Short-term standalone moratorium
Prior to the Act, one of the criticisms of the restructuring procedures available in the UK was the lack of a “debtor in possession” process under which the directors of a company are left in control to implement a rescue or restructuring plan with the benefit of a moratorium, akin to Chapter 11 in the United States.
The closest thing the UK has to such a “debtor in possession” process is the “company voluntary arrangement” (CVA). In recent years, the CVA has been (and is likely to continue to be) widely used in the retail and hospitality sectors to compromise lease liabilities of underperforming retail stores and restaurants. The CVA has limitations as a general “debtor in possession” restructuring tool. CVAs require the support of at least 75 per cent of the unsecured creditors and the support of any secured and preferential creditors, who usually insist on payment in full. Prior to the Act, during the period of negotiations, save in the case of very small enterprises, there was no moratorium on creditor actions against the company. To gain a moratorium, CVAs have to be coupled with, or used as an exit from, administration, which is a formal insolvency procedure and involves the appointment of an insolvency practitioner to run the company in place of existing management. CVAs cannot be used for a financial restructuring. The negotiation process with the key unsecured creditors is vital and can take several months, and is often difficult to achieve without the protection of a moratorium, as individual creditors can threaten to take enforcement steps in the negotiating period to seek to improve their position.
The disadvantage of the use of a CVA as an exit from administration is that it leaves the company having gone through the administration process prior to the CVA commencing, which may mean that the business has reduced in value having been in an insolvency process and is “tarnished” as a result.
Administration has been the most commonly used rescue procedure in England and Wales and has a three-part purpose. The first part of the purpose is rescuing the company as a going concern. If that is not possible the second part of the purpose is achieving a better result for the company’s creditors as a whole than would be likely if the company were wound up (without first being in administration). This is usually achieved by the sale of the business and assets of the company as a going concern. If this cannot be achieved, the third part of the purpose is realising property in order to make a distribution to one or more secured or preferential creditors.
In practice it is rare that the first part of the purpose is achieved and that the company is rescued. It is far more common that the second or third parts of the purpose are achieved and that only part of the business continues as a going concern post sale.
The Act rectifies this gap in UK law by introducing a new standalone moratorium procedure which leaves the directors in control whilst they implement a plan to rescue the company as a going concern.
In given circumstances (set out below), the directors can apply to go into a moratorium for an initial period of 20 business days. In that period, the directors remain in charge but a licensed insolvency practitioner is appointed as “monitor”. He or she is required to monitor the company’s affairs to keep under review whether it remains likely that the moratorium will result in the rescue of the company as a going concern, given that during the moratorium period creditors are asked to stand still and refrain from enforcement action against the company. The objective of the moratorium is to provide protection to the company from adverse creditor action for a short period whilst the directors attempt to restructure and rescue the business. It is not to achieve a sale of its business and assets. This objective is therefore analogous to the first part of the purpose of administration described above.
The Government Guidance on the draft legislation states that the new moratorium procedure is aimed at ensuring that companies can maximise their chances of survival during the COVID-19 crisis. It is intended to be a seamless procedure that keeps administrative burdens to a minimum, allows for a speedy entry process and does not add disproportionate costs to already struggling businesses. There are also some temporary relaxations to the requirements of the Act in the period to September 30, 2020 (the COVID Period) which make it easier for companies to use the process. For example the representation that the proposed monitor is required to make prior to the moratorium commencing, that he considers that “it is likely that the moratorium would result in the rescue of the company as a going concern” is qualified by the words “or would do so if it were not for any worsening of the financial position of the company for reasons relating to coronavirus".
The moratorium can be used as a freestanding procedure or a gateway into another insolvency procedure. The exit from the moratorium could be the recovery of the company as a going concern without need for an insolvency process (for example, through a refinancing), or it could be a precursor to a CVA, administration, scheme of arrangement or “restructuring plan” (the second new restructuring procedure introduced by the Act, which is described below).
Importantly, it is a procedure which is not just available to English companies but also to overseas companies, provided that they have a sufficient connection with the English jurisdiction.
Key features of the new moratorium procedure are discussed in further detail below.
No application can be made if the company has entered into a moratorium in the previous 12 months without an order of the court.
