The Corporate Insolvency and Governance Act 2020 has introduced a new standalone moratorium procedure for companies.1 The moratorium is part of a package of significant legislative reforms contained in the Act, intended to enhance the UK’s restructuring rescue culture. These were originally consulted on between 2016 and 2018 and were fast-tracked to deal with the COVID-19 pandemic.
The moratorium is a director led process which leaves the directors in situ to trade the company with an insolvency practitioner acting in the role of “monitor” overseeing the company’s affairs. The aim is to afford companies some breathing space from creditor action to formulate a turnaround plan without adding significant costs. The moratorium is focused on the recovery of the company rather than the realisation of its assets. This change in focus may be essential as lockdown guidelines begin to ease and the economy is kickstarted. Businesses will need time to get back up to speed and reconfigure following the effects of months of limited trading.
The Act includes some temporary concessions to the rules to enhance access to the moratorium and help facilitate business recovery. These temporary measures were initially planned to be in place until 30 September 2020, some were lifted on 1 October 2020 but others have been extended to apply until 30 September 2021, as outlined below.
The moratorium provides 20 business days protection from certain creditor action. It can be extended for a further 20 business days without any consent, or for longer with consent of the pre-moratorium creditors or the court. Early termination is also possible. The moratorium is broadly similar to the administration moratorium, and includes restrictions (among others) on insolvency proceedings, enforcement of security, and forfeiture.
The monitor must be, and remain, of the view that a rescue of the company will be possible. If the monitor is no longer of the view that rescue is possible the moratorium must end.
During the moratorium, the company must continue to pay certain debts including newly incurred liabilities, payments for new supplies, rent in respect of the moratorium period, certain payments due to employees, and debts under financial contracts, including lending contracts. If those debts are not paid, the moratorium will end. Support from lenders will therefore be required. The provisions for payment of rent may also cause some issues, as explored further below.
There is also provision for a slightly narrower category of debts to be given priority in an insolvency occurring within 12 weeks of the end of the moratorium. This aspect of the moratorium was the subject of much debate and some significant amendments in the House of Lords as the Bill made its way through the parliamentary process. There were concerns that accelerated financial debts could be given this super priority status, but amendments in the House of Lords have sought to deal with that issue.
Generally, companies are eligible to use the moratorium if:
- they are incorporated under the Companies Act 2006 or they are unregistered but may be wound up under the Insolvency Act 1986 (this category includes overseas companies);
- the directors state that the company is, or is likely to become, unable to pay its debts; and
- the monitor is of the view that it is likely a moratorium would result in the rescue of the company as a going concern.
It is not clear how much 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 may be that as an officer of the court high professional standards will be expected in this regard. It is likely that the boundaries of this test will need to be established by the courts, and there is already some debate in the market as to whether “likely” should be interpreted more akin to a “reasonable prospects” test. In any event, any proposed monitor will want to satisfy themselves that there is a deliverable plan in place for the rescue of the company as a going concern, rather than the moratorium process being used on a speculative basis in the hope that the directors may find a solution with the benefit of time.
The requirement that a rescue of the company, rather than the business, as a going concern is likely, will mean that the moratorium cannot be used to stabilise a company’s position in preparation for a sale of the business, whether through a pre-pack administration or otherwise. Concerns were raised around both these points in the House of Lords debates on the legislation, with suggestions made that the moratorium should be available where it could rather than would result in rescue, and where the business could be rescued but the company could not. Neither of these suggested changes were accepted.
Companies already subject to an insolvency procedure and those that have been in a moratorium, CVA or administration in the previous 12 months are not eligible.
Companies which are excluded from the moratorium are listed at schedule 1 of the Act and include insurance companies, banks, electronic money institutions, investment banks and firms and parties to capital market arrangements. Of particular interest is the exclusion of companies which have issued certain types of bonds – this could be a large sector of the economy and many of these companies have been severely impacted by the COVID-19 pandemic.
