Using moratoriums to create a legal fence during a company’s time of crisis

In situations where a company faces a temporary cash flow crisis that damages its balance sheet and threatens its viability, implementing a Company Voluntary Arrangement (CVA) is an effective tool. It allows the company to come to an agreement with its creditors to pay them back some or all of their debts over a period of time. CVAs proved a lifesaver during Covid-19 as they offered companies, which would normally be financially healthy, respite from Covid-19’s economic impact. But CVAs are neither simple nor quick. To be legally binding, the CVA needs at least 75% of creditors who vote (in value of claim) to be in favour of the CVA proposal. This requires the company’s management team to spend time talking to its key creditors in order to obtain their support for the CVA proposals. Planning a CVA can take a significant amount of time; typically at least two weeks. Moreover, once a company has sent its creditors notice that it is proposing a CVA, it enters an uncomfortable phase (of at least two weeks) of having no protection from creditors that have yet to appreciate its benefits. The concern is that some of those creditors might attempt to take steps to seize or freeze the company’s assets in order to achieve repayment for their debts. To protect clients from this vulnerable situation, I have used a moratorium, a new insolvency process launched in June 2020, that effectively entitles the company to a temporary stay on any payments in respect of its pre-moratorium debts (with some exceptions). The moratorium provides interim protection to a company against administration, liquidation, judicial dissolution, attachment and enforcement measures, and termination of existing contracts due to non-payment and should provide the breathing space for the CVA proposals to be formally voted on by creditors. A smaller bonus is the fact that implementing a moratorium is not expensive. They entail modest initial costs and are easy to process but will require some legal assistance. Once the moratorium has been filed at court, the applicant company is automatically protected (from any creditor action) for 20 business days – or by a further 20 business days (without needing creditor consent) if it so wishes. I have used moratoriums with good effect to create a legal fence around a company while the CVA is being negotiated in circumstances where there was a clear risk that the company’s assets were in jeopardy of creditor intervention. The protection gave the company’s management team the ability to focus its finite bandwidth and resources on the value-retaining CVA rescue plan, instead of fighting creditor intervention that ultimately only benefits a small minority (if any) of the creditors. However the CVA-moratorium combination is not always an appropriate solution. This combination is best used if the company has tangible assets that can be seized – for example, a construction company that owns cranes and trucks or a restaurant that has tables, chairs and a kitchen full of cooking equipment. Assets that are “at the mercy” of an unsympathetic landlord which is owed money or a local authority that has the freedom to appoint enforcement agents to uplift the company’s office furniture and equipment are good examples of situations where a moratorium might be justified. It is also important that the company sees the moratorium as one tool in the box of restructuring techniques and not a stand-alone panacea. In my experience, an exit route or restructuring proposal needs to have been given some thought by the company and its professional advisors ahead of the moratorium being applied for, otherwise it may struggle to be justifiable as a rescue tool. Clearly, they should only be used upon the advice and supervision of a licensed insolvency and restructuring practitioner. Last, and more fundamentally, the company in question must have the capacity to become cash flow positive once more. Putting in the work required for a successful CVA, with a moratorium or not, is only worthwhile if the Company and its restructuring advisors see a future that includes an improving balance sheet through a combination of an increase in trade and an ability to make the necessary CVA payments in the medium term. While not a perfect solution, I believe the CVA-moratorium combination is an effective tool for companies that meet the criteria. In the right circumstances, I credit the moratorium as a fundamental tool to provide the necessary protection for the approval and long-term success of CVAs. I hope to see more insolvency practitioners use them as I have seen first-hand how beneficial they can be. Lee Manning is Partner at ReSolve, a restructuring, advisory and investment firm.