Changing Times: Aspects of Creditor Enforcement in Administration and in the New Moratorium

September 4, 2020

This material was first published by Thomson Reuters, trading as Sweet & Maxwell, 5 Canada Square, Canary Wharf, London, E14 5AQ, in Insolvency Intelligence as “Changing Times: Aspects of Creditor Enforcement in Administration and in the New Moratorium” (2020) 33 Insolvency Intelligence 96 and is reproduced by agreement with the publishers.

By Lisa Linklater and Jodie Wildridge

Introduction

The currently disrupted economic landscape is understandably causing concerns. Concerns not only for struggling companies, but also for their creditors.

For some companies, the only way out of the Covid-19 pandemic will be within the confines of an insolvency or rescue procedure. In many cases, this will be through the well-established route of an administration. Other companies in financial distress are likely to take advantage of the new procedure known simply as “Moratorium”, one of the major innovations of the Corporate Insolvency and Governance Act 2020 (CIGA). After rapid progress through Parliament, the CIGA came into force on 26 June 2020.[1]

Whether a struggling company enters either administration or the Moratorium, when the unfortunate business consequences of the crisis hit home, there will be an inevitable knock-on effect on a debtor company’s creditors’ ability to enforce security and other proprietary rights, such as retention of title clauses. This article examines the enforcement, by creditors, of their rights pursuant to the administration regime[2] and the similarly worded provisions within the Moratorium.[3]

Brief overview of the “new” Moratorium

The Moratorium is a new procedure for companies in financial difficulties, directed at rescuing the company as a going concern. The Moratorium is not one of the temporary measures in the CIGA in response to the economic effects of Covid-19 but has been the subject of consultation since as early as May 2016.[4] This new procedure has shades of both administration and company voluntary arrangements but is fundamentally different from both.

The Moratorium gives a company a breathing space from creditors; leaves directors in charge of the company and is overseen by a licensed insolvency practitioner who does not manage the company and, consistently with that more limited role, is described as a “monitor”.[5] The Moratorium will be available to a company that is, or is likely to become, unable to pay its debts and where it is likely that the Moratorium would result in the rescue of the company as a going concern.[6] Even where a company is subject to an outstanding winding-up petition, the court can order, instead, that the company should be subject to a Moratorium, but only if it is satisfied that a Moratorium 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 the Moratorium).[7] Companies are generally eligible for the Moratorium unless excluded.[8] In most cases, the directors of a company may obtain the Moratorium by simply filing relevant documents at court.[9] The usual period of Moratorium, which can be extended,[10] is relatively short: 20 business days beginning with the business day after the day on which the Moratorium comes into force.[11]

The statutory Moratorium in administration

The current economic and legal climate is unparalleled in recent times and is likely to raise challenging practical issues for administrators in drafting their proposals for achieving the purpose of administration[12] and in conducting the administration. Equally, it is likely that new issues will arise in practice on the application of the leading case of Re Atlantic Computer Systems Plc[13]: by administrators considering whether to consent to the enforcement of creditor rights; or by the court when considering whether to exercise its discretion to give permission in respect of such enforcement.

Administrator’s consent or court’s permission

In the first instance, creditors will seek the consent of an administrator to the enforcement of their proprietary and/or security rights where the company is in administration. Failing which, the principles the court will consider in determining whether to grant leave were set out by Nicholls LJ in the landmark case of Re Atlantic.

Significantly:

“The underlying principle here is that an administration for the benefit of unsecured creditors should not be conducted at the expense of those who have proprietary rights which they are seeking to exercise, save to the extent that this may be unavoidable and even then this will usually be acceptable only to a strictly limited extent.”[14]

In exercising its discretion, the court must be mindful that the intention of the statutory prohibition in what is now paras 42 and 43 of Sch.B1 to the Act (but was s.11(3) of the Act when Re Atlantic was decided) is to assist the administrator to achieve the purpose for which the administration order was made. Where this intention is not likely to be impeded, the court ought to grant leave.

