Corporate Insolvency and Governance Act 2020 – Moratorium Procedure

Overview

As part of the Corporate Insolvency and Governance Act 2020, a new stand alone moratorium procedure has been introduced, which is aimed to assist with the restructuring and rescue process for companies within the UK.

The moratorium is a director led process, which provides the ability for directors to remain in control of the day to day running of their business, with an insolvency practitioner acting in the role as a “monitor” overseeing the company’s affairs.

The aim is to provide protection from creditor pressure whilst formulating a rescue plan, without the requirement to incur significant professional costs.  The process is focussed on the rescue of the company rather than a sale of the business and/or its assets and is aimed to assist with providing requisite breathing space for businesses as the lockdown eases after months of limited to no trading.

The moratorium provides 20 business days protection from certain creditor action, which may be extended for a further 20 business days without consent.  For any further extension, consent of the pre-moratorium creditors, or the court is required.

To allow the moratorium to process to proceed and continue, the monitor must be of the opinion that the rescue of the company is achievable.  However, should this view change at any time during the moratorium period, then it must be brought to an end.

Who can obtain a Moratorium?

Companies will be eligible to utilise the moratorium, providing they are incorporated under the Companies Act 2006, or they are unregistered but may be wound up pursuant to The Insolvency Act 1986, subject to the following:

• the director(s) form the opinion that the company is, or is likely to become unable to pay its debts;
• the monitor considers that it is likely that a moratorium will result in the rescue of the company as a going concern.

Companies already subject to an insolvency process and those that have been in a moratorium, CVA or Administration in the previous 12 months are not eligible.  However, this requirement is relaxed during the period to 30 September 2020, where these companies would remain eligible for a moratorium irrespective of these prior proceedings in the previous 12 months.

How to obtain a Moratorium   

A detailed above, the moratorium is a director led process, which may be brought into effect as an out of court procedure, on upon application to the court:

Out of Court Process

Similarly to the current process for appointed an administrator of a company out of court, the directors are required to file relevant documents at court.  However, unlike the administration process, no prior notice is required to be given to qualifying floating charge holder before the directors file for moratorium.

Going forwards, the out of court process will only be available if it is not subject to an outstanding winding up petition; however, as with the short term relaxations detailed above, until 30 September 2020, this restriction will not apply due to the Covid-19 situation.

In Court Process

After 30 September 2020, when the relaxation is removed, should a company be subject to an outstanding winding up petition, then an application must be made to court for a moratorium.

Where the company is subject to an outstanding winding up petition, the court may only make an order for a moratorium if it is satisfied that a moratorium will achieve a better result for the company’s creditors as a whole than would be likely if the company were wound up (without first being subject to a moratorium).  The court may also make any other order which it thinks appropriate in the circumstances, such as the court may make an order for the company to be wound up, or for the company to enter into administration if there is considered to be no benefit to the company first having a moratorium.

The documents required for either process will be the same, and will include:

• statements from the director(s) that they require a moratorium and are of the opinion that the company is, or is likely to become unable to pay its debts;
• statements from the monitor(s) that they are qualified and consent to act, and it is also their view that it is likely the moratorium will result in the rescue of the company as a going concern.

When does the moratorium take effect?

Where the out of court process is followed, the moratorium begins upon the filing of the relevant documents in court.

When an application to court for a moratorium is required, the moratorium will commence upon the making of the court order.

Once the moratorium becomes effective, the directors must notify the monitor who will be required to send notice to all known creditors of the company, the Registrar of Companies, and if appropriate, the Pension Protection Fund and Pension Regulator.

Accordingly, the moratorium will be a matter of public record.

Effects of the moratorium on insolvency and legal proceedings

During a moratorium, the directors of the company may still utilise their rights to commence an insolvency process.

However, creditors and shareholders are restricted from commencing insolvency proceedings during a moratorium.

Additionally, unless the permission of the court is granted, the company is afforded the following protection during a moratorium:

• a landlord may not exercise its rights of forfeiture;
• there can be no enforcement of security;
• goods subject to a retention of title clause or hire purchase agreement may not be repossessed;
• no legal proceedings may be instigated or continued (except employment tribunal proceedings or claims between an employer and a worker)

Restrictions on a company during a moratorium

The company may not obtain credit of more than £500, unless the creditor has been informed the company is subject to a moratorium.

