Moratorium under Part A1 of the Insolvency Act 1986
COMPANY LAW DEVELOPMENTS: Moratorium under Part A1 of the Insolvency Act 1986
What is a moratorium?
This is a relatively new procedure introduced during the COVID pandemic but actually planned some time in advance, in order to plug a perceived gap in corporate rescue options. A moratorium is a short period of breathing space for financially distressed companies during which some unsecured creditors are not able to take steps against them. They were introduced by the Corporate Insolvency and Governance Act 2020 (CIGA 2020) and have been available to companies since 2020. They are of limited use and as such moratoria are still relatively unknown. Consequently there is much uncertainty about their actual operation. Their biggest drawback is that they do not give any protection from lending obligations.
Who can use it?
In order to use the process, a company must be able to satisfy the following criteria:
The company must not be an excluded company (insurance companies, banks and investment exchanges are all included in the list of excluded companies).
The company must not have been in CVA or administration in the 12 months prior to a moratorium.
A directors must make a statement that the company is, or is likely to become, unable to pay its debts.
The Monitor (discussed below) must consider that it is likely that the moratorium will result in the rescue of the company as a going concern.
What happens once a company is in a moratorium?
A moratorium is intended to give the company time to consider how it might rearrange its affairs, continue operating or secure additional investment. Although a Monitor (who must be an insolvency practitioner) is appointed to oversee the moratorium, the company’s management team remains in place and in control. A moratorium is akin to a CVA but without the need for prior creditor approval.
For the duration of the moratorium the company is temporarily relieved of the burden of having to pay some debts, mainly those owed to suppliers. But it must still pay for goods and services supplied during the moratorium, rent, employees’ wages, and (unless suspended by separate agreement) commercial loan repayments. Suppliers of goods and services provided under term contracts must also continue to supply the company during the moratorium period (s.233B IA 1986); however in reality they are no worse off as the company must pay them during this time (or lose the protection of the moratorium) as the moratorium only applies to pre-moratorium debts.
Thus the company may have to continue to meet substantial financial obligations during the moratorium making it unsuitable for many. There is no protection from ransom demands by essential suppliers, unless supplied under a term contract. However the obligation to continue to pay these classes of creditors may offer some comfort to directors who might otherwise be worried about making potentially preferential payments.
What is the Monitor’s role?
The Monitor must be a licensed insolvency practitioner and is required continually to assess whether it remains likely that the moratorium will result in the rescue of the company. If at any point the Monitor thinks that it will not, they must bring the moratorium to an end. The choice of wording suggests, as demonstrated by the case of Re Corbin & King Holdings Ltd earlier this year, that the Monitor should be given a degree of latitude and their decisions are only open to challenge if made in bad faith or they are so perverse that no reasonable monitor could have made the decision.
How long does a moratorium last?
The initial period is just 20 business days which can be extended by a further 20 days at the instance of the Monitor.
A moratorium can then be further extended by:
Creditor agreement – resulting in an extension for up to a year from the original date the company entered moratorium; or
Obtaining an extension from a court to a date set by the court.
Interaction with insolvency procedures
Once in a moratorium, a company can still propose a CVA, scheme of arrangement, administration or a restructuring plan. If any one of these is approved/sanctioned, the moratorium will come to an end.
Comment
A moratorium will only be really useful in situations where a rescue plan has already been formulated, yet more time is needed to secure its implementation. Typically this will be the introduction of additional capital by members/directors who might first need to make their own borrowing arrangements. The company will separately need to secure the support of its bank or other lenders to make the moratorium work.
If the objective is only to save the business and not the company, then administration would normally remain the first choice option. Despite this, they have the potential to be a valuable tool for rescuing SMEs provided the owners do not leave it too late.