The Restructuring and Insolvency Reforms: What You Need to Know

The New Moratorium Process

On 20 May 2020, the Government presented the Corporate Insolvency and Governance Bill (the "Bill") to Parliament. The Bill sets out the Government's proposed temporary measures in response to the COVID-19 pandemic, as well as long-planned – and permanent – reforms to insolvency and company law to facilitate the rescue of financially distressed businesses. 

One area of principal interest to professionals dealing with distressed companies is the new statutory moratorium process. This will be available to companies that are unable to pay their debts, but it is considered likely that a moratorium would result in the company being rescued as a going concern.

What do I need to know?

Under the Bill, companies will be able to seek a moratorium without entering an insolvency procedure, whilst the directors remain in control.

Traditionally, such a moratorium has been achieved by placing the company into administration or by proposing a CVA. In the recent case of Debenhams, we have seen the use of a ‘light-touch administration’ whereby powers are restored to the company’s directors under the Insolvency Act 1986 . While the Insolvency Lawyers Association and City of London Law Society have produced a template consent protocol, the ICAEW has cautioned against widespread use of the practice due to potential risks associated with giving too much power back to directors.

Companies and LLPs are eligible to apply. Financial services firms and contracts are not eligible for the moratorium.

How do I apply? 

• The moratorium must be proposed by the company’s directors. The directors must state that in their view the company is, or is likely to become, unable to pay its debts. It is likely that either a cash flow or balance sheet test could be used, as in the context of a directors’ out-of-court appointment of an administrator.
• The insolvency practitioner acting as proposed monitor must provide a statement that it is likely that a moratorium would result in the company being rescued as a going concern.
• The company must not have been subject to a moratorium, CVA or administration in the previous 12 months, or currently in any type of insolvency process.

The moratorium is commenced by either:

• An out-of-court filing, whereby eligible companies simply complete the prescribed documents with the court, with the appropriate endorsement of the monitor; or
• If the company is currently subject to a winding-up petition, the directors can apply to court for an order. In this event the court must be satisfied that the moratorium would achieve a better result for creditors as a whole than if the company was wound up without a preceding moratorium. Further, an overseas company must always use the in-court process.

Duration of moratorium

The moratorium will initially last 20 business days but is extendable for longer periods. It can be extended if the following conditions are met:

• Without creditor consent once, for a further 20 business days.
• With creditor consent up to a year in total (including the initial period), although potentially extendable again by creditors after that.
• By the court to a date set in its discretion (and also extendable again).

Conditions for extending a moratorium

• A moratorium can only be extended while it is still in effect.
• Moratorium debts (being debts for which the company has incurred liability during the moratorium) must have been paid or discharged.
• Pre-moratorium debts, for which the company does not have a payment holiday during the moratorium and to which the company has or may become subject before or during the moratorium, must also be paid. The definition of the term “pre-moratorium debts for which the company does not have a payment holiday during the moratorium” is a unclear but appears to include:

• the monitor’s remuneration or expenses;
• payment for goods or services supplied during the moratorium;
• rent apportioned to the moratorium period;
• wages or salary and redundancy payments that have fallen due before or during the moratorium period; and
• contractual debts or liabilities relating to financial services that have fallen due before or during the moratorium period.

What happens during a moratorium?

The company’s eligibility for and adherence to the terms of the moratorium will be policed by a “monitor” who must be an insolvency practitioner. They must monitor the company’s affairs during the moratorium to decide whether it remains likely that the moratorium will result in the rescue of the company as a going concern. The monitor may require the directors to provide information in connection with their monitoring functions and may apply to court for directions. The monitor also has power to terminate the moratorium early.

The moratorium will, broadly, allow the directors to retain control over the company, and prevents creditors from placing it into insolvency proceedings. Other aspects of the moratorium broadly follow the administration moratorium:

• landlords cannot forfeit without court permission;
• security cannot be enforced without court permission (other than certain types of financial collateral); and
• legal processes against the company cannot start or continue without court permission (except certain employment claims).

During the moratorium the company must inform a potential provider of credit of more than £500 that the moratorium is in force and if they fail to do so, it will be an offence of the company and the directors. The monitor’s consent is needed for the grant of fresh security, which will only be given if the monitor thinks this will support the company’s rescue as a going concern.

Early termination of moratorium

The monitor can bring the moratorium to an end by filing a notice with the court and must do so if:

• the monitor thinks that the moratorium is no longer likely to result in the rescue of the company as a going concern to the objective of rescuing the company as a going concern has been reached;
• the monitor cannot carry out his or her functions because the directors have not provided the monitor with necessary information; or
• the company is unable to pay moratorium debts that have fallen due or pre-moratorium debts not subject to a payment holiday. The moratorium will also terminate automatically if the company enters into an insolvency process.

Interaction between a moratorium and other insolvency procedures for the company

The directors can petition for the company to be wound up or place the company into administration (whether by an out-of-court or in-court process) but must notify the monitor first.

The directors must also notify the monitor if (but not necessarily before) they recommend a company resolution for voluntary winding up. At the point that the company then goes into liquidation the moratorium will automatically terminate.

In terms of rescue procedures, the Bill envisages that a CVA, scheme of arrangement or a new restructuring plan may be proposed while the company is subject to a moratorium. However, at the point that a CVA is approved or a court sanctions a scheme of arrangement or a new restructuring plan, the moratorium will terminate.