Corporate Insolvency and Governance Bill—moratorium

Corporate Insolvency and Governance Bill—moratorium

On 20 May 2020, the government released details of the Corporate Insolvency and Governance Bill. We look at the provisions relating to the new standalone moratorium process, including how the process may be commenced, extended and challenged.

Spurred on by the coronavirus (COVID-19) pandemic, the government has released details of the Corporate Insolvency and Governance Bill. The government previously consulted on proposed changes to the UK’s insolvency regime and published its response on 26 August 2018. The current Bill is currently progressing through parliament and various provisions may be amended in that process. The Bill largely follows the conclusions set out in the government’s response and this News Analysis comments on the Bill as at 20 May 2020.

Among the proposed reforms, the Bill introduces new provisions into the Insolvency Act 1986 (IA 1986) to create a new, standalone moratorium available to financially distressed companies.

For a more general read on the Bill, see News Analysis: Corporate Insolvency and Governance Bill. Other specific News Analysis on the Bill includes:

What are the proposed changes?

Directors of insolvent companies or companies that are likely to become insolvent can obtain a 20 business day moratorium period which will allow viable businesses time to restructure or seek new investment free from creditor action. The moratorium will be overseen by an insolvency practitioner acting as a ‘monitor’ although the directors will remain in charge of running the business on a day-to-day basis (known as a ‘debtor-in-possession’ process with the company being the ‘debtor’) subject to certain constraints. The intention is to provide a streamlined procedure that keeps administrative burdens to a minimum, makes the process as quick as possible and does not add disproportionate costs on to struggling businesses.

The moratorium will be free-standing—it is not be a gateway to a particular insolvency (or any process at all, if the company can be rescued during the moratorium without needing entry into an insolvency procedure).

Who is eligible to apply?

The company needs to meet the following criteria:

  • it is, or is likely to become, unable to pay its debts, and
  • it is likely that the moratorium would result in the rescue of the company as a going concern

The directors must confirm the former in a statement to the court whereas the monitor must confirm the latter. As a temporary measure, until 30 June 2020 (or the date one month after the Bill becomes an act) the monitor is able to qualify their statement such that the moratorium would be likely to result in the company being rescued as a going concern or would do so if it were not for any worsening of the financial position due to coronavirus.

In addition, new IA 1986, Sch ZA1 excludes certain companies from using the moratorium. These include:

  • companies already subject to a formal insolvency procedure
  • companies who have in the last 12 months been subject to a moratorium (unless the court orders not to take that into account) or a company voluntary arrangement (CVA) or administration (as a temporary measure, this exclusion is omitted until 30 June 2020 (or the date one month after the Bill becomes an act))

  • certain types of companies, including: insurance companies, banks, securitisation companies and parties to capital market arrangements


How to apply

The directors of an eligible company may apply for the moratorium in two ways:


  • if there is no outstanding winding-up petition, by filing relevant documents with the court (we expect this to be a similar process to the out-of-court route to appoint administrators)
  • if there is an outstanding winding-up petition, by an application to court

As a temporary measure, until 30 June 2020 (or the date one month after the Bill becomes an act), a company which is subject to an outstanding winding-up petition is entitled to file the relevant papers at court rather than make an application to court.

An overseas company may also apply to court for a moratorium provided it is not subject to an outstanding winding-up petition.

Where the company is a regulated company, written consent of the Financial Conduct Authority or the Prudential Regulation Authority to the appointment of the proposed monitor must be included with the filing or application.

During the moratorium

During the moratorium the company must continue to pay on-going costs of running the business during the moratorium (defined as moratorium debts in the Bill). In addition, the company must meet the following pre-moratorium debts which do not benefit from a payment holiday during the moratorium:


  • the monitor’s remuneration and expenses
  • goods/services supplied during the moratorium
  • rent in respect of a period during the moratorium
  • wages or salary arising under a contract of employment
  • redundancy payments, or
  • debts or other liabilities arising under a contract or other instrument involving financial services (as defined in new IA 1986, Sch ZA2)

The moratorium that arises is very similar to the moratorium that arises in an administration under IA 1986, Sch B1:


  • no insolvency proceedings may be commenced, other than on an application by the directors or on public interest grounds
  • no steps may be taken without the permission of the court in relation to forfeiture, enforcement of security (other than in relation to financial collateral), repossessing goods under a hire purchase agreement or instituting/continuing any legal process (other than employment related claims)

The directors of the company remain in control of the company during the moratorium but are subject to certain restrictions designed to protect creditors. These include:


