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Coronavirus - Corporate Insolvency and Governance Bill: the new moratorium procedure - UK

  • United Kingdom
  • Banking and finance
  • Coronavirus
  • Restructuring and insolvency

02-06-2020

In the next in our series of articles on the much anticipated Corporate Insolvency and Governance Bill (the “Bill”), which will enact various new corporate restructuring tools as well as the temporary changes to insolvency law that have been announced by the government since the onset of the COVID-19 pandemic, we focus on the introduction of the standalone moratorium.

View our series of articles summarising the Bill:

• Corporate Insolvency and Governance Bill: summary

• Corporate Insolvency and Governance Bill: restructuring plans

• Corporate Insolvency and Governance Bill: the bar on terminating contracts for insolvency

• Temporary amendments to Insolvency Law: restriction on statutory demands and winding-up petitions

• Temporary amendments to Insolvency Law: suspension of liability for wrongful trading

• Corporate Insolvency and Governance Bill: Pensions

Introduction of new restructuring tool: the standalone moratorium

What is the standalone moratorium ?

The Bill introduces the option of a new, “standalone” moratorium for companies that are insolvent or likely to become insolvent and, in the opinion of an insolvency practitioner, capable of rescue as a going concern.

The standalone moratorium is independent of formal insolvency processes, such as administration or liquidation, and it is not necessarily a gateway to such a process: it is designed to be a breathing space from which companies emerge as a going concern.  

How does the standalone moratorium work?

The standalone moratorium restricts creditors from taking steps to recover debts and/or enforce security for its duration; it is a flexible process that allows the company to continue to trade under the control of its directors, subject to monitoring by an insolvency practitioner (known as the “monitor”), while they pursue a turnaround strategy.  

To assist with turnaround, the key features of the standalone moratorium are that:

  • the company has a “payment holiday” for pre-moratorium debts, except for the costs of continuing to trade during the moratorium;
  • the presentation of winding-up petitions and the appointment of administrators is prohibited, except by the directors (or, in the case of winding-up, on public interest grounds);
  • except with the permission of the Court:
  • landlords cannot exercise rights of forfeiture;
  • creditors cannot enforce security, unless it relates to collateral arrangements or it was granted during the moratorium with the consent of the monitor;
  • no legal process can be commenced or continued against the company, unless it is employment-related; and
  • creditors cannot take action in respect of debts for which the company has a “payment holiday” or apply to the Court for permission to do so.

How long does the standalone moratorium last?

The standalone moratorium lasts for an initial period of 20 business days and can be extended after the first 15 business days.

This period can be extended by the directors of the company without the consent of its creditors for a further 20 business days or, with the consent of its creditors, for up to a year.  The moratorium can also be extended by the Court, following an application for its extension or in the course of other relevant proceedings, to a date at its discretion.  The period will also be extended until any proposal for a company voluntary arrangement is disposed of.

To prevent abuse of the moratorium, extension depends on confirmation from the monitor that it is likely that the moratorium will result in the rescue of the company as a going concern.

Can the standalone moratorium be brought to an end earlier?

The standalone moratorium can be brought to an end at any time by the company entering into a compromise, an arrangement, a company voluntary arrangement, administration or liquidation.  It may also be brought to an end by the Court, following an application to challenge the conduct of the monitor or the directors on the basis that it has caused, or would cause, unfair harm to the applicant.

The monitor, however, must bring the moratorium to an end if they are of the opinion that (i) the rescue of the company is no longer likely; (ii) the rescue of the company has been achieved; (iii) they are unable to carry out their functions as a result of a failure of the directors to provide information; or (iv) the company is unable to pay any moratorium debts or pre-moratorium debts for which the company does not have a payment holiday.

Can the standalone moratorium really help to rescue a company?

In theory, yes: with the consent of the monitor, the company can grant security during the moratorium, which will likely be an essential part of any refinancing.

The practical challenge for directors will be stakeholder management.  Unless the turnaround strategy is very straightforward, and takes less than two months to implement, the directors of the company will need the support of creditors or the approval of the Court to extend the moratorium.

The standalone moratorium may therefore be of most use to companies with a straightforward rescue plan; for more complicated rescue strategies it is likely to be combined with a more formal insolvency process, such as a company voluntary arrangement or the new restructuring plan (also introduced by the Bill).

What does the standalone moratorium mean for directors?

The standalone moratorium represents a flexible tool for the reorganisation of companies.  It allows directors to retain control, and companies to continue to trade, while a solution is sought with creditors.

As noted above, working with stakeholders will be key, as the moratorium will only last as long as the monitor is of the view that a rescue of the company is likely (note: not merely possible) and the creditors of the company or the Court are supportive.

Directors will need to remain cautious about the effect of their decisions made during the moratorium on the company’s creditors. The moratorium will not change the duties of the directors to act in the interests of creditors, and the Bill creates various new risks and criminal offences which directors will need to consider.

What does the standalone moratorium  mean for creditors?

Unsecured creditors and suppliers may be anxious about the introduction of the moratorium, which is relatively easy to access and will prevent recovery of their debts, but may take some comfort from the fact that it can only be used by companies that are likely to emerge as a going concern (and that the monitor is responsible for keeping this under review). 

The legislation also includes strict provisions as regards the payment of debts incurred during the moratorium, which will assist creditors with their own cash flow and give suppliers comfort in light of the new provisions prohibiting termination of supply of goods and services. In the event of a winding-up which follows a failed moratorium these “moratorium debts” will have super-priority (except for fixed charge realisations).

Secured creditors may also be concerned about the moratorium, which will prevent them from enforcing their security without the permission of the Court.  However, liabilities in respect of most lending is still payable in the moratorium and the support of the secured creditors is obviously likely to be essential for the rescue of the company as a going concern, so that they will have considerable influence over the process.

I’m an insolvency practitioner – what does the standalone moratorium mean for me?

Acting as the monitor of a standalone moratorium may, at first, appear challenging.  It requires overseeing the company and reviewing whether it is likely that the moratorium will result in the rescue of the company as a going concern.

To assist them, however, monitors have the power to request any information from the directors required to fulfil their role.  They are entitled to rely on the information provided (unless they have reason to doubt its accuracy) and it is an offence for directors to make false representations to obtain or extend a moratorium.  The monitor may also apply to the Court for directions and, if they have certain concerns, they can file documents at Court to terminate the moratorium.

Ultimately therefore, although there is always the risk that a turnaround strategy will not work or that the directors will be uncooperative or even abuse the moratorium; the provisions of the Bill should give monitors protection and facilitate the rescuing of the company.

For further information on the information provided in this article, or to find out more about our restructuring and insolvency services, please contact us.

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