Some companies are not eligible for the procedure. A new schedule ZA1 to the Insolvency Act 1986 (IA 1986) introduced by the Act lists the companies which are ineligible such as insurance companies, banks, or companies which are party to a capital markets arrangement in an amount of over £10 million.
The company must be, or likely to become, unable to pay its debts.
Obtaining a moratorium
The directors can obtain a moratorium by application to court for a court order or (provided that there is no outstanding winding up petition against the company and the company is an English company) without a court application simply by filing relevant documents with the court.
During the COVID Period, the moratorium can be obtained by the filing method even if there is an outstanding winding up petition against the company.
A court application is required in the case of an overseas company as the court will need to be satisfied that the company has a sufficient connection with the English jurisdiction.
The directors must file a statement that the company is or is likely to become unable to pay its debts.
The proposed monitor needs to confirm that, in their view, it is likely that a moratorium for the company would result in the rescue of the company as a going concern. This opinion is qualified in the COVID Period by the words “or would do so if it were not for any worsening of the financial position of the company for reasons relating to coronavirus”.
Regulated companies will require the agreement of the relevant regulator to the moratorium process.
The initial period of the moratorium is 20 business days beginning with the business day after the moratorium comes into force, which is the date of the filing of the documents at court or the court order.
The duration of the moratorium may be extended in a number of ways, as discussed below.
Extension of the initial period by the directors
The initial period can be extended without creditor consent after the first 15 business days, by the directors filing with the court: (a) a notice stating that they wish to extend the moratorium; (b) a statement by the directors that the moratorium debts, and the pre-moratorium debts for which the company does not have a payment holiday, have been paid or discharged; (c) a statement by the directors confirming that the company is, or is likely to become, unable to pay its pre-moratorium debts; and (d) a statement from the monitor that in his or her view it remains likely that the moratorium will result in the rescue of the company as a going concern.
Once those documents are filed the moratorium is extended to the twentieth business day after the initial period ends.
Extension of the period with creditor consent
If the creditors (being those creditors who are not going to be paid during the moratorium because of the payment holiday) consent to an extension, the moratorium can be extended by the directors for a period of up to one year by making the necessary filings at court. The consent of such “pre-moratorium creditors” is obtained by a qualifying decision procedure.
Extension by the directors by application to court
The directors can make an application to court after the 15th business day of the initial moratorium period for an extension of the period. The court will consider whether the extension is in the interests of the pre-moratorium creditors and whether the court considers that the rescue is likely. The court will likely want to consider the views of the monitor on these points and understand why it was not possible to obtain creditor consent.
There are additional provisions for an extension to be granted by the court whilst a proposal for CVA is pending, or in the course of other proceedings such as a scheme of arrangement or restructuring plan.
Notice of a moratorium and any extensions or termination of it
There are detailed requirements as to the notice to be given of the commencement of the moratorium to all creditors, the Pension Protection Fund, Companies House and to employees. Such notification is required to be given by the monitor or the directors.
End of the moratorium as a result of the directors putting the company into an insolvency process
The directors can end the moratorium in the event they consider the rescue of the company as a going concern is no longer viable, by putting the company into administration or liquidation. They must give notice of this to the monitor who will then file a notice of termination of the moratorium.
Debts payable in the moratorium period and the concept of a “payment holiday”
A key concept in the process is the “payment holiday”. All debts of the company at the date of the moratorium are pre-moratorium debts with a payment holiday. This is the way that the Act describes the effect of the stay imposed on pre-moratorium creditors, which protects the company from enforcement action whilst the directors attempt to rescue the company.
Debts payable in the moratorium period fall into two categories:
- Pre-moratorium debts for which there is no payment holiday for amounts falling due in the moratorium period.
- Moratorium debts.
Pre-moratorium debts are: (a) any debts or liabilities to which the company becomes subject before the moratorium comes into force; or (b) any debt or liability to which the company has become or may become subject to during the moratorium by reason of any obligation incurred before the moratorium.
During the moratorium the payment holiday continues for most categories of pre-moratorium debt with six exceptions. Payments falling due during the moratorium in relation to these six categories of debt must be paid during the moratorium period and there is no payment holiday for those payments in that period.
Pre-moratorium debts for which there is no payment holiday for amounts falling due in the moratorium are the following categories of debts and are amounts payable in respect of:
- The monitor’s remuneration or expenses.
