The pre-insolvency moratorium has been introduced by CIGA 2020. Come late summer and the autumn 2020, it is unlikely to have been used very much but it can be expected that its use will become widespread through time. Pre-insolvency moratoriums will be used to achieve consensual restructurings, but can also be used by a company as a preliminary step to proposing a restructuring plan, a CVA or a scheme of arrangement.
Most UK companies will be eligible to obtain a pre-insolvency moratorium. It is easy to obtain; some documents have to be filed at court and the moratorium begins immediately. The most important documents that the company must file at court are firstly, a statement that the company is, or is likely to become, unable to pay its debts and secondly, a statement from a ‘monitor’ that it is his or her view that is likely that a moratorium would result in the rescue of the company as a going concern. A monitor must be a licenced insolvency practitioner (or ‘IP’) and will usually be an accountant. He or she will have a supervisory function during the moratorium as explained below. CIGA 2020 confers the status of ‘officer of the court’ on a monitor.
There is no court hearing to obtain a pre-insolvency moratorium and so the procedure is an out of court one. The commencement of the moratorium has to be notified at the Companies Registry and the company must do certain other things to publicise that it has obtained a moratorium. Interestingly, the company does not have to give prior notice to any qualifying floating charge holder before it obtains a pre-insolvency moratorium (in contract to the position when directors apply out of court for the appointment of an administrator).
The pre-insolvency moratorium lasts for an initial period of 20 business days but the directors can extend the period once by another 20 business days. The moratorium can be extended beyond the first 40 business days if more than 50% in value of each of the unsecured creditors and the secured creditors (in each case, only those whose claims against the company are subject to the statutory payment holiday described below) approve the extension or if the court orders an extension. The moratorium can last for a maximum period of one year but can last longer if the court consents. For any extension to take place, the directors must confirm that all ‘moratorium debts’ and all pre-moratorium debts not subject to the statutory payment holiday explained below have been paid when due and payable and the monitor must confirm that it is his or her view that the moratorium is likely to result in the rescue of the company as a going concern. The moratorium will continue automatically if the company proposes a a CVA and it will last until the outcome of the CVA proposal becomes known. The court when sanctioning a restructuring plan or a scheme of arrangement has the power to extend the moratorium for the duration of the plan or scheme.
What is a moratorium? The origin of the word comes from the Latin ‘mora’ which means delay. The key feature of the moratorium is that creditors’ rights are delayed or suspended while the moratorium exists and they cannot exercise those rights unless the court or the monitor otherwise allows. The actions restricted by the moratorium are substantially the same as with the administration moratorium which ae discussed later. These include:
- no creditor can enforce its security against the company’s assets
- there is stay of legal proceedings against the company and a bar on bringing new proceedings against it
- no winding up procedures can be commenced in respect of the company (unless commenced by the directors) and no shareholder resolution can be passed to wind up the company (unless approved by the directors)
- landlords cannot forfeit leases; and
- retention of title creditors and lessors cannot take possession of their assets.
In addition:
- no administration procedure can be commenced in respect of the company (other than by the directors); and
- no action can be taken to crystallise a floating charge (that is, turn it into a fixed charge).
The monitor’s role is limited to ensuring the circumstances exist whereby it remains the case that it is likely that the company can be rescued as a going concern and must approve all asset disposals outside the ordinary course of business or the grant of new security over the company’s assets. This means that during the moratorium, the directors continue to manage the company’s business and affairs. The pre-insolvency moratorium is therefore a rare example of ‘a debtor in possession’ procedure under UK law. As we shall see below, in the more formal insolvency procedures, the directors usually lose their powers in favour of the administrator, receiver or liquidator.
Creditors and shareholders can challenge the actions of directors during the moratorium on the ground that their interests have been unfairly prejudiced. The directors, creditors and shareholders can challenge the actions of the monitor on the same ground although the monitor cannot be required to pay compensation.
Another key feature of the pre-insolvency moratorium is that the company receives a statutory payment holiday in respect of ‘pre-moratorium debts’. This means the company does not have to pay the pre-moratorium debts while the moratorium subsists. A pre-moratorium debt is a debt that is already overdue for payment by the time the moratorium begins or one which was incurred under a contract entered into before the moratorium begins but falls due afterwards.
There is a carve-out from the definition of pre-moratorium debts for amounts due under a contract involving ‘financial services’ which includes loans, guarantees for loans and various capital market and financial transactions. These are examples of ‘pre-moratorium debts without a statutory payment holiday’. This means that a company remains liable to pay all amounts due to a bank which made a loan to it before it obtained a moratorium in accordance with the terms of the loan agreement and if the company does not do so, the bank can exercise all its contractual rights such as levying default interest, terminating the loan and accelerating its repayment. Interestingly, banks will not be able to exercise many important remedies to recover the loan if there is a default during the moratorium. For example, the bank will not be able to enforce its security over the company’s assets (and so cannot appoint an administrator or a receiver) or bring winding up proceedings against the company. This is because such actions are prohibited by the moratorium unless the court orders otherwise or the monitor otherwise consents. In practice, it is envisaged that companies will only obtain a pre-insolvency moratorium with the support and prior approval from their banks and even then, may only do so if it has entered into a standstill agreement with their banks under which the banks agree not to exercise their contractual and security rights for a specified period. This is because the banks’ contractual rights to terminate and demand repayment of facilities are not affected by the pre-insolvency moratorium and if banks did exercise their contractual rights to accelerate and make demand for repayment, the company would almost certainly not be able to pay what was then due. In these circumstances, the monitor is obliged to bring the moratorium to an end. Following termination of the moratorium, the banks could enforce whatever security they had.
There is no statutory payment holiday for ‘moratorium debts’ and the company must pay them in the usual way. Examples of moratorium debts are the monitor’s fee, debts owed for supplies of goods and services made to the company during the moratorium, rent due in respect of the moratorium period and all salaries owed to employees, regardless of when the salaries were due to be paid. What this means in practice is that companies must be ‘cash flow’ solvent and capable of paying their way during the moratorium period. Although suppliers and landlords owed moratorium debts cannot take action to recover their debts which are prohibited by the moratorium, CIGA gives them protection in two ways. The first is that if the company cannot pay a moratorium debt when due, the monitor is under an obligation to bring the moratorium to an end. Secondly, provided the company enters into a liquidation or administration within 12 weeks after the end of the moratorium, these debts are given a ‘super priority’ status in the statutory order of priority which we will look at later in this chapter. This means these debts must be paid out of floating charge realisations ahead of all other creditors (such as floating charge, preferential and prescribed part creditors). They will rank only behind fixed charge creditors.
These two protections are also available to creditors whose debts are premoratorium debts not subject to the statutory payment holiday (such as debts owed to banks under loan agreements) but the debts will not receive super priority status if they fell due during the moratorium as a result of acceleration or early termination of a loan agreement.
A pre-insolvency moratorium is intended to be an initial step to a company completing a recovery and there are various ways it can come to an end. These are:
- entering into a consensual restructuring agreement with those creditors needed to enable the company to continue as a going concern
- the court sanctions a restructuring plan or scheme of arrangement
- the company’s proposal for a CVA is approved by creditors
- the company takes steps to place itself into administration or liquidation
- the moratorium expires
- the court orders the moratorium to end; and
- the monitor brings it to an end e.g. because it is no longer likely that the company can be rescued as a going concern or if the company ceases to be able or it is unlikely that the company will be able to pay when due its moratorium debts or pre-moratorium debts for which there is no statutory payment holiday (such as bank loans).