A year in review: the Part A1 moratorium

October 2021  |  SPECIAL REPORT: RESTRUCTURING & INSOLVENCY

Financier Worldwide Magazine

October 2021 Issue

It is now over a year since the Part A1 standalone moratorium process (moratorium) was introduced by the 2020 Corporate Insolvency and Governance Act (CIGA).

The moratorium is a director-led process intended to provide a company in financial distress with a period of breathing space from creditor enforcement action. During this grace period the company is granted time and certain creditor protections to consider its rescue, restructuring or investment options, while subject to the oversight of a ‘monitor’, that must be an insolvency practitioner.

Unless extended, the moratorium provides up to 40 business days protection from specified creditor actions. The moratorium may be extended if consent from pre-moratorium creditors or the court is obtained and conversely in certain circumstances may be ended early. Importantly, for a moratorium to commence and continue, the monitor must be of the view that it remains likely that the moratorium will result in the rescue of the company as a going concern.

Although the moratorium would appear to be a potentially useful procedure to aid the rescue and restructure of a company, its use in practice has been limited. This low level of usage seems attributable to the limitations and exemptions embedded within the legislation. In addition, the temporary support measures that were introduced by the government to help businesses survive the COVID-19 pandemic have largely successfully relieved immediate financial stress and mollified creditors’ rights to enforce against defaulting debtors.

The government's legal and fiscal interventions in response to the pandemic collectively have resulted in a significant fall in the number of corporate insolvencies in the UK and meant distressed companies have not needed to seek the protection of a moratorium. Of particular note in this regard are the restrictions that were imposed on creditors presenting winding-up petitions for debts or financial hardships caused by the pandemic. Unless extended further, those winding-up restrictions are due to expire on 30 September 2021. Following the withdrawal of this safe harbour, it is possible that we may see an uptake in use of the moratorium.

Current use and its potential interaction with other insolvency tools

The introduction of the moratorium can be viewed as a positive step toward enhancing the UK’s already strong rescue culture. It is envisaged that the moratorium will be used as a preliminary tool to allow a company time and space to assess its best options going forward. As such, CIGA 2020 provides that a company voluntary arrangement (CVA), scheme of arrangement or Part 26A of the Companies Act 2006 restructuring plan may be proposed while a company is subject to a moratorium.

Under such scenarios, once the CVA is approved or the scheme of arrangement or restructuring plan sanctioned, the moratorium terminates. It is important to note that any CVA, scheme of arrangement or restructuring plan formally proposed within 12 weeks of the end of the moratorium cannot compromise: (i) debts that fell due during the moratorium; and (ii) certain pre-moratorium debts without the relevant creditor’s consent.

Role of the monitor

The moratorium is a debtor in possession process. This means that the directors of a company remain in control for the duration of the process, with the company’s affairs being overseen by a ‘monitor’ who acts as an officer of the court. The monitor is required to be a licenced insolvency practitioner and must consent to their appointment. There has been some speculation as to whether the government may widen the ambit of who may act as a monitor to include other qualified professionals.

The monitor’s core obligation is to monitor the company’s affairs for the purpose of forming the view as to whether it remains likely that the moratorium will result in the rescue of the company as a going concern. In undertaking their role and assessing whether this threshold for obtaining a moratarium has been reached, the monitor is entitled to require the directors to provide information in connection with their monitoring functions and may apply to court for directions. There is a right to challenge the monitor’s actions, decisions and omissions on the grounds of unfair harm to the applicant company.

Limits to the moratorium’s effect in practice

One of the reasons for the low uptake of the moratorium may be the conditions placed upon its use under the legislation. These include specific eligibility criteria for the types of companies that can use the moratorium and restrictions on the types of debts that are captured by the moratorium.

A company will be eligible to use the moratorium if it meets the following three criteria.

First, the company must be a company registered under the Companies Act 2006 or an unregistered company that can be wound up pursuant to the Insolvency Act 1986 and not be an excluded company listed in Schedule ZA1 of the Insolvency Act 1986. The list of excluded companies is broad and includes companies that have their own insolvency regimes – for example insurance companies, investment exchanges and banks. The list of exclusions also includes companies that have been party to capital market arrangements incurring debt of at least £10m.

In practice, the capital market arrangements exemption is likely to limit the use of the moratorium to small and medium-sized enterprises (SMEs) as larger companies are more likely to have capital structures which include capital markets debt. This factor may have contributed to the limited use of the moratorium in its first year. A company that has been in a moratorium, CVA or administration in the previous 12 months prior is also not eligible, although pursuant to temporary legislative changes owing to the COVID-19 pandemic, until 30 September 2021 this restriction does not apply.

Second, the directors must state that the company is, or is likely to become, unable to pay its debts. This statement is either filed as part of an out of court process, or as part of an application to court. The out of court process is typically only available when the company is not subject to an outstanding winding up petition, although, due to temporary relaxations to the rules, companies subject to a winding up petition can still use the out of court route until 30 September 2021. After this date, any company with an extant winding up petition against it must make an application to court if it wishes to benefit from a moratorium.

Finally, the monitor must be of the view that it remains likely that the moratorium would result in the rescue of the company as a going concern. As a practical matter this is causing prospective monitors significant concern, as assessing the future prospects of a company is a notoriously difficult (and often subjective) evaluation, and this position is compounded by the limited information and familiarity the prospective monitor will have in respect of the company prior to their appointment. Furthermore, at present, the interpretation of what ‘likely’ means in this context remains uncertain and has not been the subject of significant judicial scrutiny.

The legislation also imposes restrictions on the types of debt that are covered by the moratorium. A company’s debt will be divided into three categories: (i) pre-moratorium debts with a payment holiday; (ii) pre-moratorium debts without a payment holiday; and (iii) moratorium debts. The latter two of these categories must continue to be paid throughout the duration of the moratorium and could result in significant payments having to be made by the distressed company in question.

The obligation to pay debts or liabilities under a contract involving financing services is of particular significance, as it provides lenders that do not support the moratorium with the ability to accelerate payments and bring the moratorium to an end. The obligation to continue to pay such potentially large amounts throughout the moratarium may not in reality provide a distressed company with sufficient breathing space to implement a restructuring or refinancing.

The use of the moratorium in the future

Unless extended further, the current restrictions on presenting winding up petitions and statutory demands will lapse on 30 September 2021. With this, it is expected that there may be a significant increase in the number of financially distressed companies that may find themselves being pursued by creditors for payment of outstanding debts. As a result, there could be an influx of eligible companies looking to turn to the moratorium to provide some breathing space and support while considering or looking to implement restructuring or refinancing options.

In summary, while it has been a slow start for the moratorium, with the UK economy opening up and the impact of the COVID-19 pandemic still being felt by a large number of businesses, the value of the moratorium within the UK restructuring toolkit finally may be about to be realised.

 

Paul Bagon is a partner, Will Beck is of counsel and Kate Watson is an associate at Reynolds Porter Chamberlain. Mr Bagon can be contacted on +44 (0)20 3060 6646 or by email: paul.bagon@rpc.co.uk. Mr Beck can be contacted on +44 (0)20 3060 6000 or by email: will.beck@rpc.co.uk. Ms Watson can be contacted on +44 (0)20 3060 6000 or by email: kate.watson@rpc.co.uk.

© Financier Worldwide

BY

Paul Bagon, Will Beck and Kate Watson

Reynolds Porter Chamberlain

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