- The goods or 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.
- Debts or other liabilities arising under a contact or other instrument involving financial services. The new schedule ZA2 to IA 1986 lists the contracts which come within “financial services” which are covered by this definition such as lending, and financial leasing.
Moratorium debts are:
- Any debt or other liability which a company becomes subject to during the moratorium other than by reason of an obligation incurred before the moratorium came into force.
- Any debt or other liability to which the company has become or may become subject after the end of the moratorium by reason of any obligation incurred in the moratorium.
Pre-moratorium debts for amounts falling due within the moratorium where there is no payment holiday and moratorium debts have to be paid in full during the moratorium, and confirmations that these debts have been paid have to be filed at court to support any extension to the moratorium period. The monitor is required to terminate the moratorium if he or she considers that the company is unable to pay these debts.
Any unpaid moratorium debts and some pre- moratorium debts without a payment holiday, described as “priority pre-moratorium debts”, then get super priority in a subsequent insolvency or restructuring procedure, and there are amendments to the relevant sections of the IA 1986 to reflect this.
There was much discussion following the publication of the draft legislation as to whether lenders would be able to use contractual rights to accelerate a loan during a moratorium. Acceleration of a bank loan would be likely to lead to the termination of the moratorium by the monitor given that the company would in almost all cases be unable to pay the accelerated liability. The accelerated debt would then acquire super priority status in a subsequent insolvency or restructuring procedure started within 12 weeks.
The relevant provisions were debated at length in the House of Lords and some amendments made. As a result, it is now clear that lenders can accelerate loans in the moratorium if they have the contractual right to do so, but the drafting of the relevant provisions in the Act mean that “relevant accelerated debt” will not be a “priority pre-moratorium debt” for the purposes of super priority in a subsequent insolvency or restructuring procedure.
Whilst the position on this is now clear, not all of the potential issues in this area were resolved. For example, arguably the obligation to repay the principal falling due under a revolving credit facility falling due during the moratorium does not arise by reason of acceleration, in which case those amounts would qualify as “priority pre-moratorium debts”.
It is important to note also that, as currently drafted, loans from connected parties such as associated companies and directors could also be accelerated during the moratorium. It is expected that these provisions will require amendment if the rescue is to be given the best chance of success and the procedure is to work as intended to support the rescue of businesses in the moratorium. In practice, therefore, any company considering a moratorium is likely to need to ensure in advance that it will have the support of its lenders (including the connected party lenders) to the moratorium procedure and the proposed rescue plan. This may involve the agreement of a standstill with its lenders and a contractual variation of the loan documentation to provide that no amounts fall due to lenders during the moratorium that the company will be unable to pay. Lenders for this purpose would include the debt lent by connected parties (such as intercompany debt and directors’ loans) to the moratorium and to the rescue proposed.
Restrictions on creditors during the moratorium period
During a moratorium, creditors cannot petition for the winding up of the company, no resolution for the winding up of the company may be passed by the shareholders other than if recommended by the directors, no application for administration may be made other than by the directors, no notice of intention to appoint an administrator by the holder of a qualifying floating charge can be lodged at court and no administrative receiver may be appointed.
These restrictions do not bind the directors so they remain able to take these steps. In particular, the directors are still able to use paragraph 22(2) of Schedule B1 IA 1986 to appoint an administrator, but the Qualifying Floating Charge holder is unable to use its powers to appoint an administrator under paragraphs 14 or 22.
The Act also provides for the following restrictions on enforcement and legal proceedings against the company:
- No right of forfeiture can be exercised in relation to premises occupied by the company.
- No enforcement of security over the company’s property, other than steps to enforce the following charges: (a) a collateral security charge (within the meaning of the Financial Markets and Insolvency (Settlement Finality) Regulations 1999); (b) security created or otherwise arising under a financial collateral arrangement (within the meaning of Regulation 3 of the Financial Collateral Arrangements (No 2) Regulations 2003); and (c) steps taken with the permission of the High Court.
- No repossession of goods.
- No “legal process” can be issued or continued against the company or judgements enforced. However, this does not apply to employment disputes.