  • no credit may be obtained in excess of £500 unless the lender has been informed that there is a moratorium is in force
  • security can only be granted if the monitor consents on the basis that the grant of security will support the rescue of the company as a going concern
  • a prohibition on entry into certain financial instruments
  • no payment of pre-moratorium debts in excess of the greater of £5000 or 1% of total indebtedness unless the monitor agrees. The monitor can only consent on the basis that they think it will support the rescue of the company as a going concern
  • restrictions on the disposal of property unless the disposal is made in the ordinary way of the company’s business or the monitor or court consents

Throughout the moratorium, the monitor must monitor the company’s affairs for the purpose 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. To enable the monitor to do this, the monitor may require the directors of the company to provide any information they require as soon as practicable.


Extending the moratorium

The initial 20 business day moratorium may be extended in a number of ways:


  • extension by directors without creditors consent—the directors may apply after the first 15 business days for a further 20 business day extension by filing certain documents at court. The monitor is required to re-confirm that it is likely that the moratorium will result in the rescue of the company as a going concern
  • extension by directors with creditors consent—the directors may apply after the first 15 business days for an extension of up to 12 months by filing certain documents at court. Creditor consent is to be obtained using a qualifying decision procedure and the moratorium may be extended more than once. The monitor is required to re-confirm that it is likely that the moratorium will result in the rescue of the company as a going concern
  • extension by court on application by directors—the directors may apply to court after the first 15 business days for an extension (the Bill does not provide for an end date so it is up to the discretion of the court). This will likely be used where the directors require an extension greater than 20 days but are unable to obtain creditor consent. The monitor is required to re-confirm that it is likely that the moratorium will result in the rescue of the company as a going concern. The court is required to consider both 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
  • extension while proposal for CVA pending—where the directors make a proposal for a CVA, the moratorium ends when the CVA proposal is disposed of
  • extension by court in course of other proceedings—the court may extend the moratorium where an application is made under section 896 or 901C(1) of the Companies Act 2006 (arrangements and reconstructions: court order for holding of meeting) and a moratorium is in place

Exiting the moratorium

The moratorium is a standalone procedure but it is not a gateway to a particular procedure (or any process at all, if the company can be rescued during the moratorium without needing entry into an insolvency procedure). Companies may use the protection of a moratorium to formulate a rescue plan, which may or may not be a formal insolvency procedure. In practice, this may include a CVA or the new restructuring plan.

However, the Bill provides the monitor must bring the moratorium to an end by filing a notice at court if the monitor thinks:


  • 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
  • by reason of a failure by the directors to comply with a requirement under section A36 (provision of information to monitor), the monitor is unable properly to carry out the monitor’s functions, or
  • the company is unable to pay (i) moratorium debts or (ii) pre-moratorium debts for which the company does not have a payment holiday during the moratorium

Routes to challenge

The Bill provides for three routes to challenge the actions of the parties involved in a moratorium:


  • challenge to a monitor’s actions—creditors, directors, members or any other person affected by the moratorium may apply to court on the grounds that an act, omission or decision of the monitor during a moratorium has unfairly harmed the interests of the applicant. The court has various powers including to make any order it thinks fit but may not order the monitor to pay any compensation
  • challenge to a monitor’s remuneration—the Bill provides for rules to be enacted to confer on a subsequently appointed administrator or liquidator of a company the right to apply to the court on the ground that remuneration charged by the monitor in relation to a prior moratorium was excessive
  • challenge to directors’ actions—a creditor or member of a company may apply to court for an order on the grounds that (i) during a moratorium, the actions of the directors have unfairly harmed the interests of its creditors or members or (ii) any actual or proposed act or omission of the directors during a moratorium causes or would cause harm. The court has various powers including to make any order it thinks fit (but the provisions do not exclude ordering the directors to pay compensation as exists in relation to the monitor under the monitor challenge set out above)
There are also further offences created in relation to fraud by a director in obtaining a moratorium or during the course of a moratorium.

 

Latest Articles:
About the author:

Anna joined the Restructuring and Insolvency team at Lexis®PSL in August 2013 from Berwin Leighton Paisner where she was a senior associate in the Restructuring Team.

Anna has worked on a number of large scale restructurings primarily in the UK market acting on behalf of lending institutions.

Recent transactions include the restructuring of a UK hotel chain and the administration sale of part of the Connaught group. Anna has also spent time on secondment at The Royal Bank of Scotland and trained at Clifford Chance qualifying in 2007.