24 July 2020

One innovation introduced by the Corporate Insolvency and Governance Act 2020 is the new moratorium procedure for companies in financial distress. The intention is to give company directors time to try to turn their business around before it enters an insolvency procedure, by giving the company a payment holiday.

In the current coronavirus crisis, many companies are finding themselves both hunter and hunted when it comes to cash flow Whilst “taking the tribe cross country” might still seem like a pipe dream for most of us, prudent company directors should be aware of the possibility of taking some of their debts on holiday in the meantime.

Starting the journey

In order to obtain a moratorium, the company’s directors will need to find an insolvency practitioner who is prepared to act as a “monitor” of the company’s affairs; provide the monitor with a statement that, in their view, the company is, or is likely to become, unable to pay its debts; and persuade the monitor that the moratorium will result in the rescue of the company as a going concern. This will probably require the directors to come up with a turnaround plan of some sort. If the monitor remains of the same view, the directors can obtain a further period of protection for another 20 business days. Longer extensions, for up to one year, will require the consent of the company’s pre-moratorium creditors, or the court.

If the company is not already subject to a winding-up petition, the directors can obtain the initial moratorium by lodging the relevant documents at court. It is supposed to be straightforward. The monitor will then give notice to Companies House.

Under normal circumstances, if the company is already subject to a winding-up petition, it will need to apply to the court for a moratorium, and persuade the court that it would be likely to 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. However, in response to COVID-19 situation, this requirement has been temporarily relaxed, until 30 September 2020, and companies already subject to a winding-up petition will be able to proceed without applying to court.

The debts that go on holiday

Not all types of debt will benefit from the payment holiday. The company will still have to pay the monitor's fees, staff wages, redundancy payments, the costs of new supplies of goods and services during the moratorium, rent for periods within the moratorium, and debts or other liabilities arising “under a contract or other instrument involving financial services”, which would include most loan agreements. The debts which will benefit are other kinds of pre-moratorium debt, falling due before or during the moratorium.

A place of sanctuary

For as long as the moratorium applies, creditors will generally need the permission of the court to:

• enforce a security, or step in under a floating charge;
• irritate a lease;
• repossess goods under hire purchase or retention of title; and
• commence legal proceedings (including insolvency proceedings).

Similar restrictions apply during a company administration, but unlike an administrator, a monitor cannot give consent to this kind of enforcement action in place of the Court.

Unhappy creditors at home

If the creditors are not happy, they will have the opportunity to intervene, either at the point when an extension beyond 40 days is applied for, or at the outset if there is a winding-up petition already in place (once the temporary relation of the rules mentioned above has expired). In deciding the application, the Court must take account of the interests of pre-moratorium creditors at that stage.

There are detailed provisions as to eligibility and classification of different kinds of debt, and this represents a high-level overview only. For further information, contact:

Will Cole, Partner, E: wco@bto.co.uk T: 0131 222 2947