No notice of the crystalisation of a floating charge may be given during the moratorium, nor any other event occur that would have the same effect as such a notice. These restrictions can be overcome with the permission of the court, save that no application to court can be made for permission to enforce a pre-moratorium debt to which the payment holiday applies or to crystallise a floating charge.
Borrowing, payment restrictions, granting security and asset disposals during a moratorium
The company may borrow and incur credit provided it discloses that there is a moratorium, and it may grant security over property provided that the monitor consents. That security can be enforced during the moratorium. This therefore opens the door to “debtor in possession finance” (often known as “DIP finance”) which is used in many other jurisdictions to finance rescues.
Save where a payment comes within a de minimis threshold, the company may only make payment of pre-moratorium debts to which the payment holiday applies if: (a) the monitor consents; (b) payment is required by a court order; or (c) the court gives permission in respect of the disposal of charged or hired property. The de minimis threshold is £5,000 or 1 per cent of the value of the debts or other liabilities of the company to unsecured creditors. The monitor may give consent to a payment only if the monitor thinks it will support the rescue of the company.
Property which is not subject to a security interest can be disposed of: (a) in the ordinary way of the company’s business; (b) with the consent of the monitor; or (c) in pursuance of a court order. As above, the monitor may only consent if the monitor thinks the disposal will support the rescue of the company.
Property which is subject to a security interest, can be disposed of only: (a) in accordance with the terms of the security; or (b) with the permission of the court. The court may give such permission only if it considers that the disposal will support the rescue of the company.
The monitor is an officer of the court and must be an insolvency practitioner.
He/she 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. He/she is entitled to rely on information provided by the company during the moratorium unless he/she has reason to doubt its accuracy.
The directors are required to supply information that the monitor requests. If they do not comply it is a ground for the monitor to terminate the moratorium.
The monitor can apply to court for directions.
The monitor must bring the moratorium to an end by filing a notice at court if he/she thinks that:
- The moratorium is no longer likely to result in the rescue of the company as a going concern.
- The objective of rescue has been achieved.
- He/she is unable to carry out his functions as the directors have not provided him with the relevant information.
- The company is unable to pay moratorium debts which have fallen due or pre-moratorium debts for which the company does not have a payment holiday.
The monitor can be replaced by the court.
Challenges to actions of a monitor can be brought by an application to court by a creditor or anyone affected by the moratorium on the grounds that an act, omission or decision of the monitor has caused unfair harm. That application can seek an order to reverse or modify a decision of the monitor, or give him/her directions or make such order as the court thinks fit, but no compensation can be ordered to be paid by the monitor under this provision.
The Pension Protection Fund is to be treated as a creditor of the company and is able to challenge the decisions of the monitor.
The monitor’s remuneration can be challenged by a subsequent administrator or liquidator.
The role of the directors during the moratorium
The directors’ executive powers continue during the moratorium (in contrast to the position in an administration where their powers are suspended and the administrator controls the company). The actions of the directors can be challenged by a creditor or member of the company by application to court, on the ground that the company’s affairs are being managed in a way that unfairly harms the interests of its creditors or members or some part of them.
Challenge to directors’ actions can be brought by application to court by creditors or shareholders.
The Pension Protection Fund is to be treated as a creditor of the company and is able to challenge the decisions of the directors.
The Act introduces criminal liability of directors if they commit an offence of fraud in anticipation of the moratorium or false representation to obtain a moratorium.
The schedules to the Act provide for sections of the current Insolvency Rules to apply to the procedure until more detailed rules are produced in due course.
The moratorium procedure is another tool that can be used to help rescue companies and avoid insolvency. It will give companies a breathing space during which directors can try to restructure the company with the benefit of a stay on creditor action. Management will not be displaced and so it should be cheaper and carry less stigma than administration whilst having the protections that a CVA lacks. It may be combined with other formal procedures or used as a standalone process to implement a refinancing or turnaround.
This process will allow directors to consider possibilities to restructure the company with the benefit of the moratorium whilst they remain in control of the company and the company is not tarnished by entering into an insolvency procedure. Whilst at the current time creditors are generally exercising forbearance, this will not continue indefinitely, particularly as the lock down eases. As companies are required to contribute to furlough payments made to staff from August 2020, and when the furlough scheme ends in October 2020, cash flow will be stretched even further, which may result in significant redundancies for employees in businesses which cannot continue to operate as they did prior to the COVID-19 pandemic. Companies will need time to manage the transition out of lock down. The moratorium may offer them a bridge to formulate a rescue by a CVA or restructuring plan.
