Introduction

The Corporate and Insolvency Governance Act 2020 ("CIGA 20") brought in a raft of new legislation for assisting companies in financial distress, but perhaps the timing was not quite right for the Moratorium - with the Coronavirus pandemic and lockdown periods ongoing, and the restrictions on creditors taking legal remedial action. However, when I researched and reviewed the Moratorium as a procedure, I couldn't help but think it could be a useful tool in assisting companies and finding an exit route where it is possible to pay current debts as and when due, but historic debts were an issue. So here's my thoughts on it....from the perspective of actually doing them day-to-day in an insolvency practice. 

CIGA 20 came into effect on 26 June 2020, however, this was also right in the middle of the global coronavirus pandemic and lockdown, and the intention of the procedure was to put a hold on all legal actions, including winding-up petitions, but the new Moratorium was brought out when there were restrictions on any creditor filing a winding-up petition unless the creditor could prove the debtor's cashflow wasn't impacted by Covid-19, originally this was until 30 September 2020, but this was extended to 30 September 2021. Furthermore, extensions were given to commercial tenants with rent arrears, and generally the country shut down, with many creditors being unable to enforce high court writs or "send in the bailiffs". This meant that the Moratorium wasn't really needed by many companies due to the restrictions on creditors taking legal action. 

Well the dust has all settled on that, and I have had the unique opportunity of assisting some companies with the Moratorium procedure - mainly using the in-court procedure set out in sections A4 and A6 of the Insolvency Act 1986 ("IA86"), and seen it deployed quite successfully in certain situations. 

Pre-appointment & Advisory Period

In the advisory period where the Insolvency Practitioner is acting as advisor, there are a number of things you must satisfy yourself of before you can consider whether the Moratorium is appropriate for a company:

1. Is the company eligible for a moratorium? - Schedule ZA1, IA86 neatly sets out that a company cannot already be subject to a moratorium, or in an insolvency procedure, nor can it have been in administration or in a voluntary arrangement in the preceeding 12 months. There are also various exclusions for insurance companies, banks, investment firms and parties to capital market arrangements. This satisfies the requirement under section A6 (1)(c), IA86 in the proposed Monitor's statement. 

2. Would the Moratorium result in the rescue of the business as a going concern? - Section A6 (1)(e), IA86, the proposed Monitor must make a statement to court that they are satisfied the business can be rescued. Evidence should be supplied that there is to be a significant investment, assets sold to clear debts, or a clear restructuring plan. 

3. Ethical Considerations - Prior to considering accepting appointment the proposed Monitor must consider if there is a significant professional or personal relationship that could cause a threat or threats to being independent and objective in their role. They must also consider any threats of an unreasonable nature to the fundemental principles of the ethical code for members. 

4. Can the company pay its debts as and when due whilst in Moratorium? - While this is not explicitly stated in CIGA 20 or IA86, any proposed Monitor or Insolvency Practitioner who is willing to act as Monitor should consider significantly the position of the pre-moratorium creditors, and that the position is not worsened or deficiency increased at detriment to creditors whilst in Moratorium, and this is hinted at in section A38 (1)(d), IA86 which states that the Monitor must terminate the Moratorium if the Monitor thinks the Company is unable to pay its debts as and when due in respect of moratorium debts or pre-moratoriumn debts with no holiday (section A18, IA86). 

5. Is the outcome for creditors likely to be preferable to winding-up? - This is a common consideration for administration for Insolvency Practitioners, and likewise applies to the Moratorium, and from personal experience the judges will primarily concern themselves with Section A4 (5) of the Insolvency Act 1986, which is that "The court may make an order...only if it is satisfied that a moratorium for the company 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 a moratorium)", this means to make a court application you do ideally need to exhibit a comparative estimated outcome statement, along with a director's estimated statement of affairs, a cashflow forecast for the initial four-week moratorium period, witness statements, and any other evidence that is useful. 

6. Risks to the Monitor - There are also other concerns for the court, and risks to the insolvency practitioner as Monitor, this is a concept we as insolvency practitioners are both very familiar with, and take very seriously in our day-to-day role, that no creditor is "unfairly harmed" or that their position is worsened by the implementation of the Moratorium. Therefore, although a company approaching the insolvency profession for a Moratorium needs help quickly and directors may want to move quickly, careful consideration, and review of the appropriateness of a Moratorium is needed, along with detailed financial and monitoring information that can be demanding on both the IP and the company, but essential in ensuring that creditors are not unfairly harmed, that debts are paid as and when due, and significant decisions have to be made commercially and competently whilst the Moratorium is in progress, including various outcomes and scenarios. 

Monitoring and Reliance on the Director(s)

A further consideration is relying on the director(s) to provide information that is both quickly supplied, and contemporaneous to weekly monitoring reviews, this can be demanding on both the IP and the company, and whilst directors will be warned that failure to supply information can lead to termination, this does create additional stress and pressure on the financial reporting function of the business. 

From personal experience it is key to obtain bank statements from the company along with purchase invoices and contracts, to review that publication of "in moratorium" has been completed, debts are in fact being paid as and when due, and to hold regular meetings with the directors and/or financial controllers to review the monitoring information, consider any requests to pay pre-moratorium debts (if appropriate), consider any requests to dispose or sell assets (if appropriate), cashflow, progress of any potential rescue or restructuring, and whether any extension is required. I personally visited one company in moratorium on a weekly basis to spend the day reviewing and interrogating financial data and management accounts. 

Recent Case Law (The decision in Minor Hotel Group MEA DMCC v Dymant & Anor [2022] EWHC 340 (Ch))

This case shows that the court is ready to give a degree of latitude to monitors in their decision making, particularly in fast-moving situations such as this one, and that there is a reluctance to allow a creditor to take enforcement action against a borrower when there is the prospect of a solvent solution for the debtor in the short-term. The case also provides useful guidance for monitors on how they should exercise their judgment in a scenario where a commercial lender seeks the termination of a moratorium but the monitor considers there to be a prospect of payment of the pre-moratorium debt in the short term.

Following the rationale of this judgment the following guide appears to be a sensible start for a monitor considering whether a company is able to pay pre-moratorium debts that are due and not caught by the payment holiday and whether they should terminate a moratorium:

• the company should be considered able to pay debts that are reasonably likely to be paid within five business days;

• consider whether the company can pay the debt itself out of cash resources; and

• if not, consider whether the company either has the immediate prospect of receiving third party funds or has assets capable of immediate realisation to pay it. Immediate receipt / realisation is a matter of commercial judgment – although anything over five business days will require specific assessment.  Consideration should also be given to whether the debt will be discharged by co-obligors.

Summary

To date there has been limited use of the moratorium procedure, in large part because it was unnecessary for many companies to do so in light of the significant restrictions that were historically placed on creditors as a result of the Covid-19 pandemic. As those restrictions have ended, creditors and HM Revenue and customs are petitioning again, and in light of this favourable decision to monitors, we expect to see an increase in the number of Moratoria. These may be used as a precursor to a sale or refinancing outside of a process. Alternatively, the Moratorium may be used as a precursor to a company voluntary arrangement or restructuring plan.

With my licensed insolvency practice - Nexus Corporate Solutions Limited, I look forward to assisting directors and companies with the effective use of the Moratorium as a tool, where it is appropriate to do so, and working with clients to rescue businesses, attempt to save jobs, and provide a better result for creditors and stakeholders than would be achieved solely by a winding-up or administration.