The Moratorium: Company rescue in the new world
The coming into force of the much-accelerated Corporate Insolvency and Governance Act on 26 June 2020 could, in theory, not have been timelier. Even without the coronavirus-specific measures that have been introduced (e.g. temporary suspension of wrongful trading), the tools it contains are likely to prove beneficial for company rescue in a post-COVID-19 and post-Brexit world.
Pushed through Parliament at an almost unseemly pace, one might be mistaken for thinking that this was all the result of the pandemic that has seen an almost unprecedented shut-down of the UK economy. Yet many of new measures introduced have been called for by the restructuring and insolvency profession since before 2016. Now, at last, it seems the time has come.
What is new?
The Act introduces three main substantive changes to the UK insolvency framework:
- Firstly, a moratorium or ‘breathing space’ to protect companies from creditor action while they consider their options for business rescue (which will be the main topic for discussion here).
- Secondly, a new court-based restructuring tool that is largely based on the English Scheme of Arrangement.
- And finally, new ipso facto rules, which are designed to prevent suppliers of goods and services from cancelling contracts with businesses that are in an insolvency procedure.
The moratorium – supporting business rescue
Whilst all of the above will likely be of benefit for UK businesses, the moratorium, in particular, is likely to be particularly valuable for many of our clients, especially those who are owner-managed.
It may come as a surprise to many that the insolvency and restructuring profession is not, at the moment, overly busy. In fact, the latest insolvency statistics are relatively flat. Whilst this may seem like good news, to some extent it is an indication that the measures that have been introduced, such as the Coronavirus Job Retention Scheme and the two loan packages, have been effective at keeping businesses afloat. It is considered by most commentators that it is only a matter of time until many businesses will need to start taking advice and potentially start taking steps to save their business. This will be triggered once the furlough scheme ends and the loans and payment holidays that have been granted start needing to be repaid.
And this is where, one hopes, the new moratorium will come into its own. This will be the first time that a formal breathing space has been introduced that doesn’t require a business to have already formed a view about which insolvency process it requires. In fact, it is the first time that the UK has had a moratorium which is not part of an insolvency process. It is supremely important for the business, its employees, and its creditors, that the right restructuring mechanism is chosen.
How does it work?
The new moratorium will provide with businesses with a period of 20 business days (extendable by a further 20 business days by the directors, up to a year with creditor approval, or for however long a court sees fit) to take advice and develop a plan to rescue their business as a going concern.
During this time, most creditors are not able to take action to recover any debts due and landlords are not able to take forfeiture action. Whilst this is a debtor-in-possession procedure (i.e. the company’s directors/management will maintain control of the business), a licenced IP will be appointed by the Court as a “monitor” to oversee the procedure and ensure creditor interests are safeguarded.
In most cases, the moratorium can be entered into via an out-of-court filing by the directors. Two important statements must be made:
- The directors will need to provide a statement that the company is in a position where it is or is likely to become unable to pay its debts as they fall due
- the monitor must confirm that the moratorium will provide the time necessary to result in a rescue of the company as a going concern. A temporary caveat has also been included such that the monitor can confirm this provided that any worsening of the company’s financial position as a result of COVID-19 is disregarded.
There is some concern amongst the restructuring profession about a monitor having to make such a confirmation to the court, not in the least as information gathering to ascertain the true state of affairs of a company can, at times, be a protracted affair. There is also some reluctance around making such a declaration whilst the monitor is not in actual control of the company.
If at any point, the monitor considers that it has become unlikely that the company will be able to be rescued as a going concern, then they are duty-bound to terminate the moratorium. Careful thought will need to be given as to how to actively monitor the company and ensure creditors’ interests are protected, whilst the directors and management still hold the reins, and for some, this may seem like too much risk.
What happens to the debts of the company?
The moratorium means that most historic non-finance liabilities are parked for this period.
It is, however, important to note that debts incurred during the moratorium will need to be paid. These include the monitor’s fees and expenses, employee wages, any goods and services supplied, rent, redundancy payments and any finance-related payments due. If these are not paid, then these will become “super priority” debts during any subsequent insolvency (if it’s entered into within 12 weeks of the end of the moratorium).
What is the view of Kreston Reeves?
Whilst care will need to be taken by restructuring professionals taking on a moratorium assignment, we plan to embrace this new procedure and the opportunities for rescue that it will provide for our clients who are facing financial distress.
We think a moratorium will likely prove particularly useful for those companies which are considering proposing a Company Voluntary Arrangement (CVA) to their creditors. Having a short time (typically three to four weeks) with which to put together accurate forecasts and drill down into exactly how much the company can support giving its historic creditors going forward is difficult. Furthermore, such proposals are often put together with the prospect of a winding up petition from an impatient creditor landing on a director’s desk. A moratorium in these circumstances will be invaluable and could result in a higher success rate for CVAs overall.
Having the moratorium as an option in the company rescue arsenal will likely result in a greater number of businesses being preserved: restructuring professionals will be provided with a stable space with which to drill down further into the company’s position and to put together, with the directors, a less pressured plan that will work for both the business and its creditors, free from creditor pressure (that can limit the options available).
This should see more companies deploy rescue strategies that are actually the most appropriate for them and will, consequently, see a better return to creditors overall. We are already looking forward to taking advantage of this new tool to help our clients, particularly in the current environment, to come out the other side of business distress.
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