This process leaves the directors in control of the planning for the proposed restructuring under supervision of an insolvency practitioner. In the COVID Period this is likely to be valuable and to be a process that directors will consider is a sensible option to enable them to explore restructuring options with the protection of a moratorium. They can seek to refinance in the period or pursue a CVA or a restructuring procedure.
Whilst the moratorium prohibits secured creditors from appointing an administrator and enforcing their security, payments falling due to lenders during the moratorium need to be made, and the support of lenders will therefore be key to any proposed restructure. Their ongoing support and their agreement to a standstill is key if the moratorium is to be extended and not to be terminated by the monitor by reason of the non- payment of monies falling due to secured creditors in the period.
Power to amend corporate insolvency or governance legislation and amendments to meeting and filing requirements
The Act includes time limited powers for the Government to amend corporate insolvency legislation through regulations made by statutory instrument rather than further legislation, in the interests of speed. This will be useful regarding the further amendments required to the Insolvency Rules and perhaps to the time periods of the various COVID Period suspensions referred to above, if needed to support rescues in an extended COVID Period.
The Act also includes a number of extensions to the time periods for the filing of various documents at Companies House, and the filing of company accounts, again, to ease the burden on companies at this time. Requirements to hold physical meetings such as annual general meetings are also relaxed for a limited time in light of the lock down.
Provisions in relation to meetings
These are covered by Section 37 and Schedule 14 of the Act.
For company meetings, whether AGMs or general meetings, held between March 26, 2020 and September 30, 2020 (referred to in the Act as the “relevant period”), the meeting need not be held at a particular place; meetings may be held and votes may be cast by electronic or other means; the meeting may be held without a quorum of participants having to be together in one place; and members do not have the right to attend in person, to participate other than by voting, or to vote by particular means. Members however continue to have a right to vote by some means, whether that is electronically or by the traditional proxy method.
These temporary provisions are intended to ensure that companies and other qualifying bodies are able to hold AGMs and other meetings in a manner consistent with the need to prevent the spread of the coronavirus. The requirements of a company’s articles of association, and any relevant provisions in legislation, now have effect subject to these temporary provisions.
The period within which a company or other qualifying body must hold an AGM (whether as a result of legislation or a provision in the company’s articles) has been extended. This applies where a company or other qualifying body was or is required to hold an AGM before the end of a period expiring during the period between March 26 and September 30, 2020. It has the effect of giving businesses until the end of that period (or a later date, if extended) to hold their AGM.
The Secretary of State also has authority to make regulations to further extend, on a temporary basis, the deadline for holding an AGM but those regulations cannot be used to extend the period for holding an AGM by more than eight months.
Temporary extension of period for public company to file accounts
Section 38 of the Act provides for a temporary extension to the period which a public company has to file accounts and reports with the registrar at Companies House. It applies where the filing period ends after March 25, 2020, and before the “relevant day”. That is defined as the earlier of September 30, 2020 and the last day of the period of 12 months immediately following the end of the relevant accounting reference period. As an example, if a public company’s accounting reference period ended on December 1, 2019 then under Section 442 Companies Act 2006, the directors of the company must deliver to the registrar the company’s accounts and reports on or by June 1, 2020. This deadline of June 1, 2020 falls within the time period referred to above (i.e. between March 25, 2020 and the relevant day), so the company has until September 30, 2020 to file its accounts.
Temporary extension of period for filing information at Companies House
Section 39 of the Act concerns the filing of certain documents with the registrar at Companies House. The Act provides the Secretary of State with the power to make regulations to extend the time period which a company or other entity has to provide the registrar with these filings (and these regulations have now been made). Maximum time periods which may be substituted for the existing periods for those filings are specified and Section 40 lists the provisions in the Companies Act 2006 and other legislation that relate to the particular filings and allows for certain deadlines to be extended. These deadlines include the periods for filing accounts and confirmation statements. They also include the time allowed to notify the registrar of certain relevant events that are covered by the confirmation statement, such as notifying the registrar of a change in director. In addition, the deadline for registering a charge with Companies House has been extended.