On 20 May 2020, the UK Government introduced the Corporate Insolvency and Governance Bill (the “Bill”) to the House of Commons. The Bill introduces a new debtor-in-possession moratorium to give companies breathing space in order to try to rescue the company as a going concern. The Bill is currently only in draft form and therefore amendments may be made. It is anticipated that the legislation will come into force by the end of June 2020.
This blog (the first in a series of blogs about this new measure) outlines the key provisions of the moratorium and how it will work.
What is the new moratorium?
The moratorium is a debtor-in-possession regime and allows directors to continue to run a company, under the supervision of a licensed insolvency practitioner (the “Monitor”) and subject to certain restrictions. A key impact on lenders is that the moratorium suspends a floating charge holder’s ability to crystallise their charge or appoint an administrator, so lenders may well wish to factor this in to their credit and operational procedures to enable them to deal with the risk of a hostile monitor appointment.
The Bill also introduces temporary COVID-19 measures that will enable companies to benefit from the moratorium, despite not meeting the usual eligibility criteria. The temporary changes are available until 30 June 2020 (or one month after the legislation comes into force, whichever is later) (the “COVID Period”). This period can be (and is perhaps likely to be) extended by the government.
Eligibility, Entry and Duration
All companies are prima facie eligible, unless specifically excluded (e.g. banks and other regulated entities, such as insurance companies). In addition, if a company is going through another insolvency process at the time of filing (e.g.. a CVA, administration, liquidation etc.) or is subject to an interim moratorium (for administration) or has an outstanding winding-up petition, it will be ineligible. Companies that have been subject to a CVA, administration or another moratorium in the last 12 months will also be ineligible (other than during the COVID Period). By way of example if a company is subject to, a CVA, which is likely to fail due to say COVID19. Ordinarily, this company would not be eligible for a moratorium within the next 12 months. However, during the COVID Period, once the CVA fails (and the company is no longer subject to the CVA), that company would be eligible for the moratorium.
The new moratorium is stand-alone and is not (but can be used as) a pre-cursor to an insolvency process. It commences when certain documents are filed at court by the company and the Monitor including a statement by the Monitor that it is “likely that” the moratorium will result in rescue of the company as a going concern. This could be through a CVA, a restructuring, implementation of the “new” Restructuring Plan or a refinance, but there is no requirement to specify how the company will be rescued. The consent of (or even notice to) secured creditors is not required prior to filing the documents at court.
During the COVID Period, the Monitor must be of the view that the moratorium is likely to result in the rescue of the company as a going concern, or would do so if it were not for any worsening of the financial position of the company for reasons relating to coronavirus.
Ordinarily, an overseas company or a company that is subject to an outstanding winding-up petition cannot use the out-of-court route and must apply to the court for a moratorium order on the basis that a moratorium would achieve a better result for creditors than a winding-up. However, during the COVID Period, only an overseas company can go to court for a moratorium order (and companies subject to an outstanding winding-up petition can use the out-of-court route).
The moratorium automatically ends 20 business days from the day after the moratorium comes into force. This can be extended by a further 20 business days without creditor consent but can also be extended for up to 12 months with consent of creditors and/or a court order.
The moratorium will automatically be extended in some cases (such as where the company proposes a CVA) or brought to an end if the company enters into an insolvency process (e.g. upon the appointment of administrators or liquidators). In addition, the Monitor is obliged to end the moratorium in certain circumstances, for example if the company fails to pay certain debts due during the moratorium (such as trade or finance creditors or wages) or the Monitor determines that the moratorium is no longer likely to result in the rescue of the company as a going concern. During the COVID Period the Monitor has to disregard any worsening of the financial position of the company relating to COVID19 when making that assessment.
Effect of the Moratorium
A company subject to a moratorium obtains the benefit of a payment holiday from certain “pre-moratorium debts” which will largely be trade debts. The following will still have to be paid during the period of the moratorium::
- The Monitor’s remuneration and expenses (although pre-moratorium remuneration and expenses are explicitly carved out);
- Goods or services supplied during the moratorium;
- Rent (for the moratorium period);
- Wages, salary and redundancy payments (not limited to those falling due during the moratorium); and
- Debts or other liabilities arising under a contract or other instrument involving financial services. This means that the usual capital repayments and interest due to lenders will likely still be payable (unless otherwise agreed with the lender).
During the moratorium period, various actions of creditors will be prevented:
- Floating charge-holders cannot crystallise their charge or appoint an administrator;
- Creditors (and the company’s members) cannot commence insolvency proceedings;
- No steps can be taken to enforce security (without consent of the Monitor or court) or repossess hire-purchase goods (without court consent);
- No proceedings or other legal processes (except certain employment claims) can be commenced or continued during the moratorium without court consent;
- Landlords cannot forfeit leases without court consent;
- No security can be taken over the company’s property (without the Monitor’s consent); and
- Pre-moratorium creditors cannot apply to court to enforce their debt.
In addition, there are numerous restrictions and obligations of the company and its directors, including a £500 restriction on credit, inability to enter into certain types of contract and a threshold on payment of pre-moratorium debt without the Monitor’s consent.
This is the first of a series of blogs considering this new measure. Our next blog will focus on the impact on secured lenders and lastly we will consider issues for other stakeholders such as suppliers, customers, employees, the company and its directors and insolvency practitioners (who will be tasked with monitoring the moratorium).
A broader overview of the measures introduced by the Bill can be found here, our blog outlining the temporary suspension of wrongful trading can be found here and our quick guide on directors’ duties here.