There are some temporary changes to the eligibility criteria:
Until 1 October 2020:
- The requirement that the monitor is of the view that it is likely a moratorium would result in the rescue of the company as a going concern was relaxed slightly so that the monitor must only have been of the view that a rescue would be possible were it not for any worsening of the financial position of the company for reasons relating to coronavirus.
- There was an additional exclusion from eligibility. Certain regulated companies which may have held money for clients were not eligible for moratorium.
Until 30 September 2021, a company will be eligible for a moratorium even if it was subject to a prior moratorium or administration or CVA in the previous 12 months.
How to enter into a moratorium
There are two ways a company may enter moratorium:
- By the directors filing relevant documents at court (the out-of-court process).
The out-of-court process is similar to the current process for appointing administrators out of court, but unlike the administration process, no prior notice is required to be given to floating charge holders before the directors file for moratorium.
The out-of-court process will usually only be available to a company if it is not subject to an outstanding winding up petition and is not an overseas company. But to make the procedure more accessible to companies dealing with the COVID-19 situation, companies which are not overseas companies, but are subject to a winding-up petition, will be able to use the out-of-court process until 30 September 2021.
- By the directors making an application to court (the in-court process).
There are two circumstances where, in ordinary circumstances, the directors of a company may use the in-court process:
- where there is an outstanding winding up petition ; or
- where the company is an overseas company.
However as noted above, until 30 September 2021, companies which are not overseas companies, but are subject to an outstanding winding-up petition, will be able to use the out-of-court process. Therefore the only companies using the in-court process during this initial period will be overseas companies.
Where the company is subject to an outstanding winding-up petition, the court may make an order for a moratorium only if it is satisfied that a moratorium would 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). In the alternative, the court may make any other order which the court thinks appropriate, for example the court may make an order for the company to be wound up or for the company to enter into administration if there is no benefit to the company in having a moratorium first.
The documents that need to be filed for the out-of-court process and that will accompany an application for the in-court process are the same. They include: statements from the directors that they wish to obtain a moratorium and that they are of the view that the company is or is likely to become unable to pay its debts; and statements from the monitor(s) that they are qualified and consent to act, that the company is eligible and that in the monitor’s view it is likely that the moratorium will result in the rescue of the company as a going concern.
Pre-moratorium debts, priority pre-moratorium debts, moratorium debts and payment holidays
The Act divides the company’s debts into three categories:
- pre-moratorium debts for which the company has a payment holiday;
- pre-moratorium debts for which the company does not have a payment holiday; and
- moratorium debts.
The significance of these is that the company must continue to pay pre-moratorium debts without a payment holiday and moratorium debts during the moratorium, but it is severely restricted in its ability to pay pre-moratorium debts with a payment holiday. Those owed pre-moratorium debts with a payment holiday are not able to get court permission to enforce security in respect of those debts.
What is a pre-moratorium debt?
A pre-moratorium debt is, essentially, a debt which existed before the moratorium began, or, a debt which did not itself exist before the moratorium began but where the obligation under which the company later becomes liable to pay that debt did.
What are pre-moratorium debts with and without a payment holiday?
Pre-moratorium debts are divided into those with a payment holiday and those without a payment holiday.
Pre-moratorium debts without a payment holiday are those pre-moratorium debts which have fallen due before the moratorium or which fall due during the moratorium and which are amounts payable in respect of:
- the monitor’s remuneration and expenses (for the period of the moratorium);
- goods and services supplied during the moratorium;
- wages or salary arising under a contract of employment;
- redundancy payments;
- rent in respect of a period during the moratorium; and
- debts or other liabilities arising under a contract or other instrument involving financial services – which includes a loan agreement.
All other pre-moratorium debts are pre-moratorium debts with a payment holiday.
What is a priority pre-moratorium debt?
Priority pre-moratorium debts are a slightly narrower category of pre-moratorium debts without a payment holiday. The significance of these is that priority pre-moratorium debts are able to gain priority or protection in a subsequent process, as explained further in the section on Debts having priority or protection in subsequent process below.
