On 26 June 2020 the Corporate Insolvency and Governance Act 2020 (the Act) came into force, introducing a number of permanent reforms to English insolvency and restructuring law. Among these reforms is a standalone moratorium available to any eligible company that is, or is likely to become, unable to pay its debts.
The moratorium is available for companies of all sizes (including overseas companies which meet a “sufficient connection” test) unless specific exclusions apply. The exclusions include, inter alia, companies that are subject to current or recent insolvency procedures, banks, and companies which are party to capital markets arrangements in excess of £10 million (in view of the COVID-19 pandemic, certain of these exclusions are relaxed up to 30 September 2020).
Process and Duration
Except in certain circumstances where a court order is required (such as where a company is subject to an outstanding winding-up petition), an eligible company can obtain a moratorium by filing relevant documents at court.
As part of such a filing, the directors must state that the company is, or is likely to become, unable to pay its debts. In addition, the “proposed monitor” (a licensed insolvency practitioner who is required to oversee the moratorium, although the directors remain in charge) must state that it consents to act as the monitor, that the company is an eligible company and that, in the proposed monitor’s view, it is likely that a moratorium for the company would result in the rescue of the company as a going concern (or pursuant to the temporary measures in place until 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 COVID-19).
The initial moratorium period is 20 business days and it can be extended by the directors for a further 20 business days. Longer extensions are also possible but require creditor consent or the consent of the court.
Role of the Monitor
The guidance to monitors highlights that a monitor is an officer of the court and must support the integrity of the moratorium process and ensure that creditor interests are protected. It is also recognised in the guidance that a prospective monitor will need to engage with directors pre-appointment to seek information in order to assess the company’s financial position, prospects and eligibility for a moratorium. The extent of this pre-appointment work should be proportionate to the size and complexity of the company as judged by the prospective monitor.
The monitor will need to be mindful of any conflicts of interest and have regard to the relevant code of ethics in considering whether any pre-appointment engagements give rise to a significant professional relationship with the company.
The monitor’s role is to supervise the company's eligibility at the start and throughout the course of the moratorium and to monitor the likelihood that the company can be rescued as a going concern.
The monitor’s actions can be challenged in court by, among others, a creditor, a director or the Board of the Pension Protection Fund. The monitor’s remuneration can be challenged by a subsequent administrator or liquidator.
Effect of the Moratorium
Through the duration of the moratorium, except in certain limited circumstances or with the leave of the court:
- no insolvency proceedings can be commenced against the company.
- no steps may be taken to enforce any security over the company’s property or repossess any goods under any hire-purchase agreement.
- no proceedings or legal process can be commenced or continued.
- no right of forfeiture may be exercised by a landlord.
Pre-moratorium debts are subject to a payment holiday save for certain specified exceptions, which include the monitor’s remuneration and expenses, rent in respect of the moratorium period, and wages or salaries arising under a contract of employment.
Moratorium debts, which arise during the duration of the moratorium or as a result of an obligation incurred during the moratorium remain payable.
The Act also provides for “priority pre-moratorium debts” – these are any unpaid moratorium debts and some pre- moratorium debts without a payment holiday, which get super priority in a subsequent insolvency or restructuring procedure. Lenders to a company remain able to accelerate loans in the moratorium if they have the contractual right to do so. However, these will not be considered “priority pre-moratorium debts” and therefore will not have the benefit of the super priority.
The moratorium also imposes certain restrictions on the company, including the ability to borrow money, to grant security and to dispose of property. Granting security and disposing of property are among the actions which are permitted only with monitor consent. The monitor should only give consent if it thinks that it will support the rescue of the company as a going concern.
End of the Moratorium
The moratorium may be brought to an end by the monitor if:
- the monitor no longer thinks that the moratorium will result in the rescue of the company as a going concern.
- the monitor thinks that the objective of rescuing the company as a going concern has been achieved.
- the directors have failed to provide the required information as a result of which the monitor is unable to carry out its functions.
- the monitor thinks that the company is unable to pay moratorium debts and pre-moratorium debts with no payment holiday, that have fallen due.
The moratorium will also come to an end if the company enters into any insolvency procedure, if a restructuring plan or scheme of arrangement is sanctioned or if the duration of the moratorium expires.
A New Era for Restructuring?
The moratorium reads as an even “lighter touch” version of a “light touch” administration and an attempt to move towards a more U.S.-style “debtor in possession” model (including allowing companies to obtain “DIP finance” style borrowing with the consent of the monitor). By specifically keeping management in place, the appointment of a monitor should be a less intrusive, and therefore potentially more palatable, measure for directors than administrator appointments (which have not proved to be all that “light touch” in practice and, perhaps consequently, have led to appointments at too late a stage to truly facilitate the rescue of distressed companies).
However, the fact that, absent a court-ordered or creditor-approved extension, the duration of the moratorium would be no more than 40 business days, and that finance creditors remain able to accelerate loans, means that directors will not be able to rely on the moratorium alone and will, in reality, need to carefully time an application for the moratorium in conjunction with wider restructuring negotiations and standstill arrangements with relevant creditors.
Additionally, the moratorium is not available to companies which are party to capital markets arrangements in excess of £10 million, which means that many companies with more complex borrowing arrangements that might benefit from this breathing space will be unable to access it.
What the practical experience of operating during a moratorium may ultimately provide is the opportunity for management and monitors to attempt a “test drive” before accepting and availing themselves of the benefits of true “light touch” administration which, if used as originally intended, would still be the optimum method of achieving the rescue of the company as a going concern.
This concludes Faegre Drinker Biddle & Reath LLP’s series of briefings on the developments introduced by the Act. If you have any queries, please contact a member of the London corporate restructuring team.