How useful will the new Moratorium be?
For businesses facing short-term financial issues, a new statutory Moratorium regime may provide a lifeline. It is a welcome addition to the IPs toolkit. However, the procedure introduced by the Corporate Insolvency and Governance Act 2020 has several areas of uncertainty, which will need to be further clarified.
The new procedure was consulted upon in 2016, and the basic drafting was started in 2018. That allowed for the fast-tracked insolvency protections to deal with the COVID-19 pandemic.
It is the UK’s first Debtor-in-Possession procedure as the Company remains under the control of and management of the directors, subject to oversight by the Monitor. Its sole purpose is to ensure the complete survival of the Company; not a sale of the business, or any assets.
Creditors do not need to give consent or be given notice of the moratorium prior to filing the documents at court.
It offers a breathing space from creditor enforcement to aid the Company – or for protection – whilst other rescue options are explored and implemented; most notably the Company Voluntary Arrangement. It is intended as a “light touch” procedure, and there is no requirement for a pre-determined exit route. And it comes with a raft of new terms that we all have to get used to using.
To avail itself of the procedure the Company must be unable, or likely to become unable to pay its debts. There is an initial time limit of 20 business days which can be extended for up to a year with the creditors and/or Courts permission.
All companies are eligible to access this procedure unless they are not – Schedule ZA1 specifies the ineligible companies mainly:-
- That the Company is not subject to an outstanding winding-up petition;
- Overseas companies (unless capable of being wound up in the UK);
- Banks, insurers, payment institutions, designated exchanges etc.;
- A company with over £10million of capital market debt.
The directors of the Company file the relevant documents, which include the proposed Monitor’s view that “it is likely that a moratorium for the company would result in the rescue of the company as a going concern”. I will return to this statement, and the role of the Monitor as this is the main cause for concern for IPs.
The effect of the Moratorium on creditors
It provides for:-
- A “payment holiday” during the Moratorium in respect of pre-moratorium debts;
- Restriction on insolvency proceedings;
- Restriction on enforcement and legal proceedings;
- Restriction on the crystallisation of floating charges;
- Restriction on security granted during the Moratorium save with the consent of the Monitor.
Whilst there are restrictions on enforcement action, it does not stop creditors issuing any default notices, nor does it stop the right of set-off between the Company and a creditor. Now the issue of a default notice may not seem worthy of note. Still, it may bring forward an accelerated payment during the Moratorium bringing cashflow pinch points and even the undermining and collapse of the whole process.
The Moratorium provides for a “payment holiday” for pre moratorium debts, but there are some debts not protected against the effects of the Moratorium:-
- Goods or services supplied during in the Moratorium;
- Rent during the Moratorium;
- Wages or salaries under a contract of employment (including holiday pay);
- Redundancy payments;
- Debts or other liabilities arising under a contract or other instrument involving financial services.
The “payment holiday” debts must still be paid (otherwise it would not be rescued as a company) but not during the course of the Moratorium.
The outcomes envisaged by the bill is the rescue of the Company, and as I have noted above, this could be a stand-alone procedure. There are, however, other possibilities where the Company may need additional support to achieve the desired outcome. These are:-
- A Company Voluntary Arrangement;
- Implementing a Restructuring Plan – another new procedure under the Act;
- A Scheme of Arrangement;
- On failure – administration or liquidation.
The role of the Monitor
The Monitor will be required to file into Court a statement that in his/her view “it is likely that a moratorium for the company would result in the rescue of the company as a going concern”. As the Act, and the guidance issued by the Insolvency Service, envisaged this to be a “light touch” procedure (and therefore the costs of the office holder are supposed to reflect this light touch), the Monitor will not be undertaking an audit of the Company, nor will be heavily involved in running the business.
How then can the Monitor, who will be an officer of the Court, reasonably make this statement? This is supposed to be an objective test so how can the Monitor make a factual, unbiased statement without all the facts? And what does the term “likely” mean? We are going to have to take our steer from the position of a Nominee in a Company Voluntary Arrangement, and there is good case precedent on this role for us to follow. Whether the Courts will take the same view remains to be seen if a challenge is made.
The Monitor then has an ongoing duty to monitor the Company and must fail the Moratorium if the Company cannot achieve the stated purpose or fails to pay moratorium debts or pre moratorium debts for which the Company does not have a payment holiday. If the Monitor is not supposed to be involved in the oversight of the business, does not have an in-depth ongoing review of the Company’s position how will he/she know that debts are not being paid, that the rescue is not going to plan; especially when directors may not be that forthcoming?
Such clarifications will come once the Courts have reviewed a few challenges to Monitor’s statements or director’s decisions. So, watch this space!
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