) prohibit or impose conditions on investors entering into a short sale of any type of financial instrument; and
d) restrict or limit entering into sovereign credit default swap transactions.
In exceptional circumstances, the European Securities and Markets Authority may intervene and require notification of net short positions or prohibit or impose conditions on the entry into a short sale.
2. Emergency Steps Taken by the Government to Date
2.1 Power to detain or isolate suspected patients
The government used the emergency procedure in section 45R of the Public Health (Control of Disease) Act 1984 to introduce the Health Protection (Coronavirus) Regulations 2020. They were approved by Parliament on March 9, 2020, and contain a sunset clause of two years, meaning they will lapse in two years if not renewed.
The regulations give health professionals power to detain patients for screening and assessment and to isolate such patients. Under the regulations, the police can also detain anyone suspected of having COVID-19.
The government has stated that these regulations are intended to apply to people who attempt to leave supported isolation before the current quarantine period of 14 days is complete.
2.2 Proposed COVID-19 emergency bill
The government announced on March 8, 2020, that it intended to introduce a COVID-19 emergency bill (the Bill). The Bill will be laid before Parliament on March 19, 2020.
The powers contained in the Bill will not all come into force immediately; rather, the Bill allows the government to introduce the new powers when it is deemed they are required.
The Bill will be time-limited and expire after two years.
(a) Increasing the available health and social care workforce
The Bill enables regulators to emergency register suitable people as regulated healthcare professionals, including recently retired medical professionals and students near the end of their training. To support this, the rules preventing National Health Service (NHS) staff who return to work after retirement from working more than 16 hours a week will be suspended, as will the rules on drawdowns of NHS pensions when retirees return to work.
The Bill also enables regulators to add social workers who have recently left the profession to their registers.
Employees who volunteer through an appropriate authority will, under the powers contained in the Bill, be able to take Emergency Volunteer Leave as unpaid statutory leave, and will be compensated for their time at a flat rate through a UK-wide compensation fund.
The Bill provides an indemnity for clinical negligence liabilities arising from NHS activities carried out for the purposes of dealing with the COVID-19 pandemic.
(b) Easing the burden on frontline staff
Mental health legislation
The Bill contains the power to make certain changes to the operation of mental health legislation: the powers to detain and treat patients could be implemented using just one doctor’s opinion, as opposed to two; and the time limits contained in mental health legislation could temporarily be extended or removed.
The Bill could give NHS providers the power to delay the assessment process for NHS continuing healthcare, for individuals being discharged from hospital, until after the emergency period.
Under the Bill, changes could be made to the Care Act 2014 (and its Welsh equivalent) to enable local authorities to prioritize the services they offer to ensure the most urgent and serious care needs are met.
If local authorities were at imminent risk of failing to fulfill their duties, the Bill includes the power to:
i. temporarily relax local authorities’ duties in relation to their duties to conduct a needs assessment and prepare an adult carer support plan;
ii. require educational institutions and childcare providers to stay open and to relax requirements around education legislations (for example, teacher ratios, school meals standards and provisions for those with special educational needs);
iii. request that port and airport operators close and suspend operations if Border Force staff shortages mean there is significant threat to UK border security;
iv. expand availability of video and audio link in court proceedings;
v. enable a single commissioner or Treasury minister to sign instruments during a COVID-19 emergency period;
vi. allow temporary judicial commissioners to be appointed, if there are insufficient commissioners available to operate the system under the Investigatory Powers Act 2016 (this is the legislation that forms the statutory basis for use of investigatory powers by the intelligence and law enforcement agencies); and
vii. allow the Home Secretary to vary the time allowed for urgent warrants to be reviewed to up to 12 days (from the current three days).
(c) Containing and slowing the virus
The government will be able, under the Bill, to restrict and prohibit events and gatherings in any place, vehicle, train, vessel or aircraft and to close premises if necessary.
The Bill will provide the government with a temporary power to close educational establishments and childcare providers.
The Bill will allow the government to postpone local, mayoral and Police and Crime Commissioner elections that were due to take place in May 2020.
The Bill will also enable police and immigration officers to detain a person who may be infectious and to take him or her to a suitable place for screening and assessment.
(d) Managing the deceased with respect and dignity
The Bill will introduce various measures relating to the registration and management of deaths, to account for the fact that families who are self-isolating may have limited ability to register and manage deaths in the usual manner.
(e) Supporting people
Statutory Sick Pay (SSP)
SSP will be available from the first day an individual is off work. The Bill suspends the rule that SSP is not paid for the first three days of work missed.
Under the Bill, and as announced in the Budget, employers with fewer than 250 employees will be able to reclaim SSP paid for sickness absences relating to COVID-19.
Information about food supplies
In the event that an industry partner does not comply with the voluntary information sharing arrangements about food supplies, the Bill will contain a power to enable the government to require that partner to provide that information.
