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Throughout June our Restructuring and Insolvency Team are looking at the potential impact of the Corporate Insolvency and Governance Bill.  This article looks at the Moratorium Procedure introduced by the Bill.

Insolvency law in the UK is largely built on a system of creditor led procedure with creditors having the power to instigate insolvency process and to approve procedures proposed by the company or its directors. The Bill seeks to introduce new measures that will be driven by the debtor company rather than its creditors.   

The Moratorium Procedure

One of the stated driving forces behind the Bill is to provide viable companies with some breathing space to pursue a rescue plan where their cash flow position has become critical. The Bill introduces a new type of insolvency measure in order to try and achieve that goal, the moratorium (not to be confused with the moratorium which already applies within the context of a company administration insolvency procedure).

Obtaining a Moratorium

If a company is the subject of a moratorium it will prevent creditors from taking legal action against the company for a set period of time. To obtain a moratorium the company’s directors must file the required documentation with the court and they must have the support of an insolvency practitioner who is willing to act as a ‘monitor’ in the process. Therefore, the company will be required to obtain advice from an insolvency practitioner from an early stage in order to ensure that this process is the correct one for the company. The insolvency practitioner will need to consider what the long term prospects are for the company and whether there is the ability to raise finance or restructure the company in a manner that would preserve the company as a going concern. If the company cannot be preserved as a going concern then it is likely that the insolvency practitioner will recommend a different process to the directors such as administration.   

If a company is already subject to a winding up petition, or is an overseas company, its directors can still apply to the court for a moratorium, but rather than this being granted as a paper exercise the court will need to hear the application.  In the case of a pre-existing winding up petition the court must be satisfied that the moratorium will achieve better results for the company’s creditors as a whole than if the company were to be wound up.

The documentation which requires to be submitted to the court includes statements from the proposed monitor that they are a qualified person who consents to acting as monitor, a statement confirming that the monitor considers the company to be eligible for the moratorium and a statement from the monitor confirming that a moratorium is likely to result in the rescue of the company as a going concern.  The statements required by the monitor are not dissimilar to those required in an administration.   

The Covid-19 pandemic is expected to have caused a significant backlog in the Sheriff Courts, however, given the urgent nature of an application for a moratorium we would expect that any applications will be treated as urgent and early hearings will be obtained where necessary. 

Duration of Moratorium

The moratorium will be in place for an initial period of 20 business days starting the day after the moratorium comes into force. If after the first 15 days it is apparent that the company will require further time, for instance if funding has been delayed, the company can extend the moratorium without creditor consent for a further period of 20 business days so long as they have paid or otherwise discharged the moratorium debts and pre-moratorium debts that are not subject to a payment holiday such as:-

  • the monitor’s remuneration or expenses,
  • payment of goods and services supplied during the moratorium,
  • rent arising during the moratorium,
  • wages and salaries due under a contract of employment,
  • redundancy payments; and
  • debts/liabilities arising under a contract or other instrument involving financial services.

It is clear from this list of debts that in order to benefit from an extension the company will need to be in a position to continue servicing its major outlays.  Therefore, it can be seen that the moratorium is only likely to provide benefit to companies who continue to have a decent cash-flow or cash reserve to cover these costs.

The monitor must also provide a statement indicating that the moratorium is likely to result in a rescue plan of the company as a going concern.

At any time after the first 15 days of a moratorium a company can also apply to extend the moratorium with the consent of its creditors.  The directors will need to lodge documents with the court and also creditor consents. In this situation the moratorium can be extended to a date agreed to by the creditors but before the first anniversary of the day when the moratorium was first granted.  Creditors can provide their consent by using a qualifying decision procedure, which can include electronic voting through a portal set up by the insolvency practitioner. Consent will not be granted by the creditors if:-

(1) a majority of the pre-moratorium creditors who are unconnected secured creditors vote against the proposed date or

(2) if a majority of the pre-moratorium unconnected unsecured creditors vote against the proposed date.

The court can also grant an extension to the moratorium.  In deciding if the extension should be granted the court must have consideration for the interests of the pre-moratorium creditors and the likelihood that the moratorium procedure will result in the rescue of the company.

Ending the Moratorium Early

A moratorium can also come to an early end if the company enters into a compromise or arrangement (such as a restructuring plan or scheme of arrangement under the Companies Act 2006) or an insolvency procedure.

A monitor can bring the moratorium to an end by filing a notice with the court if:-

  • the monitor thinks that the moratorium is not likely to result in the rescue of the company as a going concern
  • if the objective of rescuing the company as a going concern has been achieved
  • if the monitor cannot properly carry out the monitor’s functions because of the directors’ failure to provide information to the monitor
  • the company cannot pay its moratorium debts or pre-moratorium debts which it does not have a payment holiday from.

On filing such a notice the moratorium will come to an end.

Summary

The moratorium appears to be intended to be a useful tool to help companies survive the immediate effects of the Covid-19 pandemic. It is intended to dovetail with the “restructuring plan” introduced by the Bill which will be the subject of one of the later articles in this series.

For directors who are concerned that their company is going to struggle to meet its liabilities over the coming months they should not delay in obtaining advice from an insolvency practitioner. An insolvency practitioner will be in a position to assist the directors in analysing the available information in order to identify the correct form of insolvency process. If the company is facing a short term crisis, but there remains a viable business, a moratorium may provide the directors with the required breathing space to obtain additional funding or put in place a restructuring plan that could save the existing business entity.

For insolvency practitioners the moratorium will not be entirely unfamiliar territory.  Much of the processes involved are in keeping with other types of procedure such as the appointment of an administrator. The monitor must at every stage be satisfied that the moratorium can preserve the company as a going concern.  If the monitor at any point considers that this goal cannot be achieved the moratorium should be brought to an end. Unlike administrations the directors remain in control of the business. Monitors will need to be satisfied that they are obtaining all of the information so that they can be satisfied that the aim of the moratorium can be achieved.

There is a bit of uncertainty in how the courts are going to deal with applications relating to the new moratorium process, in particular in circumstances where (likely rarely) such applications are contested. However, absent updates to the Insolvency Rules in secondary legislation, we would anticipate the Summary Application process before the Sheriff Court will apply with the familiar process of intimation on relevant parties, time for the lodging of answers, and a Hearing only where necessary/requested by the Sheriff. Given time constraints, consideration will require to be given to accompanying technical applications to reduce default notice periods or waive them entirely.

We are at hand to work with and support parties dealing with any issues arising in connection with corporate insolvency. Follow/subscribe to Stronachs on social media to be kept up to date with our upcoming analysis of the Bill throughout June.

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