When can the English court order a standalone moratorium?

What is the standalone moratorium?

A standalone moratorium, which is a temporary breathing space to corporate debtors, was introduced as part of the UK’s 2020 corporate insolvency reforms. The legislation provides an initial 20 business day payment holiday in respect of most ‘pre-moratorium’ debts, which can be extended for a further 20 business days without creditor consent. While it is a debtor-in-possession procedure, a licensed insolvency practitioner (IP), known as the monitor, oversees matters.

In its initial 2020 Impact Assessment, the UK Government anticipated there would be 1,000-1,500 moratoria per year. In fact, between its introduction and 30 September 2023, the procedure had been used only 46 times.

There are several factors explaining the lower than expected take up. In a November 2022 report commissioned by the government, three factors in particular stood out. First, the procedure cannot be commenced unless the “monitor” (an insolvency practitioner appointed to oversee the moratorium) confirms that in their view the moratorium is likely to result in the company being rescued as a going concern. This is a high bar and far higher than the entry thresholds for entering administration or the Part 26A restructuring plan. Secondly, there is no payment holiday in respect of debts arising under financial services contracts, limiting the procedure’s utility. Thirdly, companies with £10 million or more of “capital market arrangements” are not eligible for a moratorium.

Re Grove Independent School Ltd[1]

At the time of writing, there have been only two reported cases on the moratorium, the most recent of which (heard in February 2023 but only recently published) considered when the court may order a moratorium.  A moratorium can usually be obtained by filing prescribed documents at court, which include a statement from the proposed monitor that: (i) the company is or is likely to become unable to pay its debts, and (ii) in their view it is likely that a moratorium for the company would result in the rescue of the company as a going concern.

However, in this case, an outstanding winding up petition presented by HMRC in respect of pandemic-related debts meant that the directors of Grove Independent School needed to apply to court for an order.[2]

Under section A4(5), the court may only make such an order “if it is satisfied that a moratorium for the company would achieve a better result for the company’s creditors as a whole than would be likely if the company were wound up (without first being subject to a moratorium)”.

The school operated a nursery and primary school, with approximately 200 students and 50 staff members. The winding-up petition was listed for 1 March 2023, with the moratorium application being heard one week earlier. HMRC did not make representations at the hearing. The directors argued a moratorium would allow time to refinance to satisfy the approximately £656,000 owing to HMRC. The company had assets, including a balance sheet surplus of £2 million and a freehold property last valued at £4.25 million. It also intended to self-fund during the moratorium period.

The judge agreed to grant the moratorium, expressing the view that the ‘light touch’ process would minimise disruption and costs for a company fulfilling an important social function.

There are three key points from the judgment.

1. The court has a discretion whether to grant a moratorium in relation to an eligible company (which must be insolvent or likely to become insolvent). That general discretion is narrowed by the section A4(5) statutory requirement that the court may only make an order if it is satisfied that a moratorium “would achieve a better result for the company’s creditors than would be likely if the company were wound up (without first being subject to a moratorium)”.
2. The judge held this analysis requires a comparison of two potential outcomes (a moratorium and a liquidation) in accordance with “commercial realities”. If the likely outcome would, on the balance of probabilities, be better for unsecured creditors should a moratorium be granted, then the court may make the order.
3. In undertaking this analysis, the court will have reference to the proposed monitor’s statement that, in the proposed monitor’s view, “it is likely that a moratorium for the company would result in the rescue of the company as a going concern”.

The second point is particularly interesting. First, the judge held that the test for whether creditors would be better off is whether that is likely on the balance of probabilities (the ordinary civil law burden of proof). This is a higher bar than for administration, where the purpose of administration must be “reasonably likely” (i.e. not just “likely”) to be achieved (suggesting less than 50% confidence may suffice).

Secondly, the judge suggested that to grant a moratorium, the outcome should be better for unsecured creditors, rather than creditors as a whole. This is a new consideration as the legislation does not confine the court’s discretion to an assessment of the outcome for unsecured creditors. It remains to be seen whether this narrow focus will be adopted by subsequent judges. In the meantime, HMRC’s winding-up petition was dismissed by the court in April 2023, suggesting the moratorium was successful in this case.