The New Moratorium
May 29, 2020
By Lisa Linklater and Jodie Wildridge
The New Moratorium will be a major innovation in corporate insolvency. The objective of rescuing companies in financial difficulties is achieved by curtailing creditors’ rights. Does it strike a balance? How will it be received by businesses and insolvency practitioners?
One of the major innovations in the Corporate Insolvency and Governance Bill (“CIGB”) that is currently progressing through Parliament, is described in the CIGB simply as “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 CIGB in response to the economic effects of COVID-19, but has been the subject of consultation since as early as May 2016 (a copy of which is here). While the CIGB has been published for only one week, the Moratorium has already attracted considerable attention because of its far-reaching effect upon creditors. This new procedure has shades of both administration and company voluntary arrangements but is fundamentally different from both.
The Moratorium will be available to a company that is or is likely to become unable to pay its debts as they fall due and where it is likely that the Moratorium would result in the rescue of the company as a going concern. Companies are generally eligible for the Moratorium unless excluded. In most cases, the directors of a company may obtain the Moratorium by simply filing relevant documents at court. 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).
At the heart of this new procedure is a stay on a wide range of creditor proceedings and a “payment holiday” in respect of certain debts during the period of Moratorium. The usual period of Moratorium, which can be extended, is relatively short: 20 business days beginning with the business day after the day on which the Moratorium comes into force. The definition of debts that are subject to a “payment holiday” is very broad with a limited list of exceptions that includes “rent in respect of a period during the moratorium” and “debts or liabilities arising under a contract or other instrument involving financial services”. These excepted debts and “moratorium debts” are treated as preferential debts in a winding up of the company in certain circumstances.
Unlike administration, where the power of management is with the administrator (unless the administrator consents), the directors of the company remain in control of the company during a Moratorium. The licensed insolvency practitioner who is involved in the Moratorium does not manage the company and, consistently with that more limited role, is described as a “monitor”. However, the monitor is required to bring the Moratorium to an end at any time by filing a notice in court in specific circumstances. These include where the monitor thinks that the Moratorium is no longer likely to result in the rescue of the company as a going concern. How will insolvency practitioners make that evaluation? In this context, it should be noted that the monitor may be subject to challenge for “unfairly harming” any of a creditor, director or member of a company. Will this type of challenge be more frequent than in administrations?
The scope of that part of the Moratorium which restricts enforcement by creditors and legal proceedings is very similar to the statutory moratorium in administrations, which was considered by the authors in a recent article which is available here. 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. At this very early stage of the CIGB’s progression through Parliament, it may be difficult to predict the circumstances in which the court would grant such permission. There are restrictions on insolvency proceedings during the Moratorium, although there are exceptions allowing the directors to present a winding up petition (having notified the monitor) or the Secretary of State for Business, Energy and Industrial Strategy to petition to wind up the company on grounds of public interest.
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. 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.
It is to be recalled that in the leading and enduring case on the statutory moratorium in administrations, Re Atlantic Computer Systems plc [1992] Ch 505 (CA), Nicholls LJ stated that “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.” This decision stood the test of the reforms of administration made by the Enterprise Act 2002. Will this decision have any influence on the exercise of the Court’s discretion in respect of the Moratorium?
In addition, there are new concepts which impact upon lenders. Notably, while in force the Moratorium prevents a floating charge from crystallising.
The Moratorium is not however a refuge from creditors, with no consequences for the company in respect of its ability to trade. For instance, the company must inform those from whom it seeks to obtain credit of more than £500 that there is a Moratorium in force. In addition, there are restrictions on the company disposing of property during the Moratorium.
In conclusion, there is no denying that the Moratorium brings with it a number of uncertainties for all involved. Insolvency practitioners will have to adapt to their new role; and to the possible tensions with the retained control of a company’s directors. These are unprecedented times, and it will be interesting to see if and how the CIGB Moratorium, and the existing law on statutory moratoriums in administrations, coincide in practice.
The CIGB continues to progress through Parliament and its current text is here; it is due to be revisited on 3 June 2020.
Lisa Linklater is a barrister specialist in commercial litigation including insolvency and company law. 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.
