On 26 June 2020 the Corporate Insolvency and Governance Act 2020 (the Act) introduced a number of permanent reforms to English insolvency law. Among these was a standalone moratorium available to any eligible company that is, or is likely to become, unable to pay its debts.
Companies which are excluded from eligibility include 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 (certain of these exclusions are relaxed up to 30 September 2020).
Process and role of the monitor
The moratorium is intended to facilitate director lead restructurings subject only to oversight of a “monitor” (a licensed insolvency practitioner). The role of the monitor is even more “light touch” than that of an administrator in a “light touch” administration and is a shift towards a more US style Chapter 11 “debtor in possession” model which allows directors to remain in control albeit subject to the supervision of the US Bankruptcy Court.
The directors’ application for the moratorium will require, among other things, confirmation from the proposed monitor that, in her or his view it is likely that a moratorium 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 likelihood that the company can be rescued as a going concern is to be monitored throughout the course of the moratorium and the monitor must bring the moratorium to an end if he or she thinks that the moratorium is no longer likely to result in such a rescue.
The rescue objective relates to the company itself rather than all or part of its business so, for example, a proposed asset sale which might have been capable of being implemented through a pre-pack administration would not fulfill this objective. Monitors will therefore have to give careful consideration to the assessment of “likelihood” of rescue both at the time of application and on an active, ongoing basis.
Effect of the moratorium
The initial moratorium period is 20 business days and 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.
During the moratorium the company benefits from protection against legal enforcement and insolvency proceedings by creditors so that it has the breathing space required to facilitate its rescue.
Most pre-moratorium debts are subject to a payment holiday. Moratorium debts, which arise during the duration of the moratorium or as a result of an obligation incurred during the moratorium remain payable. However, crucially, finance creditors to a company remain able to accelerate loans in the moratorium if they have the contractual right to do so.
Limited uptake so far
The uncertainty around just how “likely” the rescue of a company needs to be in order for a monitor to support the application for and maintenance of this moratorium may be one explanation for the slow take–up by distressed companies thus far.
The monitor’s actions can be challenged in court by, among others, a creditor, a director or the Board of the Pension Protection Fund. Monitors will be aware that a failure to apply for the termination of a moratorium in what creditors consider a timely fashion could well be the subject of a challenge and will understandably be cautious about what they consider as being required to meet the threshold of likelihood of rescue. Clear court guidance on the point may be what ultimately opens the floodgates but potentially, before that arrives, the date to watch will be 1 October 2020 – the day after the temporary measures under the Act, including the suspensions of winding-up petitions, is currently set to expire. If the government sees no cause to extend these protections then struggling companies may have no choice but to seek the safe haven of the moratorium.
The challenge for these companies will be deciding whether the work required to convince a monitor of the viability of a rescue plan will be worth the mere 40 business days of relief that they would gain absent creditor or court consent for a longer duration. Perhaps the greatest deterrent is the fact that the moratorium would not prevent finance creditors from accelerating loans which in many cases is very likely to derail any attempt to rescue the Company.
Accordingly, a company may conclude that the time, effort and resources spent preparing the application with a monitor are better preserved for undertaking negotiations with a broad base of creditors that, if successful, may result in a more comprehensive and longer contractual standstill. In fact any moratorium likely to achieve its objective will probably be only one part of the strategy involving wider restructuring negotiations and standstill arrangements.
Ultimately, a company and a monitor scrutinizing the burdens and benefits of a moratorium application may well find themselves turning for relief not to the new and untested provisions of the Act but rather to the existing measures in paragraph 64 of Schedule B1 of the Insolvency Act 1986 and the promise enshrined therein of “light touch” administrations. Dulled with age perhaps but certainly taking on a new shine in these COVID times, the prospect of true “light touch” administration, which leaves directors in charge under the supervision of an administrator, provides a wider, all-encompassing moratorium and a broader meaning of rescue may prove to be just the option that is needed and the solution that was there all along.