Security may only be granted by the company if the monitor consents.  Consent will only be given if the monitor considers that the granting of security will support the rescue of the company.

The company may only dispose of property if:

1. the disposal is made in the ordinary course of the company’s business;
2. the monitor consents; or
3. it is done pursuant to a court order.

Duration of a moratorium

The moratorium lasts for an initial period of 20 business days.  Given this is a very short timeframe to allow the company to prepare and implement a detailing restructuring plan, the moratorium may be extended (further details below).

Extending a moratorium

Subject to certain conditions being satisfied, the moratorium may be extended by the directors without creditor consent, for an additional period of 20 business days beginning after the initial period ends.

If a longer or further extension is required, the directors are able to extend the moratorium by obtaining creditor consent.  In this circumstance, the maximum period for the moratorium is 364 days, which includes the initial 20 business day period.

A moratorium may be extended by creditor consent more than once.

Alternatively, the directors may apply to court to extend the moratorium.  Where the extension is applied for via court, there is no maximum extension period, and a moratorium may be extended by court application more than once.

It is important to note that no extensions may be sought within the first business days of the moratorium.  Given this only leaves a short period of the initial moratorium to secure an extension, in practice it is likely that in most cases where an extension is required, an initial extension is obtained by creditors without the consent of creditors, which will allow the subsequent 20 business day period to consider a further application by way of creditor consent or court application.

Ending the moratorium

The monitor must terminate the moratorium if they consider that:

• the moratorium is no longer likely to result in the rescue of the company as a going concern;
• the objective of rescuing the company as a going concern has been achieved;
• the monitor is unable to carry out their functions, as a result of non-provision of company information by the directors required and requested by the monitor;
• the company is unable to pay any moratorium debts, or pre-moratorium debts for which it does not have a payment holiday.

Additionally, the moratorium will end should any of the following be applicable:

• if the company enters an alternative insolvency process;
• if a restructuring plan or scheme of arrangement is approved;
• by order of the court;
• automatically upon expiry of the moratorium term.

Role of the monitor

It remains unclear the extent of work the monitor is expected to undertake to form the view that the moratorium is likely to result in the rescue of the company as a going concern.  It is likely that as an officer of the court, high professional standards will be expected in this regard.

Any proposed monitor will want to satisfy themselves of the feasibility of the rescue plan, rather than agreeing to the process being used on a more speculative basis, with the hope that the company will be able to survive.

The monitor must be a licensed insolvency practitioner, with the duty of ensuring that the conditions for a moratorium continue to be met, together with protecting the interests of creditors.

The role of the monitor is to monitor the company’s affairs for the purposes of forming and maintaining the view that it is likely that the moratorium will result in the rescue of the company as a going concern.

The day to day running of the business remains with the directors; however, as noted above, the monitor’s consent is required for the directors to undertake certain actions.

The monitor must terminate the moratorium in the circumstances detailed in the relevant section above.

Right to challenge

The Act provides for the right to challenge the actions of the monitor or the directors, including any decisions made or failure to act, on the ground of actual or prospective unfair harm to the applicant.

Additionally, there is also the right for a subsequently appointed administrator or liquidator to challenge the monitor’s remuneration as excessive.

Conclusion

Whilst the moratorium process is welcomed as a potential rescue tool in light of recent events, there remains uncertainty in a number of aspects, which will be interesting to see how these are dealt with in practice and possibly clarified with further court direction or amendments to the act.

Should you have any clients concerned about the viability of their business as a result of the recent Covid-19 pandemic, or otherwise, please do not hesitate to contact one of our licensed insolvency practitioners, who will be delighted to discuss the position with you and hold an initial free of charge consultation.

It is always recommended that specialist advice is obtained by directors at the earliest opportunity, which can often result in the greatest chance of assisting a business with a rescue/turnaround process, and this is very much key when considering the moratorium process.