The Corporate Insolvency and Governance Bill – Proposal for a New Moratorium
The Corporate Insolvency and Governance Bill is currently making its way through Parliament and is expected to become law by the end of June 2020. There are a number of key aspects to the Bill as far as insolvency is concerned, but perhaps the most striking is the introduction of a new statutory Moratorium process. This will allow directors of a limited company or LLP, to seek protection from creditors, for an initial 20 business day period whilst attempts are made to rescue the business as a going concern.
Eligibility for a Moratorium
Other than some specific exclusions (e.g. banks and other regulated entities, such as insurance companies) any company is able to utilise the Moratorium, providing it meets certain criteria and is not already going through another insolvency procedure (e.g. a CVA, administration, liquidation).
The directors will be required to state that in their view the company is, or is likely to become, unable to pay its debts as and when they fall due. At the same time, the proposed Monitor will be required to certify that in their view, it is likely that a Moratorium period will result in the company being rescued as a going concern, for example through a CVA, a restructure or a refinance.
How to Apply
The Moratorium is proposed by the directors and will commence with the filing of prescribed documents at court – this is known as the “out of court process” and can be achieved relatively swiftly. However, if the company is already subject to a winding up petition, then an application for a court order will need to be made.
Unlike an administration, the consent of (or even notice to) secured creditors is not required prior to filing the documents at court.
The Moratorium automatically ends 20 business days from the day after the Moratorium comes into force. This can be extended for a further 20 business days, by agreement with the Monitor and without creditor consent. It can also be extended for up to 12 months with the consent of creditors and/or a court order. An extension will only be granted (by the Monitor or a court) if the company has so far complied with the terms of the Moratorium and they still believe that the Moratorium will result in the company being rescued as a going concern. (see more below).
Effect of the Moratorium
A company subject to a Moratorium obtains the benefit of a break from paying certain “pre-Moratorium debts” (primarily trade debts, including rent arrears). Various creditor enforcement actions will be avoided, including:
- Floating charge-holders cannot crystallise their charge or appoint an administrator
- Creditors cannot commence proceedings to wind the company up
- No steps can be taken to enforce security or repossess hire-purchase goods (without consent of the Monitor or court)
- No legal proceedings (except certain employment claims) can be commenced or continued during the Moratorium without court consent
- Landlords cannot forfeit leases without court consent
- No security can be taken over the company’s property without the Monitor’s consent
- Pre-Moratorium creditors cannot apply to court to enforce their debt
However, liabilities arising under a contract involving financial services (for example loan interest and capital repayments) will still need to be paid during the Moratorium, unless agreed with the lender. The company will also need to pay any ongoing liabilities during the period of the Moratorium, which would include:
- The Monitor’s remuneration and expenses
- Goods or services supplied during the Moratorium
- Rent (for the Moratorium period)
- Wages, salary and redundancy payments (including any due before the Moratorium started)
In addition, there are numerous restrictions and obligations of the company and its directors, including a £500 restriction on credit, inability to enter into certain types of contract and a threshold on payment of pre-Moratorium debt without the Monitor’s consent.
It will be interesting to see to what extent this new solution is utilised but in the post-COVID 19 period especially, it could prove to be a valuable tool for directors to save their business.