Otherwise, the discretion of the court involves a balancing exercise between:

• the likely loss which would be caused to an applicant if leave was refused;
• the effect of the grating of leave on the administration, including the likely loss which would be caused to the other company creditors; and
• the likelihood of any such losses occurring

Determining those losses will involve the court’s consideration of a number of factors, including, but not limited to, the financial position of the company; its ability to pay the rental arrears and the continuing rentals (if relevant); the administrator’s proposals; the period for which the administration order has already been in force and is expected to remain in force; and the history of the administration so far. The conduct of the parties has also been determined a material consideration.[15]

Creditor considerations following the coronavirus crisis

It should be borne in mind that a creditor seeking leave has the burden of persuading the court that it should be granted. Accordingly, proper consideration ought to be given to the making of any such application, which should only follow once consent has been sought and refused or there has been an unreasonable delay by an administrator in responding to a request for consent.

Where a creditor is seeking enforcement of a security right, if there is any dispute between the parties as to the security itself, i.e. its validity etc, the court will not usually determine that issue.[16] However, where such dispute arises, the court needs only be satisfied that the applicant has a seriously arguable case. In the event that a creditor seeking to enforce a security is fully secured, a delay in enforcing that security is not likely to cause significant prejudice and the granting of leave is therefore unlikely. However, in the current market there will inevitably be complex issues arising as to the valuation of security.

Furthermore, the court has the power to impose terms, either in granting leave, or as a condition for its refusal. For example, the court may refuse leave to a creditor seeking to recover their property, but order that the administrator pays to the applicant the current rent due from the administrator’s use of the property. It is therefore worthwhile for a creditor seeking to enforce their rights to consider what terms, if any, they would ask the court to impose in the event that leave is refused.

The general observations of Nicholls LJ are a well-established touchstone in this area, and their applicability and significance have been acknowledged frequently over the years.[17] But in these unprecedented times, the legal and economic landscape of the future is more uncertain than ever before. The tension between creditor rights and the statutory moratorium in administrations is likely to undergo rigorous testing during the months ahead; and whether these long-standing general observations withstand the inevitable challenges remains to be seen.

The stays on insolvency proceedings and creditor enforcement in the “new” Moratorium

Similarly to administration, creditors cannot start or end insolvency proceedings during the Moratorium.[18] Significantly this includes a qualifying floating charge holder which is also prevented from appointing or giving notice to appoint an administrator.[19] Moreover, during the Moratorium, directors of the debtor company can start or conclude winding-up proceedings or make an application for an administration order or appoint an administrator under para.22(2) of Sch.B1.[20] However, the directors must notify the monitor before commencing insolvency proceedings during the Moratorium.[21]

At the heart of the Moratorium is a stay on a wide range of enforcement and legal proceedings by creditors of the debtor company during the Moratorium. The scope of enforcement and legal proceedings encompassed in the stay is very similar to that in administration. For instance, “a landlord or other person to whom rent is payable may not exercise a right of forfeiture by peaceable re-entry in relation to premises let to the company, except with the permission of the court”.[22] Similarly, “no steps may be taken to repossess goods in the company’s possession under any hire-purchase agreement, except with the permission of the court”.[23]

However, there are some very important differences. First, unlike an administration, where the administrator may consent to the lifting of the stay, the restriction on enforcement and legal proceedings in the Moratorium may only be lifted by the court; neither the directors nor the monitor has that power.

