Home > Moratoriums under The Corporate Insolvency and Governance Bill

Moratoriums under The Corporate Insolvency and Governance Bill

4th June 2020

Moratoriums under The Corporate Insolvency and Governance Bill

This article follows the #HardwickeBrew on 28th May 2020 which looked at the Corporate Insolvency & Governance Bill.  If you would like to take part in future #HardwickeBrews, please sign up via our Events page.

Introduction

  1. This note reviews the provisions relating to the moratorium procedure for Great Britain under the draft Corporate Insolvency and Governance Bill (“CIGB”).

CIGB

  1. The CIGB serves two core functions, introducing:
    1. Permanent reforms to corporate insolvency processes; and
    2. Temporary measures to address the COVID-19 crisis.
  1. The likely long term effects of the CIGB remain uncertain: it contains ambiguities which will be resolved either during the legislative process or in the courts, and it contains extensive powers for the Secretary of State to modify legislation as deemed necessary to respond to the evolving COVID-19 situation: ss. A18-A25, A39 and A45.

The Moratorium

  1. CIGB introduces two new regimes:
    1. A permanent addition to corporate insolvency procedures, the “Moratorium”, via the insertion of a new Part A1 and Schedules ZA1 and ZA2 into the Insolvency Act 1986 (“IA86”), and various consequential amendments.
    2. A modified version of the Moratorium by way of response to the COVID-10 crisis, intended to have effect for a very short period of time (the “Temporary Regime”): s.3 and Sch.4.
  1. This long-anticipated reform intended to provide companies the breathing space to pursue rescue as a going concern, via a streamlined and free-standing process. Unlike administration or liquidation, a Moratorium will leave the company’s directors in charge of the company. But a monitor who is a qualified insolvency practitioner is appointed at the same time to oversee the process.
  2. The key provisions of CIGB concerning Moratoriums are:
    1. s.1, which includes the text of the new Part A1 for insertion into IA86, comprising ss.A1-A53;
    2. Sch. 1, which sets out the text of the new Schedule ZA1 to IA86;
    3. Sch. 2, which sets out the text of Schedule ZA2 to IA86; and
    4. Sch. 3, which sets out various consequential amendments to primary legislation.

Availability

  1. A Moratorium is available to any “eligible company”, defined in Sch.ZA1 as any company that is not excluded by:
    1. Having been subject to a Moratorium or insolvency procedure in the preceding 12 months: Sch.ZA1 para.2; and
    2. Carrying on business in an excluded category: Sch.ZA1 paras.3-22. The excluded categories largely comprise businesses within the financial services sector.
  1. An eligible company which is not subject to a winding up petition and is not an overseas company may obtain a Moratorium simply by filing certain documentation at court: s.A3. Eligible companies subject to winding up petitions and eligible overseas companies are required to make an application to court in order to obtain a Moratorium: ss.A4-A5.
  2. Whether the appointment is made out of court or by application, the supporting documentation in s.A6 must be produced. This includes a statement from the monitor which confirms that it is likely that the Moratorium would result in the rescue of the company as a going concern: the core objective of a Moratorium.
  3. CIGB does not deal with the position of a company which is subject to an outstanding creditor’s administration application. Part A1 as currently drafted does not explicitly prevent a company subject such an application from obtaining a Moratorium out of court in order to thwart a hostile administration application.

Duration

  1. The initial period of the Moratorium is 20 business days, which, subject to fulfilment of certain criteria, can be extended out of court by the directors (either for 20 days, or for longer if creditors consent) or by order of the court. In certain circumstances a Moratorium may be terminated before it expires: see ss.A9-A16.

Key features

  1. The key features of a Moratorium are:
    1. The suspension of various legal processes and execution against the company, similar to the moratorium accompanying administration: see ss.A20-A23.
    2. Restrictions on certain actions by the company, including obtaining credit, paying some Pre-Moratorium debts and disposing of property: ss.A25-A30. Each restriction contains exemptions and workarounds (the most common being monitor consent).
    3. The ability, with the court’s permission, to dispose of property free from charges, security interests or rights under hire purchase agreements that would otherwise apply: ss.A31-A32. The court should only give permission if it thinks that doing so will support rescue as a going concern. The provisions contain stipulations intending to compensate the creditor for the loss of its security/proprietary interest. It is, however, easy to envisage circumstances where the creditor would nevertheless be prejudiced.
    4. Light touch supervision by the monitor.
    5. Payment holidays, which affect the priority of those debts during the moratorium and in subsequent insolvency proceedings: s.A18 (see below).

Moratorium debts

  1. CIGB classifies debts as follows:
    1. Moratorium debts;
    2. Pre-Moratorium debts subject to a payment holiday; and
    3. Pre-Moratorium debts not subject to a payment holiday.
  1. Moratorium debts are debts or liabilities to which the company becomes subject during or after the Moratorium, by reason of an obligation incurred during the Moratorium: s.A51(2).
  2. Pre-Moratorium debts are debts or liabilities to which the company is subject: (i) before the Moratorium; or (ii) during the Moratorium, by reason of an obligation incurred before the Moratorium came into effect. It is to be anticipated that case law on contingent debts under IA86 will be an aide to the interpretation of the latter category: s.A51(1).
  1. Subsection A18(3) defines the categories of Pre-Moratorium debts not subject to a payment holiday as amounts due in respect of:
    1. the monitor’s remuneration or expenses;
    2. goods or services supplied during the Moratorium;
    3. rent in respect of a period during the Moratorium;
    4. wages or salary arising under a contract of employment;
    5. redundancy payments; or
    6. debts or other liabilities arising under a contract or other instrument involving financial services, as defined in Sch.ZA2.
  1. All other pre-Moratorium debts are Pre-Moratorium debts subject to a payment holiday: s.A18(3).
  1. The range of liabilities excluded from the payment holiday provisions is surprising. The categories are broadly defined, and are not limited by reference to the type of creditor. This is particularly notable in relation to contracts “for the provision of financial services”, consisting of “lending (including factoring and financing of commercial transactions)”. Clearly, this captures any bank loans or overdrafts, but may also be interpreted as including private funding, including loans by company directors.

