The aim of the new Bill is to introduce to law:
- Corporate moratorium to protect companies in rescue procedures
- Cross Class Cram Down Procedure
- Ban on landlords WUPs (Temp to 30/6/2020)
- Suspension of wrongful trading (s214 Insolvency Act 1986)
- Termination clauses in supply contracts (if buyer insolvent)
- Public company meeting rule changes etc
My focus, here, is on the corporate moratorium although we will comment on the rest in due course.
The Bill could be enacted before the end of May. And initially cover a period we believe to end of June, although my view is this will be extended in the Act to a time to be determined by the Government. It would seem folly to work so hard to change the law for one month. And as we all know insolvency companies are busiest after a recession as growth recovers. So, my hope is that this tool remains available for Company Rescue for the foreseeable future.
How long might that be? Well what price a V shaped recover or a U shaped recovery or will it be something longer i.e. something worse? Surely the recovery will inform the timing. But I do think it is up to the insolvency profession to use the tools provided and help save more solid companies, which lockdown has hugely damaged. In my view, these are the true targets for this tool. Not, perhaps those zombie companies, who’ve long failed any covenant tests and survive by raising more and more debt or through lender forbearance.
The Bill interestingly sets out the moratorium section first. Reminiscent, perhaps to some old timers, of the Insolvency Act 1986 in Part 1, the company voluntary arrangements tool for the first time.
Section A3 determines eligibility for filing a moratorium application;
(a) it is not subject to an outstanding winding-up petition, and (b) is not an overseas company.
(b) The directors of the company may obtain a moratorium
(c) For the purposes of this Chapter, “the relevant documents” are—
• (a) a notice that the directors wish to obtain a moratorium,
• (b) a statement from a qualified person (“the proposed monitor”) that the person is a qualified person, and consents to act as the monitor in relation to the proposed moratorium,
• (c) a statement from the proposed monitor that the company is an eligible company, (d) a statement from the directors that, in their view, the company is, or is likely to become, unable to pay its debts, and
• (e) a statement from the proposed monitor that, in the proposed monitor’s view, it is likely that a moratorium for the company would result in the rescue of the company as a going concern.
So, for the first time we see the introduction of a new role of “moratorium monitor”. This person or persons must be licensed insolvency practitioners. Many in the turnaround profession lobbied hard, in the consultation period on this moratorium concept in 2018, to be included as qualified person, however the Bill sticks with IPs only.
Section 4 is interesting in that it sets out the ability for a company subject to a winding up petition to apply for a moratorium. After many long years of dealing with petitioners using injunctions, applying for validation orders and the problem of liquidation having commenced after the issuance of a petition it is refreshing to see this inclusion.
- Obtaining a moratorium for company subject to winding-up petition. The directors of the company may apply to the court for a moratorium for the company.
- On hearing the application the court may make an order that the company should be subject to a moratorium, or make any other order which the court thinks appropriate.
- The court may make a moratorium 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)
The moratorium for a company comes into force at the time at which, the relevant documents are filed with the court under subsection (2) of that section and on the coming into force of a moratorium, the person or persons who made the proposed monitor statement becomes the monitor in relation to the moratorium.
Rather similar in some ways to a notice of intention to appoint administrators this means a simple court application (except under section 4 where a winding up petition has been issued) confirms the moratorium and the appointment of the monitor. What happens next is a new process:
- As soon as reasonably practicable after a moratorium for a company comes into force, the directors must notify the monitor of that fact. And as soon as reasonably practicable after receiving a notice, the monitor must notify the registrar of companies, and every creditor of the company of whose claim the monitor is aware that a moratorium for the company has come into force.
In our view, this points to a material period of “discovery” or pre monitor’s appointment advisory work. The proposed monitor and their firm will need to satisfy him or herself that there is adequate financial and creditor information, the need for daily or weekly cashflow modelling and they will probably will already have prepared a statement of affairs BEFORE the moratorium is applied for.
Initially the moratorium period is for the period of 20 business days beginning with the business day after the day on which the moratorium comes into force. This can be extended for a further 20 business days. Thus in practical terms the client and advisors have four weeks to build the rescue CVA (section A14 of the Bill) or to move to administration if not viable, perhaps.
Unlike a notice of intention to appoint administrators, the Bill introduces a publicity requirement to ensure that creditor dealings with the company post moratorium are protected. How this will work in practice remains to be seen.
Moratorium publicity, during a moratorium, the company must, in any premises, where business of the company is carried on, and (b) to which customers of the company or suppliers of goods or services to the company have access, display, in a prominent position so that it may easily be read by such customers or suppliers, a notice containing the required information. During a moratorium, any websites of the company must state the required information. And finally, during a moratorium, every business document issued by or on behalf of the company must state the required information. This includes purchase orders, invoices and communications.
Quick summary of a few of the rules included with regards to moratorium – we will comment more on these measures later
- The company in moratorium commits an offence if it seeks to obtain credit above £500 without notifying the proposed supplier that it is in a moratorium period
- Floating charge holders may not crystallise their floating charge (may not appoint administrators). No administration application may be made except by the directors.
- Directors must inform if the company proposes to make an administration application or voluntary winding up resolution.
- Monitor must form a view on whether the moratorium will result in the rescue of the company as a going concern.
- The directors must supply information to the monitor as soon as practicable or the monitor can terminate the moratorium.
- Monitors may apply to the court for direction about the carrying out of the monitors role, (shades of Chapter 11?).
The role of the monitor itself will be interesting and whilst he/she will not yet be acting as proposed nominee (nominated supervisor) he or she will want to be monitoring cashflow, new debt and creditor issues, legal compliance regularly perhaps 2-3 times weekly. Will the monitor require to have people on site? How much will this cost? Many questions will need to be answered as the Bill progresses. But we will certainly be making our plans to utilise this tool when able to.
With regards to working with qualifying floating charge holders the moratorium will need to be carefully discussed with the “bank” before applying surely, to make sure that the benefits and downsides are understood. Unlike notice of intention to appointment administrators I don’t see any requirement so far, to provide 5 days notice to the QFC.
Summary of the new moratorium tool and our early views of what it might mean for CVA led company rescues?
Potentially this answers the age old client objection with regards to the CVA process. Usually the biggest objection from potential clients is the lack of protection in the CVA preparatory period and the notice period once the nominee’s report has been filed at court and the decision meeting called.
In practice this may give us 4 weeks to prepare a CVA and then extend the moratorium to cover the 14-28 day creditors notice period before the decision process.
If the CVA fails to progress or, is rejected then Administration or liquidation will be the next options to plan for as before.
The requirement to post notices of the moratorium on premises, online and on published documents may be problematic for trading and could be an issue, but generally the creditors know there is a payment problem! Whilst this process confirms the company is now insolvent but has the protection of the moratorium, it will focus on creditors minds on how to deal with a proposed CVA from the debtor.
The monitor role needs to be understood in detail and will need actual practice, case law perhaps will follow. But it appears to the author to be less onerous than Schedule A1 Insolvency Act on first reading. In my view the monitor’s office will need to be more involved pre CVA, then consent to act as a nominee.