Secondly, the creditors who may apply to the court for enforcement is very limited. Significantly, a creditor with a “pre-moratorium debt” that is subject to a “payment holiday” during the Moratorium may not apply for permission to enforce that debt.[24] Such creditor will be aware of the Moratorium because as soon as reasonably practicable after a Moratorium comes into force, the company directors must notify the monitor; and as soon as reasonably practicable thereafter, the monitor must notify every creditor of the company, of whose claim the monitor is aware, of the existence of the Moratorium.[25] This will preclude a large number of creditors from taking such enforcement steps, allowing only those with “moratorium debts”[26] or debts which are within the specific exceptions to “pre-moratorium debts with a payment holiday”.[27] In addition, application may not be made to the court with a view to obtaining crystallization of a floating charge or “the imposition, by virtue of provision in an instrument creating a floating charge, of any restriction on the disposal of any property of the company”.[28]

Given the differing focus and mechanics of administration and the Moratorium, it is very likely that the primacy given to proprietary rights on such applications in administration will not be automatically applied in the Moratorium and that a new approach will apply. However, it is likely that there will be certain landlords who may seek the court’s permission to forfeit for rent accruing after the Moratorium, as well as parties to litigation where the focus is establishing respective proprietary rights.

Conclusion

These are unprecedented times, and it will be interesting to see if and how the CIGA Moratorium, and the existing law on the statutory moratoria in administrations, coincide in practice. Creditors, debtors and insolvency practitioners will, no doubt, each carefully assess the advantages and disadvantages of the differing regimes and their impact upon creditors and their rights.

[1] References to e.g. A1 are to the new Pt A1 of the Insolvency Act 1986, introduced by the CIGA.

[2] See paras 42–44 of Sch.B1 to the Insolvency Act 1986.

[3] See A20 and A21.

[4] The Insolvency Service, A Review of the Corporate Insolvency Framework (25 May 2016).

[5] A35.

[6] A6.

[7] A4.

[8] A2 and A3.

[9] A3.

[10] A10-A15.

[11] A9.

[12] See para.3 of Sch.B1 to the Act. By contrast with the Moratorium, “rescuing the company as a going concern” is only one of the three alternative objectives of administration.

[13] Re Atlantic Computer Systems Plc [1992] Ch. 505; [1992] 2 W.L.R. 467 CA (Civ Div).

[14] Re Atlantic [1992] Ch. 505 at 542.

[15] Bristol Airport Plc v Powdrill [1990] Ch. 744; [1990] 2 W.L.R. 1362 CA (Civ Div).

[16] This is unless the dispute involves a short point of law, which it is convenient for the court to determine without further ado—Re Atlantic [1992] Ch. 505 at 544.

[17] Example cases include the following: Innovative Logistics Ltd v Sunberry Properties Ltd (In Administration) [2008] EWCA Civ 1321; [2009] B.C.C. 164; Re SSRL Realisations Ltd (In Administration) [2015] EWHC 2590 (Ch); [2016] 1 P. & C.R. 2; and Somerfield Stores Ltd v Spring (Sutton Coldfield) Ltd [2009] EWHC 2384 (Ch); [2010] L. & T.R. 8.

[18] A20.

[19] A20(1)(f) and (g).

[20] A20(1)(a), (c), (d) and (e).

[21] A24.

[22] A21(1)(a).

[23] A21(1)(d). The definition of “hire purchase agreement” is broad and includes “a conditional sale agreement, a chattel leasing agreement and a retention of title agreement”: see A54.

[24] A21(2).

[25] A8. There are also publicity requirements during the Moratorium: A19.

[26] Defined as: “(a) any debt or other liability to which the company becomes subject during the moratorium, other than by reason of an obligation incurred before the moratorium came into force, or (b) any debt or other liability to which the company has become or may become subject after the end of the moratorium by reason of an obligation incurred during the moratorium, but this is subject to subsection (3)” A53 and A54.

[27] A18(3) “a reference to pre-moratorium debts for which a company has a payment holiday during a moratorium is to its pre-moratorium debts that have fallen due before the moratorium, or that fall due during the moratorium, except in so far as they consist of amounts payable in respect of— (a) the monitor’s remuneration or expenses, (b)

goods or services supplied during the moratorium, (c) rent in respect of a period during the moratorium, (d) wages or salary arising under a contract of employment, (e) redundancy payments, or (f) debts or other liabilities arising under a contract or other instrument involving financial services”. As for the definition of the latter, see Sch.ZA2.

[28] A21(3).

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