3. Steps Taken to Support Businesses Affected by the Covid-19 Outbreak
In the government’s budget announced on March 11, 2020 (the Budget), the Chancellor of the Exchequer, Rishi Sunak MP (the Chancellor), announced various measures to support the country through COVID-19. On March 17, 2020, the Chancellor announced further economic support measures (the Announcement), both expanding on and increasing various measures set out in the Budget. In addition to the specific measures set out in the Announcement, the Chancellor noted that the Bill will contain the necessary legal power to enable the Chancellor to offer whatever further financial support he decides is necessary.
3.1 Government-backed and guaranteed loans
There will be an initial £330 billion of government-backed and guaranteed loans made available to businesses. These loans will be available to any business needing access to cash to pay rent, salaries or suppliers or to purchase stock.
This support will be delivered through two schemes, both of which will be up and running by the start of next week:
(a) to support larger firms, a lending facility has been agreed with the Bank of England to provide low-cost, easily accessible commercial paper; and
(b) to support lending to small and medium-size businesses, the Business Interruption Loan Scheme (initially announced in the Budget) will provide loans of up to £5 million. The government will provide lenders with a guarantee of 80 percent on each loan. The government will also cover the first six months of interest payments for each business that receives a loan.
3.2 Support for the aviation industry
No support package for the aviation industry has yet been announced. However, the Announcement noted that the Chancellor and the Secretary of State for Transport would discuss a potential support package “in the coming days.”
Although the Announcement did not give any specific detail of the operation of insurance policies in relation to the pandemic, it noted that for businesses that have an insurance policy that covers pandemics, “the government’s action is sufficient and will allow businesses to make an insurance claim against their policy.”
There are no specific measures to be put in place for businesses that do not have relevant insurance. However, the Announcement focused on the various relief and grants available to businesses: he intent is seemingly that these measures will make up shortfalls faced by businesses.
3.4 Business rates relief and cash grants
The government had previously announced in the Budget that retail, hospitality and leisure businesses with a rateable value of less than £51,000 would pay no business rates for the next 12 months. The Announcement extends this to all retail, hospitality and leisure businesses, regardless of their rateable value.
In addition, the Announcement states that those retail, hospitality and leisure businesses with a rateable value of more than £15,000 but less than £51,000 will be provided with an additional cash grant of up to £25,000 per business.
The Budget had announced that a cash grant of £3,000 would be provided to 700,000 of the smallest businesses (those eligible for Small Business Rate Relief). The Announcement has increased that amount to £10,000.
3.5 Her Majesty’s Revenue and Customs’ Time to Pay service
Any businesses in financial distress with outstanding tax liabilities may be entitled to support through Her Majesty’s Revenue and Customs’ Time to Pay service. All arrangements will be agreed on a case-by-case basis.
3.6 Relaxation of planning rules
The Communities Secretary has announced that the government will relax planning rules to enable pubs and restaurants to operate as hot food takeaways/carryouts so that they can serve people having to stay at home.
The government has said that the measures will be introduced through a statutory instrument as soon as possible and will operate for a period of up to 12 months.
The government is likely to use the powers granted by the Town and Country Planning Act 1990, which gives it the right to exclude certain changes of use from requiring planning permission.
3.7 Life sciences investment
While not specifically targeted at countering the impact of the COVID-19 outbreak, the Budget also contained a number of measures to support the NHS and boost research and development, including these:
(a) compared to 2018-19, NHS England will receive a cash increase of £34 billion per year by 2024;
(b) public research and development (R&D) investment will be increased to £22 billion per year by 2024-25, which the Budget states represents 0.8 percent of gross domestic product;
(c) R&D tax credit will be increased from 12 percent to 13 percent, with a review on widening the eligibility of activities included under the relief;
(d) the government will provide the British Business Bank with additional resources to launch a dedicated £200 million investment program toward health and life sciences innovation, which is expected to enable £600 million of financing, including private investment;
(e) the government will put £800 million toward a new blue-skies funding agency to invest in high-risk, high-reward science, modeled on the Advanced Research Projects Agency in the United States; and
(f) the government will put £400 million toward investment in research, infrastructure and equipment across the UK, particularly in basic research and physical sciences.
Sidley Austin LLP provides this information as a service to clients and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship. Readers should not act upon this information without seeking advice from professional advisers. In addition, this information was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding any U.S. federal, state or local tax penalties that may be imposed on such person.
Attorney Advertising—Sidley Austin LLP, One South Dearborn, Chicago, IL 60603. +1 312 853 7000. Sidley and Sidley Austin refer to Sidley Austin LLP and affiliated partnerships, as explained at www.sidley.com/disclaimer.
© Sidley Austin LLP