Add a bookmark to get started

23 November 20238 minute read

High Court exercises its discretion to grant a moratorium in favour of company subject to a winding-up petition

A free-standing moratorium for financially distressed but ultimately viable companies was introduced in 2020. It is sometimes called a Part A1 moratorium, after the part of the Insolvency Act 1986 which provides for it.

The Part A1 moratorium affords companies breathing space to pursue restructuring efforts, by prohibiting most types of creditor action. Despite its relatively infrequent use to date, it is a welcome tool for business rescue. As with all types of restructuring and rescue processes, early engagement with restructuring professionals increases the chances of successfully deploying a moratorium to rescue a business.

In a recently published High Court decision from February 2023, ICC Judge Greenwood looked at the test to be applied by the court when deciding whether to grant a Part A1 moratorium for a company subject to a winding-up petition. He held that:

  1. The court has a discretion whether to grant a moratorium in relation to an eligible company.
  2. That discretion is narrowed by the requirement in the legislation that the court may only make an order for a moratorium if it is satisfied that a moratorium would achieve a better result for the company's creditors than would be likely if the company were wound up without first being subject to a moratorium.
  3. This requires an assessment of the likely outcome if a moratorium were ordered against the likely outcome in a liquidation without a prior moratorium. If the likely outcome would, on the balance of probabilities, be better if a moratorium were granted, then the court can grant one.

The case provides welcome clarity for companies needing to use the in-court route to obtain a moratorium and shows the potential for the moratorium to be used in company rescue.


The Moratorium

The moratorium focuses on the recovery of companies rather than the realisation of their assets, and was widely greeted by the industry as a welcome addition to the UK's restructuring toolkit. For a refresher on the moratorium process, and how it operates, see our summary.

However, its usage has perhaps been lower than anticipated. Insolvency Service statistics indicate that the moratorium process has only been used on 47 occasions between its inception in June 2020 and October 2023.

In its three-year review of the measures implemented by the Corporate Insolvency and Governance Act 2020 (including the moratorium), the Insolvency Service identified certain concerns in relation to the moratorium process, namely that it was likely only to be used by SMEs, which commonly have a single bank as their only creditor. As the moratorium will not usually prevent financial service providers from enforcing their rights against the company, the utility of the moratorium for the business world more generally could been seen as lacking. This is compounded by exclusion of companies with GBP10 million or more of debt under capital market arrangements (which is quite widely defined). This exclusion precludes many larger companies from being eligible for the moratorium. Moreover, the review reports that a significant proportion of insolvency practitioners saw reputational risks associated with companies not being rescued as a going concern as a deterrent in deciding whether to recommend the moratorium. Nevertheless, a parliamentary review notes that, out of all the instances where the moratorium process has been used, more than half had resulted in the company being rescued as a going concern and over a quarter resulted in CVAs being successfully agreed.

Despite the concerns identified in the review, it is evident that the Part A1 moratorium remains a viable and potentially highly effective tool in certain circumstances.


The case

The Grove Independent School Limited (the Company) traded as an independent school with 200 pupils aged from three to 13 years old and with 50 staff. HMRC presented the Company with a winding-up petition for debts apparently accrued during (and as a result of) of the COVID-19 pandemic. The Company applied for a Part A1 moratorium.

While the Company was facing revenue problems it had a balance sheet surplus of GBP2 million and a freehold property valued at GBP4.25 million. The Company's only secured creditor was supportive of the application for moratorium and was reportedly willing to extend finance throughout it. Although HMRC were notified of the application, HMRC made no submissions and were not represented before the Judge, meaning that the application for moratorium was ultimately unopposed. The Company said it was seeking a moratorium to allow additional time for it to pursue a refinancing.

In the absence of any prior reported decision, the court was required to consider the relevant test to be applied in such circumstances.

ICC Judge Greenwood confirmed that, in accordance with the relevant legislation, the courts had a discretion as to whether to grant a moratorium which could only be exercised if the court was satisfied that the moratorium was likely to achieve a better result for the company's creditors as a whole than would be likely achieved by the company being wound up without the moratorium. He held that this requires an assessment of the likely or probable outcome if a moratorium were ordered against the likely or probable outcome in a liquidation without a prior moratorium. If the likely outcome would, on the balance of probabilities, be better if a moratorium were granted, then the court may grant one.

The court was satisfied in this case that the moratorium was likely to achieve a better result than an immediate liquidation. In reaching its decision, the court accepted the proposed monitors' conclusion that the moratorium was likely to result in the rescue of the Company as a going concern, as well as the evidence that the Company could self-fund throughout the moratorium, meaning that the creditors would not be worse off as a result. It contrasted this with the likely situation following liquidation, namely the chaos created for parents and children as well as the claims which could arise due to the school’s closure.

However, what is perhaps more instructive than the test itself (after all, provided the court does not find reason to disagree with the proposed monitors' assessment that the moratorium is likely to result in the rescue of the company as a going concern, this will presumably represent a better outcome for creditors than an immediate winding-up in the vast majority of situations), are ICC Judge Greenwood's comments that the analysis to be undertaken by the court in comparing the two possible outcomes ought to be conducted in a broad fashion and in accordance with the commercial realities (albeit it should be borne in mind that this was ultimately an unopposed application).

Having concluded that the relevant test was met, ICC Judge Greenwood further ruled that it was appropriate for the court to exercise its discretion to grant the application in a set of circumstances which represented precisely the sort of case which these new provisions were designed to meet.

ICC Judge Greenwood also remarked positively as to the comparative advantages of the moratorium process (versus an administration) for a company of this nature, namely that it would be a light touch process that would minimise disruption, adverse publicity and unnecessary costs, for a business fulfilling an important social function.


A success story for the moratorium

The decision provides a useful insight into the exercise of the courts' discretion in circumstances where a company subject to a winding-up petition wishes to avail itself of the protection of the moratorium process.

In particular, the court's willingness to take a proportionate and commercial approach to the comparison exercise between the likely outcome under a moratorium and in a winding-up will be well-received by the restructuring community.

It also appears to be an example of the moratorium process being successfully deployed; according to Companies House, the Company has now exited the moratorium, with the monitors considering that the rescue of the Company as a going concern had been achieved.

Ultimately, the moratorium remains a unique and potentially useful process which, if considered by directors at a sufficiently early stage of financial difficulties, has clear potential to facilitate the rescue of a company as a going concern.