The key difference between priority pre-moratorium debts and pre-moratorium debts without a payment holiday is that amounts due under a contract or other instrument involving financial services are not included in priority pre-moratorium debts if they fell due before or during the moratorium because of the operation or exercise of an acceleration or early termination clause or right in the period from the day on which the monitor’s statement that rescue would be likely is made (so slightly before commencement of the moratorium) and the end of the moratorium. There is also a slight difference in the treatment of wages and salary as such amounts are only included in priority pre-moratorium debts if they relate to a period of employment before or during the moratorium.
As drafted initially the legislation gave priority status to all pre-moratorium debts without a payment holiday, but concerns were raised that the exercise of acceleration rights by financial creditors could allow them to gain super priority for the full amount due to them. This narrower category of debt was introduced to address this.
What is a moratorium debt?
A moratorium debt is, essentially, a new debt arising during the moratorium or a debt which might arise after the moratorium but due to an obligation incurred during the moratorium.
Lenders’ ability to stifle the moratorium
Given that financial debts and liabilities are classed as pre-moratorium debts without a payment holiday, and it is a condition of the moratorium continuing that such debts continue to be paid, it will be possible for lenders who do not support the moratorium to bring it to an end.
They could do this by exercising their rights to accelerate payments due under their lending agreements and call for all sums due thereunder to be repaid (such rights are not caught by the restrictions on termination of contracts upon insolvency - please see our article for more detail on these restrictions). Equally, a lender will be able to make demand in respect of on demand facilities. This would almost certainly mean that an already distressed company is unable to pay and therefore would force the monitor to terminate the moratorium. Lenders will not however be able to benefit from enhanced priority rights in a subsequent process within 12 weeks of the moratorium ending (see further on this under Debts having priority in subsequent administration or liquidation of the company ).
This means that for the moratorium to be fully effective the company will need to have the support of its lenders, and possibly enter into some form of waiver or standstill agreement with them. This potentially limits the benefits and wide-spread use of the moratorium procedure.
The drafting in respect of a company’s liability to pay rent while in a moratorium is unclear.
The legislation refers to “rent in respect of a period during the moratorium” that falls due before or during the moratorium period as being a pre-moratorium debt that is not subject to a payment holiday. How this will be applied in practice is somewhat uncertain and the existing drafting could have some unintended consequences.
Where rent is payable in advance and falls due before or during the moratorium, it might appear that this liability should be apportioned on a daily basis in the same manner as the current law on payment of rent as if an expense in administrations, such that the company is only obliged to pay the rent for the period that the company is in a moratorium, rather than the whole rental period, however that is not expressly set out.
From the drafting, the view may be taken that rent which is payable in arrears and falls due for payment during the moratorium would only have to be paid for the period which relates to the moratorium since the legislation refers to the rent for the period of the moratorium. However, again this is not expressly set out. The drafting could lead to strategically timed moratoria (ie a day or two after quarterly rent payment dates) where rent is payable in arrears as the company would not have to make payment of that rent given that no sums relating to the period of the moratorium will have fallen due. This may not be what was intended by the draftsman, but could be a natural consequence of the Act, until tested by the Court.
When does the moratorium become effective?
Where the out-of-court process is followed, the moratorium commences when the relevant documents are filed with the court. Where the in-court process is followed, the moratorium commences when the court order is made.
The directors must then notify the monitor who must send a notice to all known creditors, the Registrar at Companies House and (if relevant) the Pensions Regulator or the Pension Protection Fund (PPF). Therefore, it will be a matter of public record that a company has entered into a moratorium process.
The effect of a moratorium on insolvency proceedings
During a moratorium creditors and shareholders are restricted from commencing an insolvency process (liquidation, administration or administrative receivership).
Directors may still put the company into a process, and voluntary liquidation is possible if recommended by the directors.
