A new Act, The Corporate Insolvency and Governance Act 2020 (“CIGA”) came into force on 26 June 2020 together with the introduction of a freestanding Company Moratorium to the UK corporate insolvency regime.
What is a Company Moratorium?
It is a stand-alone process designed to give companies “breathing space” from creditor pressure so that they can review their affairs and look at rescue options in order to allow for the Company to be rescued as a going concern. (PLEASE NOTE THIS IS THE RESCUE OF THE COMPANY NOT THE SALE OF THE BUSINESS AND ASSETS.) The procedure is independent of other insolvency procedures but can be used in combination with a CVA or Restructuring Plan proposal.
What is the effect of a Company Moratorium?
With the granting of a Moratorium, creditors temporarily have their rights against the Company suspended, including a stop on any legal action without permission from the Court. In this sense, it is very similar to Administration. However, for the duration of the Moratorium, the Company will have a “payment holiday” in respect of pre-moratorium debts. This is subject to certain exceptions including payments due under a contract or other instruments involving financial services (such as capital or interest payments). Furthermore, the Company will have to maintain certain ongoing liabilities (i.e rent) and the charge of a QFC will not be crystallised on the granting of a Moratorium Order.
What type of Companies can apply for a Moratorium?
Essentially any Company and LLP registered in England and Wales, Scotland and Northern Ireland can apply for a Moratorium UNLESS:
· It has been subject to a Moratorium in the last 12 months;
· Is currently in an insolvency procedure; and/or
· Is not an eligible company i.e. those providing financial services, insurance or is party to a capital market arrangement.
What is the role of the Monitor?
The new role of a “Monitor” has been created by CIGA. The role of a Monitor is one of oversight of the Company and directors’ actions during the Moratorium. It does not involve any control of the Company. The Monitor’s key duty is to form an independent, objective view on whether the moratorium “would result in the rescue of the company as a going concern”. If a proposed Monitor does not form this view, the moratorium cannot be granted and if this opinion changes at any point, the Monitor must terminate the moratorium immediately (by filing documents at Court).
In order to form this view, the Monitor is entitled to rely on the information provided by the Directors. The Directors can be asked to provide any information in order that the Monitor can carry out his/her function. It is implied that the Monitor is required to continually update his/her opinion on the achievability of the Company’s rescue as a going concern. However, no details have yet been provided in respect of the frequency of this review or of the level of scrutiny and due diligence required.
During the course of the Moratorium, the Monitor’s consent must be obtained to carry out the following:
· Grant security over a property;
· Make payment in respect of a Pre-Moratorium debt; and/or
· Dispose of any assets of the company.
Consent can only be given if it will facilitate the rescue of the Company. However, if further clarification is needed an application can be made to Court for directions.
A company in Moratorium must be able to pay its Moratorium debts i.e any costs and expenses incurred during the period of the Moratorium:
· the Monitor’s remuneration or expenses;
· goods or services supplied during the moratorium;
· rent in respect of a period during the moratorium;
· wages or salaries arising under a contract of employment;
· redundancy payments; or
· debts or other liabilities arising under a contract or other instrument involving financial services.
If the Company is unable to pay these costs and/or those pre-Moratorium debts that did not fall under the payment holiday, the Moratorium will fail. If the Company then enters into a formal insolvency procedure within 12 weeks of the Moratorium’s failure, those Moratorium debts that are still outstanding will have “Super Priority” over any subsequently incurred liabilities (this includes Officeholders’ fees).
What are the Directors’ duties?
The Directors of the Company have many duties in addition to their usual fiduciary duties. Their pertinent duties relating to the Moratorium are listed below:
· Apply for the Moratorium and, on receipt of the Order, notify the Monitor immediately. The Directors must also apply for any subsequent extensions of the term of the Moratorium.
· To publicise the fact that the Company is in a Moratorium in all prominent position at their premises and on business letters and websites, along with the name and contact details of the Monitor.
· To notify the Monitor before commencing insolvency proceedings in respect of the Company.
· To provide any information necessary for the purpose of assessing the continued viability of the Moratorium as soon as practicable. A failure to do so is one of the grounds upon which a Monitor is obliged to bring a Moratorium to an end.
· Not to obtain credit of £500 or more without informing the supplier that a Moratorium is in force in relation to the Company.
· To obtain the Monitor’s consent to enter into certain transactions:
o Payment of pre-moratorium debts subject to a payment holiday of the greater of £5,000 or 1% of the value of the debts and liabilities owed to the unsecured creditors at the time the Moratorium began.
o Dispose of assets outside the normal course of business.
o Dispose of hire-purchase assets o Provide security over company assets.
What is the process to obtain a Moratorium?
There are two ways in which the Company can enter into a Moratorium:
§ Filing documents at Court
§ Making an application to the Court (in cases where there is an outstanding winding up petition) In order to obtain a Moratorium the following documentation is required:
§ A statement that the IP is qualified and willing to act.
§ A statement from the proposed Monitor(s) that the Company is an eligible company.
§ A statement from the directors that, in their view, the Company is, or is likely to become, unable to pay its debts.
§ A statement from the proposed Monitor(s) 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.
In the event that an application has to be made to Court as a result of an outstanding winding up petition, the Court will only grant an order for a Moratorium if it is likely that it would result in a better outcome for creditors than in a winding up. Please be aware that there is a temporary provision which allows for the directors to use the out of court procedure where there is an outstanding winding up petition until 30 September 2020.
What is the duration of a Moratorium and can it be extended?
The initial timeframe for a Moratorium is 20 business days (the Initial Period). The Company’s Directors can extend this period by filing a notice at Court after 15 business days into the initial period for a further period of 20 business days. Once extended, the Directors must notify the Monitor(s) of the extension. In order to qualify for an extension, the Company’s Directors must confirm that the Moratorium debts (including rent and other expenses incurred) have been paid prior to extension. At any time after the first 15 business days of the Initial Period, the Moratorium can be extended by creditors’ consent for a period of up to a year (in total including the Initial Period). In order to obtain consent from the Company’s creditors, the Directors are obliged to use a qualifying decision procedure.
Alternatively the Moratorium can be extended for an unlimited period with the Court’s permission, any time after the first 15 business days of the Initial Period. Once the Court has extended the period of the Moratorium, the Directors must notify the Monitor(s) of the extension and provide a copy of the Order immediately.
Termination
A Moratorium will terminate either upon expiry of term without extension, upon the Company entering into an insolvency procedure or by Order of the Court. Early termination can be triggered by the Monitor if:
· It is no longer likely that the Moratorium will result in the rescue of the Company as a going concern;
· The objective of the Moratorium has been achieved;
· A failure by the Company or its officers to provide the requested information that leads to the Monitor being unable to carry his/her function; or
· If the Company is unable to pay its Moratorium debts.
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