The new moratorium procedure under the Corporate Insolvency and Governance Act
The Corporate Insolvency and Governance Act 2020 came into force on 26 June 2020. It introduces a new moratorium procedure which allows a company or LLP to pursue a rescue plan free from creditor action. During the moratorium, the company enjoys a payment holiday from most of its pre-moratorium non-financial debts, and is protected from legal or enforcement action and forfeiture proceedings by its landlords. A company or LLP applying for a moratorium will need to appoint a “monitor”, a licensed insolvency practitioner, to oversee the moratorium. The intention is that a moratorium will result in a more efficient rescue plan that benefits all of the company’s stakeholders.
Effects of the Moratorium
A company in a moratorium is entitled to a payment holiday in respect of its “pre-moratorium debts”. However, the definition of pre-moratorium debts excludes:
- the monitor’s fees and expenses;
- any goods and services supplied during the moratorium;
- rent payments during the moratorium period;
- wages and salaries;
- redundancy payments; and
- debts or other liabilities arising under a contract or other instrument involving financial services (for example, bank loan).
It is important to note that during the moratorium the company must continue to pay (i) all its debts incurred during the moratorium as they fall due and (ii) all its pre-moratorium debts for which it does not have a payment holiday as they fall due. So a company must continue to pay its banks and other lenders throughout the moratorium, whilst trade creditors and landlords can remain unpaid in respect of any arrears incurred before the moratorium takes effect.
During the moratorium:
- no insolvency proceedings may be commenced against the company;
- a landlord may not forfeit a lease by peaceable re-entry in relation to premises let to the company;
- no steps may be taken to enforce any security over the company’s property (unless it is a security created under a financial collateral arrangement or a step to enforce a collateral security charge or with the court’s permission);
- no steps may be taken to repossess any goods in the company’s possession under a hire-purchase agreement (except with the court’s permission);
- no legal proceedings may be commencement or continued against the company or its property (other than employment tribunal proceedings);
- a floating charge will not be crystallised and any chargee is prevented from causing the floating charge to crystallise. This preserves a company’s ability to dispose of its floating charge assets in the ordinary course of business during the moratorium. However, the company will not be entitled to dispose of other charged property unless the court permits.
Eligibility for a Moratorium
Companies (including overseas companies with a sufficient connection to the UK) and LLPs can apply for a moratorium, although financial services related entities (such as insurers, banks and investment firms) are ineligible.
Obtaining a Moratorium
The court may make an order only if it is satisfied that a moratorium for the company would achieve a better result for the company’s creditors as a whole than would be likely if the company were wound up. To obtain an order, two conditions must be met:
- the directors need to make a statement that the company is or is likely to become unable to pay its debts as they fall due; and
- the monitor must confirm that it is likely that the moratorium would result in a rescue of the company as a going concern.
Duration of a Moratorium
The initial period of the moratorium will be 20 business days, unless extended by the directors for another 20 business days, either with or without creditor consent. Further extensions are possible with creditor consent (for up to a maximum of one year duration) or the consent of the court (for such period as the court thinks fit). For each extension, the two qualifying conditions referred to above for obtaining a moratorium must continue to be met. The moratorium can also be extended where a CVA has been proposed, until it has been disposed of, or similarly at the convening hearing for a scheme or restructuring plan to provide protection until the scheme or plan can be approved and sanctioned.
Management control during the Moratorium
The company’s management remains in control. However, the monitor is appointed to provide oversight and safeguards for creditors. The monitor has a duty to monitor the likelihood of rescue of the company as a going concern. If the monitor considers that a successful rescue is unlikely to be achieved, the monitor must terminate the moratorium.
Moratorium debts in any subsequent insolvency proceedings
As stated above, the company must pay its moratorium debts and pre-moratorium debts for which it does not have a payment holiday during the moratorium as they fall due. If any of such debts remain unpaid and the company goes into a subsequent procedure (such as a CVA, administration or liquidation) which begins before 12 weeks after the moratorium ends, these moratorium-related debts will have super-priority in the subsequent procedure. Lenders to a company in a moratorium cannot obtain a super-priority for their debt in a subsequent insolvency process if they accelerate that debt during the moratorium.
Creditors can challenge the actions, omissions or decisions of both the monitor and the directors on the basis of unfair prejudice. The court can make such order as it sees fit, including terminating the moratorium, but cannot make a compensation order against the monitor.
In general terms, the moratorium provides a welcome additional tool for corporate rescues. However, given the fact that a company must still be able to pay its debts incurred during the moratorium as they fall due and certain key pre-moratorium debts (including bank loans and other finance creditors) are excluded from the payment holiday, the scope for businesses to make use of the moratorium may be more limited than first imagined.