The effect on legal proceedings/enforcement of rights
During a moratorium:
- a landlord may not exercise its right of forfeiture or irritancy;
- there can be no enforcement of security (except financial collateral or a collateral security charge);
- there can be no repossession of goods under a hire purchase agreement or exercise of a retention of title clause;
- no legal proceedings or legal process may be raised, carried out or continued (except employment tribunal proceedings, legal processes arising out of such proceedings or proceedings involving a claim between an employer and a worker),
in each case without the permission of the court;
Unlike administration, there is no provision whereby the monitor can grant his consent to such proceedings during the moratorium.
In addition, during a moratorium, the holder of an uncrystallised floating charge on the property of the company is prohibited from giving notice which would have the effect of either (i) causing the floating charge to crystallise or (ii) restricting the disposal of the property of the company.2 This is to allow the business to continue to trade normally during moratorium.
There is some ambiguity as to whether new security granted by a company during a moratorium can be enforced. While the Act states that such security may be enforced if the monitor consented to the grant of the security, the relevant provision also refers back to the overall prohibition on enforcement of security. This seems to indicate that a new as well as existing security holder cannot enforce during the moratorium, but the drafting is not clear.
Restrictions on a company in a moratorium
During a moratorium there are various restrictions imposed on the company. These are set out in the table below.
|Things the company may not do
|Obtain credit of more than GBP500 (this includes entry into a conditional sale agreement for the supply of goods or hire purchase agreement or the company being paid in advance for the supply of goods or services).
||The company may obtain credit of more than GBP500 if the creditor has been informed that the company is in a moratorium.
||Security may be granted if the monitor consents. Consent will only be provided if the monitor thinks that the grant of security will support the rescue of the company.
Enter a transaction of the following nature:
- market contract;
- financial collateral arrangement;
- transfer order;
- market charge or a system-charge; or
- collateral security.
|Dispose of property
A company may dispose of its property if:
- the disposal is made in the ordinary way of the company’s business;
- the monitor consents; or
- it is done pursuant to a court order.
|Make payments in respect of pre-moratorium debts for which the company has a payment holiday, in an amount which (in total) exceeds the greater of GBP5000 and 1% of the company’s total unsecured debt when the moratorium began.
Such payments can be made
- if the monitor consents;
- they are made pursuant to a court order; or
- they are required in relation to a court ordered disposal of secured or hire purchase/retention of title property.
Where the monitor’s consent is required as a condition to the action such consent will only be given if the monitor thinks that it will support the rescue of the company as a going concern.
Duration of a moratorium
The initial period of the moratorium is 20 business days. This is a very short period of time for a company to negotiate and be ready to implement a substantive restructuring. Therefore, we would expect the vast majority of moratoria to be extended and in practice, given the ease by which the directors can extend the moratorium (as set out in the next section), we expect that many moratoria will last at least 40 business days.
Termination of the moratorium
A monitor must terminate the moratorium if the monitor thinks 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;
- as a result of the failure of the directors to provide information regarding the company required and requested by the monitor, the monitor is unable to carry out the monitor’s functions;
- the company is unable to pay any moratorium debts or pre-moratorium debts for which the company does not have a payment holiday (which as discussed above includes any sums owed to its lenders).
In addition a moratorium will come to an end:
- if the company enters another insolvency process (administration, including filing a notice of intention to appoint, CVA, liquidation)
- if a restructuring plan or scheme of arrangement is sanctioned
- if the court so orders;
- automatically upon the expiry of the moratorium term.
What is the process for extending a moratorium?
The table below sets out the extension processes:
||Extension by directors without creditor consent
||Extension by directors with creditor consent
||Extension by court on application by directors
||20 business days after the initial period ends.
The maximum period is 364 days (including the initial 20 business day period).
A moratorium may be extended by creditor consent more than once.
There is no maximum extension period.
A moratorium may be extended by application to court more than once.
|Conditions that must satisfied for all extensions
Directors state that all moratorium debts and pre-moratorium debts for which the company does not have a payment holiday during the moratorium that have fallen due have been paid.
Directors state that, in their view, the company is, or is likely to become, unable to pay its pre-moratorium debts.
