The Corporate Insolvency and Governance Act (the "CIGA") introduces a new moratorium procedure for companies needing protection from creditors while they pursue a rescue plan, which might include rescue of the company as a going concern using a CVA, scheme or the new restructuring plan, or perhaps rescue of its business via a subsequent administration. Under the moratorium, during an initial 20-day period, which can be extended, the company enjoys a payment holiday from most of its non-finance pre-moratorium debts, and is protected from legal or enforcement action and forfeiture proceedings by its landlords. Creditor safeguards are provided in the form of a monitor, who is a licensed insolvency practitioner. The monitor's role is to oversee the moratorium, and if necessary, bring it to a close if rescue of the company ceases to be likely.
The Government views the moratorium as a vital new tool to help companies which are struggling as a direct result of Coronavirus to survive as a going concern. The moratorium forms part of a suite of three new permanent restructuring tools introduced to our restructuring and insolvency regime by the CIGA comprising: this moratorium, a new restructuring plan and a new ipso facto (insolvency termination) tool. Click here for our overview briefing on these measures, here for our briefing on the restructuring plan and here for our briefing on the ipso facto (termination) provision. The CIGA came into force on 26 June 2020 after a fast-tracked procedure through Parliament.
Who can use the Moratorium?
Companies (including overseas companies with a sufficient connection to the UK) and LLPs are eligible to apply for the moratorium. However, there are some important financial services exclusions, including insurers, banks, investment banks, investment firms, parties to capital markets arrangements, and other financial services related entities are ineligible.
How does a Company obtain a Moratorium?
The usual procedure for an eligible company to obtain a moratorium is for the directors to file the relevant documentation at court by way of an out-of-court filing (which can be done 24/7 using the on-line court filing system). The usual procedure is available except where there is an outstanding winding-up petition1 or the company is an overseas company, in which cases an in-court application will be required. The court may make an order only if it is satisfied that a moratorium for the company would achieve a better result for the company’s creditors as a whole than would be likely if the company were wound up (without first being subject to a moratorium).
There are two qualifying conditions, namely (a) a directors' statement needs to be made that the company is or is likely to become unable to pay its debts as they fall due; and (b) the monitor must confirm that it is likely that the moratorium would result in a rescue of the company as a going concern (or, for a temporary period expiring on 30 September 2020, that it would do so if it were not for any worsening of the financial position of the company for reasons relating to Coronavirus).2
How Long will a Moratorium Last?
The initial period of the moratorium is 20 business days unless extended by the directors for another 20 business days, either with or without creditor consent. Further extensions are possible with creditor consent (for up to a maximum of one year duration) or the consent of the court (for such period as the court thinks fit). For each and every extension, the two qualifying conditions mentioned above still need to be met. The moratorium can also be extended where a CVA has been proposed, until it has been disposed of, or similarly at the convening hearing for a scheme or restructuring plan to provide protection until the scheme or plan can be approved and sanctioned.
Who is in Charge during the Moratorium?
The moratorium is a debtor-in-possession procedure, which means the company's management remains in control. However, a licensed insolvency practitioner, known as the monitor, is appointed to provide oversight and safeguards for creditors. The monitor has a duty to monitor the likelihood of rescue of the Company as a going concern. Should the monitor consider that outcome is unlikely to be achieved, the monitor has a duty to terminate the moratorium (subject to a temporary more relaxed test on 30 September 2020).3
What are the Effects of the Moratorium?
The company is entitled to a payment holiday in respect of its pre-moratorium debts except for (a) the monitor's fees and expenses for the moratorium period; (b) any goods and services supplied during the moratorium; (c) rent payments for the moratorium period; (d) wages and salaries; (e) redundancy payments; and (f) debts or other liabilities arising under a contract or other instrument involving financial services. The inclusion of category (f) is significant because it means that the company must continue to pay its banks and other lenders throughout the moratorium, whilst trade creditors and landlords remain unpaid in respect of any arrears. While this may make sense in an SME context, where it is usually necessary to keep paying the lenders whose support is vital to any anticipated rescue plan, it is less obviously helpful in a large company scenario where, typically, the first step in most restructurings is to put in place a standstill among the financial creditors.
Importantly, the moratorium will not crystallise a floating charge and any chargee is prevented from causing the floating charge to crystallise. This correlates with the purpose of the moratorium primarily as a rescue tool, and so has the effect of preserving a company's ability to dispose of its floating charge assets in the ordinary course of business during the moratorium (or if the monitor consents and such disposal will support the rescue of the company as a going concern). However, the company will not be entitled to dispose of other charged property (including hire purchase property) unless the court permits, and any net proceeds must be used to discharge the secured debt.
Moratorium Debts in any subsequent Insolvency Proceedings
As mentioned above, the moratorium requires the company to pay its moratorium debts and pre-moratorium debts for which it does not have a payment holiday during the moratorium as they fall due. However, if any of them remain unpaid and the company goes into a subsequent procedure (such as a CVA, scheme, plan, administration or liquidation) which begins before 12 weeks after the moratorium ends, these moratorium-related debts will have super-priority in the subsequent procedure. However, during the course of its passage through Parliament, an amendment was approved to ensure that lenders to a company in a moratorium cannot obtain a super-priority for their debt in a subsequent insolvency process if they accelerate that debt during the moratorium. The right to accelerate remains untouched (and in practice needs to be dealt with in advance as unfettered acceleration will bring the moratorium to an end), but any such accelerated liabilities do not have the benefit of the super-priority provision.
Detail aside, the protections given to finance creditors will in practice limit the usefulness of the moratorium for big companies with a sophisticated finance structure where rescue may depend upon being able to delay the payment of and ultimately compromise the finance debt.
Challenges and offences
Creditors can challenge the actions, omissions or decisions of both the monitor and the directors on the basis of unfair prejudice. We consider that 'unfair prejudice' will be given a similar meaning to the term 'unfair harm' which is used in the context of administration. The court can make such order as it sees fit, including terminating the moratorium but importantly it cannot make a compensation order against the monitor.
The moratorium regime is backed up with a comprehensive set of criminal offences if the directors or the monitor fail to comply with their duties. The purpose of the offences regime is to act as a deterrent to the management, who remain in possession of the company while it shelters from creditor action in this way, from abusing the situation to the detriment of creditors.
Conclusion
Taken as a whole, the moratorium is a welcome addition to the UK's restructuring toolkit. However, it is not without its surprises, most notably the requirement to pay a broad category of finance creditors in full, including any sums in respect of which acceleration is triggered because of the moratorium itself. This is likely to limit the tool's utility to large companies needing to restructure their finance creditors and instead be confined for use as an SME tool.
For more information please contact your usual Ashurst contact.
1. The requirement for an in-court application where the applicant company is subject to a winding-up petition is being relaxed temporarily because of Coronavirus until 30 March 2021 (as extended by the Corporate Insolvency and Governance Act 2020 (Coronavirus) (Extension of the Relevant Period) Regulations 2020and note that this date may be extended further).
2. This temporary relaxation will cease to have effect from 1 October 2020, pursuant to The Corporate Insolvency and Governance Act 2020 (Coronavirus) (Early Termination of Certain Temporary Provisions) Regulations 2020.
3. Note that in respect of any moratoria which have come into force (or for which the court application was made to the court) before 1 October 2020, the temporary relaxed test will continue to apply until at least 30 March 2021, pursuant to the Corporate Insolvency and Governance Act 2020 (Coronavirus) (Extension of the Relevant Period) Regulations 2020 and the Corporate Insolvency and Governance Act 2020 (Coronavirus) (Early Termination of Certain Temporary Provisions) Regulations 2020.
