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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:
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).
The company needs to meet the following criteria:
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 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
The directors of an eligible company may apply for the moratorium in two ways:
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 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 moratorium that arises is very similar to the moratorium that arises in an administration under IA 1986, Sch B1:
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:
The initial 20 business day moratorium may be extended in a number of ways:
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 Bill provides for three routes to challenge the actions of the parties involved in a moratorium:
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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.
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