Corporate Insolvency and Governance Bill: Moratorium
The Corporate Insolvency and Governance Bill (CIGB), which we expect to pass into law in week commencing 1 June 2020, contains provisions that enable an "eligible" company, in certain circumstances, to obtain a moratorium, giving it various protections from creditors.
In the following article we explain what the moratorium is and its effect, the eligibility criteria, and the attendant risks for directors. This article is necessarily high-level, and so readers are encouraged to speak to their contacts at Michelmores to explore the detail.
Debtors (and their creditors) in the United Kingdom already have access to a mature, robust and creditor-friendly restructuring and insolvency toolkit. But, in some cases stakeholders are hindered in their ability to restructure and/or rescue a business because we lack a free-standing moratorium to give stakeholders the necessary time and breathing space to effect a sale, or new debt or equity funding, or consensual restructuring, or scheme of arrangement, or company voluntary arrangement, or restructuring plan (a new restructuring process introduced under the CIGB; which we will discuss further in a later article).
Historically, debtors needing breathing space have been forced to enter administration, simply to access the administration moratorium (we call that a "wrapper" administration). That approach (unless it is a "light touch" administration) divests the directors of control, and can be costly. This new moratorium leaves directors in control (it is a "debtor in possession" procedure), subject only to oversight from a monitor, and should be less costly.
Of course, some Government reliefs currently restrict certain landlord actions, but this moratorium goes much further than that. Readers should also note that the existing Government reliefs are likely to be withdrawn (or be made more limited) at some point.
The principal requirements for obtaining a moratorium are as follows:
- The company is, or is likely to become, unable to pay its debts.
- It is likely that a moratorium would result in the rescue of the company as a going concern.
- The company can discharge certain prescribed pre-moratorium debts and all moratorium debts during the moratorium.
- A putative monitor has been engaged, and is supportive.
Which companies are eligible?
A company is an "eligible" company if it is a company not excluded under the CIGB. The categories of excluded companies include (a) companies that are or were recently subject to an insolvency procedure, and (b) companies that are insurance companies, or securitisation companies, and so on.
What are the effects of a moratorium?
The CIGB distinguishes between:
- A "pre-moratorium debt" (being any debt which the company becomes subject before the moratorium); and
- A "moratorium debt" (being any debt to which the company becomes subject during the moratorium).
In a moratorium most pre-moratorium debts are subject to a payment holiday. Pre-moratorium debts that are not subject to a payment holiday include the monitor’s remuneration or expenses, rent and wages or salary.
Therefore companies wishing to use the moratorium must have sufficient cash (or access to funding) to meet those liabilities.
During a moratorium no steps can be taken to effect an administration or winding up of a company. In addition, there can be no forfeiture or re-entry, no repossession, and no steps may be taken to enforce security or to commence or continue any legal process.
How do companies obtain a moratorium?
The detail is beyond the scope of this article, but as regards obtaining the initial period of a moratorium different provisions apply depending on whether a company is:
- Not subject to a winding-up petition and not an overseas company.
- Subject to a winding-up petition.
- An overseas company.
In this article, for simplicity, we assume that the company in question is not subject to a winding-up petition and is not an overseas company. To summarise, companies that are subject to a winding-up petition or that are overseas companies must make an application to court to obtain an initial moratorium (rather than simply file documents at court).
The directors of a company may obtain a moratorium by filing the relevant documents with the court. The relevant documents include:
- A notice that the directors wish to obtain a moratorium.
- A statement from the directors that, in their view, the company is, or is likely to become, unable to pay its debts.
- A statement from the proposed monitor 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.
The moratorium comes into force at the time at which the relevant documents are filed at court.
A moratorium ends (if not extended; see below) at the end of 20 business days beginning with the day after the day on which the moratorium comes into force.
Who is the monitor and what do they do?
The monitor must be a qualified person, that is to say, an insolvency practitioner, and is an officer of the court. During a moratorium, the monitor must monitor the company’s affairs for the purpose of forming a view as to whether it remains likely that the moratorium will result in the rescue of the company as a going concern. The monitor must bring a moratorium to an end by filing a notice with the court if:
- The monitor thinks that the moratorium is no longer likely to 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 monitor thinks that the company is unable to pay any of the following that have fallen due (i) moratorium debts; (ii) pre-moratorium debts for which the company does not have a payment holiday during the moratorium.
