Changing Times: Statutory Moratorium in Administrations and Creditor Remedies during the Coronavirus crisis

April 29, 2020

By Lisa Linklater and Jodie Wildridge

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 this pandemic will be within the confines of an insolvency regime and in many cases, this will be through administration. When the unfortunate business consequences of the crisis hit home, there will be an inevitable knock-on effect on a company’s creditor’s ability to enforce security and proprietary rights, such as retention of title clauses.

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 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 [1992] Ch 505 (CA) 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.

Administration and Statutory Moratoria

Creditors’ rights are restricted by statutory moratoria in administration at two stages:

• by an interim moratorium pending either the disposal of an administration application or the coming into effect of an out-of-court appointment of an administrator [paragraph 44 of Schedule B1 of the Insolvency Act 1986 (“the Act”)] and
• during the period when the company is in administration (paragraphs 42 and 43 of Schedule B1 of the Act).

Under those provisions, during either of those periods:

• no order may be made for the winding up of the company or resolution passed for its winding up;
• creditors cannot seek to repossess goods in the company’s possession under any hire-purchase agreement (which is broadly defined to include a retention of title agreement: see paragraph 111(1) of Schedule B1);
• landlords are not able to exercise any right of forfeiture;
• creditors cannot seek to enforce any security;
• creditors cannot commence or continue proceedings, execution or any other legal process and cannot levy any distress against the company or company property;

except with leave of the Court or (when the company is in administration) with the administrator’s consent.

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 Computer Systems Plc.

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.”[1]       

In exercising its discretion, the Court must be mindful that the intention of the statutory prohibition in what is now paragraphs 42 and 43 of Schedule B1 of the Act (but was s11(3) of the Act when Atlantic Computer Systems 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.[2]

Creditor considerations in 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.[3] 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 be 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 his 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 his rights to consider what terms, if any, he 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.[4] 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 how these long-standing general observations are applied or adapted to the inevitable challenges remains to be seen.

Lisa Linklater is a barrister specialist in all aspects of contentious and non-contentious insolvency, company law and commercial litigation. She is recommended in both Legal 500 UK Bar Guide 2020 (commercial, banking, insolvency and Chancery law) and Chambers UK Bar Guide 2020 (Chancery and insolvency).

Jodie Wildridge is a second six commercial pupil at Exchange Chambers who practices in the areas of commercial dispute resolution, insolvency and property and who appears regularly in the District Registries of the High Court and in the County Court on a wide range of matters.

 

[1] Re Atlantic Computer Systems Plc [1992] Ch. 505, 542

[2] Bristol Airport Plc v Powdrill [1990] 2 W.L.R. 1362

[3] 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 Computer Systems Plc [1992] Ch. 505, 543.

[4] Example cases include the following: Innovative Logistics Ltd v Sunberry Properties Ltd [2009] B.C.C. 164; Re SSRL Realisations Ltd (in administration) [2016] 1 P. & C.R. 2; Somerfield Stores Ltd v Spring (Sutton Coldfield) Ltd [2010] L. & T.R. 8.