Priority of debts

  1. CIGB provides for pre-moratorium debts subject to a payment holiday to be treated differently from other debts in several material respects.
    1. A Moratorium not only relieves the company of the obligation to pay Pre-Moratorium debts subject to a payment holiday, it restricts a company’s ability to do: s.A28. Payments of in excess of £5,000 or 1% of the total debt (which ever is greater) may only be made with a Monitor’s consent, a court order or where payment is required by ss A31(3) or A32(3) (payments to creditors following disposal of property subject to a security interest or hire purchase agreement).
    2. In contrast, a company must pay Moratorium debts and Pre-Moratorium Debts not subject to a payment holiday which fall due during the Moratorium. Payment of such debts is precondition of an extension of the Moratorium beyond the 20 day initial period (other than the automatic extensions applicable pending decision on CVA proposals or schemes of arrangement): ss.A10(1)(b), A11(1)(b) and A13(2)(a). Inability to pay such debts is grounds to terminate a Moratorium: s.A38(1)(d).
    3. If a company goes into liquidation or administration as consequence of a resolution, application or petition presented before the Moratorium or within 12 weeks following the end a Moratorium, both Moratorium debts and Pre-Moratorium debts not subject to a payment holiday will be paid in preference to other claims, in order of the priority shown (which presumably refers to the order as it appears in A18): Sch.3 paras.13-14 and 31.
  1. A Moratorium will alter the priority of debts in a subsequent liquidation or administration and will have significant impact on the level of recoveries likely to be made by creditors if rescue cannot be achieved. Banks and other lenders would appear to have everything to gain by calling in any loans or overdrafts due during the Moratorium period.

The monitor

  1. During the period of the 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: s.A35.
  2. The monitor “must bring the moratorium to an end” if they think that the company is no longer likely to be rescued as a going concern, or if various other conditions are met: s.A38. However, CIGB does not state how quickly the monitor must act in this scenario.
  3. A creditor, director, or member of the company, or any other person affected by the Moratorium, may apply to the court if their interests have been unfairly harmed by an act, omission or decision of the monitor: s.A42(1)-(3). The court can confirm, reverse or modify any act of the monitor, or give directions, but cannot order the monitor to pay compensation: s.A42(4).
  4. CIGB does not preclude the monitor from taking a later appointment as an administrator or liquidator and it is likely in practice that monitors will, in some instances, take such appointments.

s.127 IA86

  1. Section 127 IA86 (avoidance of property dispositions after commencement of winding up) is disapplied for the period a Moratorium is in force: Sch.4 para.12.
  2. In its place, the Moratorium contains watered down restrictions on dispositions of property (s.A29) which allow a company to dispose of property in the ordinary course of business. Crucially, unlike s.127, the restriction does not provide any remedy which would allow property transferred in breach of the restriction to be recovered from the recipient.

The Temporary Regime

  1. A modified version of the Moratorium is introduced in response to the Covid-19 crisis, and is intended to have effect for a very short period of time: Sch. 4 para.1.
  2. CIGB stipulates that the Temporary Regime will end on 30 June 2020 or one month after the legislation comes into force (currently expected to be 10 June), although this is subject to a general power to change the duration of, or switch off, the temporary provisions: s.A39; Sch.4 paras.1-3.
  3. The main difference between the two regimes is that the Temporary Regime involves a significant relaxation of the criteria for obtaining a Moratorium:
    1. A Moratorium can be obtained out of court, even where a winding up petition is pending: Sch.4 para.6(1)(a).
    2. A Moratorium may be granted, extended or permitted to continue even where, due to the worsening of companies position due to COVID-19, the monitor cannot confirm that rescue as a going concern is likely: Sch.4 paras.6-9.
  1. Schedule 4 paras.12-52 set out temporary modifications to the Insolvency Rules, providing the practical mechanics of the scheme in more detail. There are currently no equivalent modifications in relation to the permanent Moratorium regime.
  2. While the instinct to extend the availability of the Moratorium to companies facing financial difficulties due to COVID-19 is understandable, there is reason to question whether this form of relaxation goes too far. The legislative intent behind the Moratorium is to give companies breathing space to explore rescue as a going concern, but the lesser requirements for obtaining a Moratorium under the Temporary Regime will provide life support to companies that have no prospect of rescue.

This content is provided free of charge for information purposes only. It does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by any member of Chambers or by Chambers as a whole.

Contact

Please note that we do not give legal advice on individual cases which may relate to this content other than by way of formal instruction of a member of Hardwicke.  However if you have any other queries about this content please contact:

Sally Wollaston
Sally Wollaston
Business Development and Marketing Director
Menu