On 20 May 2020, the UK government announced the Corporate Insolvency and Governance Bill (the “Bill”), introducing a mixture of permanent and temporary measures, the latter being in response to the financial challenges companies are facing as a result of the Covid-19 pandemic and lockdown. In the absence of extensive consultation with insolvency practitioners and industry experts, it remains to be seen how effective the measures will be in practice.
As anticipated, a new standalone moratorium, overseen by a “monitor”, has been introduced. The provisions largely mirror those put forward during the limited consultation in 2018 – the purpose being to provide a company with the breathing space to explore a rescue or restructuring of the business, which includes the newly introduced restructuring plan. It is not intended that the company has the form of rescue/restructuring in mind at the time the moratorium is applied for and the moratorium is not a gateway to any particular insolvency process. Notably, the moratorium enables the directors to remain in day to day control of the business and enables them to lead discussions regarding rescue and restructuring, albeit we expect that the monitor will provide invaluable knowledge and guidance in crafting the best form of rescue/restructuring. Current timelines indicate that companies may be able to seek this new moratorium as early as the end of June 2020.
A moratorium can be initiated by an eligible company by simply filing the required documentation with the court. We expect that this will be done by e-filing as an out of court process.
Amongst certain other formalities, the relevant documents must be accompanied by: (i) a statement by the directors that in their opinion the company is unable to pay or is likely to be unable to pay its debts; and (ii) a statement from the monitor that it is likely that a moratorium would result in the rescue of the company as a going concern. The moratorium notice does not need to specify the route by which ‘rescue as a going concern’ is to be achieved.
The moratorium takes effect when the documents are filed with the court or, where an application to court is necessary, the court makes the relevant order.
Companies eligible for a moratorium include English companies and foreign companies with sufficient connection to the UK. In the latter case, we note that the moratorium may not be recognised in other jurisdictions.
Certain companies are simply excluded, including financial institutions and those subject to specialist insolvency regimes, such as banks, investment firms and insurance companies. Notably, any company that is party to a capital market arrangement (involving debts of at least £10m) is also excluded. These exclusions mean that many large corporates who are party to bond financing arrangements will not be able to benefit from the moratorium, and will have to continue to agree consensual standstills / forbearance, or seek assistance from the court on a discretionary basis.
Companies that are subject to a winding up petition or are incorporated overseas can only obtain a moratorium by application to court. Additionally, companies can only initiate a moratorium, without a court waiver, if they have not been subject to a moratorium or insolvency proceedings in the preceding 12 months.
Effect of the Moratorium
The moratorium provides a payment holiday for certain types of pre-moratorium debts as well as post-moratorium debts. The following debts are excluded, and in most cases must continue to be paid as a condition of any extension:
- liabilities arising under a contract/instrument involving financial services, which include bank facilities, capital market arrangements (which captures arrangements involving guarantee or grant of security), and contracts secured by financial collateral arrangements;
- goods and services supplied during the moratorium;
- rent in relation to the moratorium period;
- wages, salaries and redundancy payments; and
- the monitor’s fees and expenses from the commencement of the moratorium.
The carve out of such debts means that a company could still require access to significant funds during a moratorium and a moratorium could be of limited use where the company is subject to significant financing arrangements for which a payment holiday is not granted. However, the Bill does provide an ability to obtain new money funding, with the monitor having to approve the grant of new security. Whilst this is not a fully developed DIP financing provision available to all companies, rescue financing has clearly been considered for companies eligible for the moratorium.
Unpaid moratorium and pre-moratorium debts, which the company was required to pay during the moratorium, will have super priority in a subsequent liquidation or administration where the company enters administration or winding up proceedings are commenced 12 weeks following termination of moratorium.
In addition to the payment holiday outlined above, the moratorium places the following restrictions on both secured and unsecured creditors:
- no winding up petition can be presented;
- no administration may be commenced;
- except with the court’s permission (which can only be sought to enforce pre-moratorium debts for which the company does not have a payment holiday during the moratorium):
- no steps can be taken to enforce security, except with respect to enforcement of financial collateral arrangements;
- no floating charge may be crystallised by the floating charge holder;
- no landlord may exercise any rights of forfeiture; and
- no steps can be taken to repossess goods under any hire purchase arrangement.
The moratorium does not prevent the exercise of set off or netting in finance arrangements.
It is also worth noting that the Bill is silent as to whether a moratorium will be an insolvency event for the purposes of triggering a PPF assessment period.
Period of Moratorium & Extensions
The initial moratorium period will be 20 business days commencing on the next business day after it takes effects.
There are various methods of extension:
- By Directors only: the directors can extend the initial moratorium by 20 business days by filing a further notice after the 15th business day of initial moratorium.
- By Directors with Creditor consent: with pre-moratorium creditor consent (secured and unsecured), the directors can extend the initial moratorium by a maximum of one year (in a single or by multiple extensions).
- By Directors by Application to Court: the directors may apply for an unlimited and multiple extensions by application to the court. The court will consider whether pre-moratorium creditors have been consulted on the application and the effect of the extension on these creditors’ interests.
For each of the extension options, the notice presented by directors must be accompanied by a further directors’ statement that: (i) all moratorium and all pre-moratorium debts for which the company does not have a payment holiday, have been paid during the moratorium period; and (ii) the company is or is likely to become unable to pay its other pre-moratorium debts. The monitor must also reconfirm that the moratorium is likely to result in a rescue of the company as a going concern.
Additionally, the court has discretion to grant an extension to the moratorium pending a CVA proposal or within a restructuring plan or scheme of arrangement.
The moratorium will terminate in various scenarios including: (i) at the end of the moratorium period if not extended; (ii) if a restructuring plan / scheme of arrangement is sanctioned; (iii) if the company enters liquidation or administration; or (iii) by the monitor.
The monitor must be a licenced insolvency practitioner and their primary role is to ensure the creditors’ interests are being protected during the period of the moratorium.
At the outset, the monitor must confirm that the company is eligible for the moratorium and the monitor, must make a statement that it is likely the moratorium will result in the rescue of the company as a going concern. The monitor is given certain powers to request information from the directors and to terminate the moratorium. The monitor’s consent is also required for certain transactions , for example, the grant of new security and the disposal of assets outside the ordinary course of business.
Any person affected by the moratorium may apply to the court on the grounds that an act, omission, or decision of the monitor during the moratorium has unfairly harmed the applicant. The court has wide discretion to make any order it sees fit, including reversing or modifying the monitor’s decision, or bringing the moratorium to an end. The monitor cannot be the subject of a compensation claim, however.
The option of entering into a moratorium outside a formal insolvency process is a helpful step in providing companies a way of carving out a breathing space early in the financial distress cycle, and the debtor in possession construct should alleviate directors’ concerns around losing control of their businesses. However, we anticipate that the exclusions worked into the eligibility criteria and the carved out debts for which a payment holiday will not be available, will impact its use in practice. Given the exclusions, it is most likely to be of use to SME’s and in particular, we may find that its bark is more useful than its bite, with the threat of a moratorium being used to corral stakeholders to agree to support companies through periods of stress.