Monitor states that their view remains that it is likely that the moratorium will result in the rescue of the company as a going concern.
|Additional Conditions that must be satisfied
||Directors file notice at court stating that they wish to extend the moratorium.
Directors file notice at court stating that they wish to extend the moratorium.
Consent of a majority of pre-moratorium creditors with a payment holiday whose debts have not been discharged.
Directors must confirm that all the above conditions are satisfied and state whether pre-moratorium creditors with a payment holiday have been consulted about the application and if not why not.
In determining whether to make an order to extend the period of the moratorium, the court will consider:
- the interests of the pre-moratorium creditors; and
- the likelihood that the extension of the moratorium will result in the rescue of the company as a going concern.
No extensions can be sought within the first 15 business days of the moratorium. Therefore if the directors did not wish to avail themselves of the 20 business day extension without consent, that only leaves 5 business days for either an application to be made to court and be heard or for creditor consent to be obtained and the filing made at court. We therefore expect that in most cases where an extension is required the directors will extend without consent and use the second 20 business days to secure a further extension, if needed.
There are particular rules relating to extensions of the moratorium where the company subsequently enters into another insolvency process. Where directors make a CVA proposal the moratorium is automatically extended until the CVA takes effect. Where the company applies for an order to convene meetings in respect of a scheme of arrangement or a restructuring plan, the court has discretion to grant an order to extend the moratorium.
Debts having priority or protection in subsequent process
If within 12 weeks of the end of the moratorium a company enters into administration or liquidation, unpaid moratorium debts and priority pre-moratorium debts are given a priority ranking in the insolvency distribution waterfall. Such debts fall to be paid out after fixed charges but ahead of insolvency practitioner expenses and remuneration, preferential creditors, the prescribed part and floating charge holders.
Priority pre-moratorium debts include all lending whether secured or unsecured, but not accelerated debt (as discussed above under What is a priority pre-moratorium debt?). If new lending is made during the moratorium and remains unpaid then this will have the elevated priority (as a moratorium debt). In cases where there are substantial moratorium debts and priority pre-moratorium debts, these priority arrangements may not leave much in the way of funding for an administrator or liquidator’s remuneration, before distributions can then be made to preferential creditors and then floating charge distributions. Similarly, the priority arrangements where there are insufficient funds to pay all moratorium debts and priority pre-moratorium debts put the monitor’s remuneration and expenses at the end of the queue.
Moratorium debts and priority pre-moratorium debts also have protection from compromise in a CVA, scheme of arrangement, or the new restructuring plan procedure, again if the process occurs within 12 weeks of the end of the moratorium.
The role of the monitor
The monitor must be a licensed insolvency practitioner. The monitor’s role is to ensure the conditions for the moratorium to be in place continue to be met and to protect creditors’ interests.
The first statement in the Act regarding the role of the monitor is that the monitor is an officer of the court. The monitor’s purpose is to monitor the company’s affairs for the purposes 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.
As noted above the monitor’s consent is required for the directors to undertake certain transactions, otherwise the day to day running of the business of the company remains with the directors, thus making the moratorium a debtor-in-possession process.
The monitor must terminate the moratorium in certain circumstances as described under Termination of the moratorium above.
Right to challenge
The Act provides for the right to challenge the monitor’s or the directors’ actions, decisions or failure to act on the grounds of (actual or prospective) unfair harm to the applicant. There is also a right for a subsequently appointed administrator or liquidator to challenge the monitor’s remuneration as excessive.
The Act creates new offences of fraud during or in anticipation of a moratorium and false representation to obtain a moratorium.
While the moratorium as a debtor-focused process is a welcome addition to the UK’s restructuring toolkit, the Act has a number of areas of uncertainty/anomalies, which will need to be navigated in practice and possibly clarified by the courts or further amendment to the Act.
1The moratorium is also available to LLPs, but in this article we focus on companies.
2There are exclusions for collateral security, market charges, financial collateral arrangements and system charges.