Can the moratorium be extended?
The moratorium can be extended in five different circumstances.
Extension by directors without creditor consent (for 20 business days after the initial period ends)
During the initial period, but after the first 15 business days of that period, the directors may extend the moratorium by filing with the court:
- A notice that the directors wish to extend the moratorium.
- A statement from the directors that all of the following that have fallen due have been paid or otherwise discharged (i) moratorium debts, and (ii) pre-moratorium debts for which the company does not have a payment holiday during the moratorium.
- A statement from the directors that, in their view, the company is, or is likely to become, unable to pay its pre-moratorium debts.
- A statement from the monitor that, in the monitor’s view, it is likely that the moratorium will result in the rescue of the company as a going concern.
Extension by directors with creditor consent (to any day before the end of the period of one year beginning with the first day of the initial period)
At any time after the first 15 business days of the initial period the directors may, if they have obtained creditor consent, extend the moratorium by filing with the court the documents described above (Extension by directors without court consent), plus a statement from the directors that creditor consent has been obtained, and of the revised end date for which that consent was obtained.
Extension by court on application of directors (unlimited)
At any time after the first 15 business days of the initial period the directors may, if they have obtained creditor consent, extend the moratorium by filing with the court the documents described above (Extension by directors without court consent), plus a statement from the directors as to whether pre-moratorium creditors have been consulted about the application and if not why not.
On hearing the application the court may:
- Make an order that the moratorium be extended to such date as is specified in the order, or
- Make any other order which the court thinks appropriate.
The moratorium can also be extended where a proposal for a CVA is pending or where an order is made by the court in other proceedings. The detail of those provisions is beyond the scope of this article.
Can a moratorium be challenged?
A creditor, director or member of the company, or any other person affected by the moratorium, may apply to the court on the ground that an act, omission or decision of the monitor during a moratorium has unfairly harmed the interests of the applicant. On hearing such an application the court may:
- Confirm, reverse or modify any act or decision of the monitor.
- Give the monitor directions, or
- Make such other order as it thinks fit.
A creditor or member of a company may apply to the court for an order that:
- During a moratorium, the company’s affairs, business and property are being or have been managed by the directors in a manner which has unfairly harmed the interests of its creditors or members generally or of some part of its creditors or members (including at least the applicant).
- Any actual or proposed act or omission of the directors during a moratorium causes or would cause such harm.
On hearing such an application the court may:
- Regulate the management by the directors of the company’s affairs, business and property during the remainder of the moratorium.
- Require the directors to refrain from doing or continuing an act complained of by the applicant or to do an act which the applicant has complained they have omitted to do.
- Require a decision of the company’s creditors to be sought (using a qualifying decision procedure) on such matters as the court may direct.
- Bring the moratorium to an end and make such consequential provision as the court thinks fit (it is implicit, but not clear, that this could include ordering the directors to pay compensation).
What are the risks for officers?
An officer of a company will commit the offence of fraud etc. in anticipation of a moratorium if they do or a privy to any concealment of property, or making any false entry in any document affecting or relating to the company’s property or affairs.
An officer of a company will commit the offence of false representation etc. to obtain a moratorium if, for the purpose of obtaining a moratorium for the company or an extension of a moratorium for the company, the officer:
- Makes any false representation.
- Fraudulently does, or omits to do, anything.
The monitor must report such offences, and officers can be made subject to criminal procedures.
The moratorium could be "game-changing", but only for companies that have sufficient funding, and, critically, a credible and deliverable rescue plan. This is not a process that can be deployed lightly, and without a robust roadmap.
If you would like to discuss any of the issues raised in this article, please contact Douglas Hawthorn, Sacha Pickering, Karen Williams or Charles Maunder in Michelmores' Restructuring & Insolvency team.
This article is for information purposes only and is not a substitute for legal advice and should not be relied upon as such. Please contact our specialist lawyers to discuss any issues you are facing.