What does the government insolvency moratorium mean for your business? Philip Stephenson explains what you need in order to be prepared for this new legislation.
The Corporate Insolvency and Governance Bill had its formal first reading in the House of Commons on 20 May 2020 and is likely to become law within a few weeks. The central provision is for a company to be able to obtain a moratorium, initially for 20 business days, but capable of extension.
The new procedures may not yet be law, but if companies want to use them immediately, they need to starting planning now. This also has implications for secured creditors who may find their options limited if they do not take steps to protect their position.
Why companies need to start planning now if they want to obtain a moratorium
The Corporate Insolvency and Governance Bill process requires a licensed insolvency practitioner to act as monitor. A key document that has to be filed with the court to obtain the moratorium is a statement from the prospective monitor that entering the moratorium is likely to result in the rescue of the company as a going concern.
This means that, whether the rescue plan is a Company Voluntary Arrangement (CVA), a Companies Act scheme of arrangement, or simply a trade-out under a lengthy moratorium, the plan needs to have been identified and be built to the point that its viability can reasonably be seen before the company enters the moratorium. This will lie at the core of the directors and their advisers making a success of the opportunity offered by the moratorium.
To identify such a plan will take time and, in essence, requires a focused strategic and options review to be undertaken so that the prospective monitor is comfortable making the statement. In a way, it is comparable to the work undertaken by a potential nominee of a CVA in advance of formulating the proposal. Therefore, assuming the Bill becomes law on, for example, 1 July 2020, companies would need to start planning now and working with the prospective monitor.
Why should secured lenders be concerned with the moratorium?
The Corporate Insolvency and Governance Bill moratorium will prevent a secured lender from appointing an administrator, or otherwise enforcing its security. Under most circumstances, it is expected that the company will almost certainly depend on the continuing support of its lenders throughout the rescue, and the company will, therefore, need to work alongside its lenders in planning the rescue before a moratorium is obtained. If this is the case, the lender will need to understand the rescue plan in full (including the exit from the moratorium), the implications it may have on the lender and, as the debtor remains in possession, be confident of management’s ability to effect a turnaround.
However, there may be instances where the lender is not consulted fully, or even at all, and may find itself stuck with the moratorium. The first knowledge the lender may have of the moratorium is when it receives notification from the monitor. On hearing of the potential of a moratorium, secured creditors may therefore need to act quickly and take pre-emptive steps to enforce their security to protect their position in advance of the moratorium being put in place. However, this will also require planning and careful consideration of any reputational and political issues.
What are the duties of the monitor after the granting of a moratorium?
The statutory duties of the monitor are few, being essentially to check throughout the period of the moratorium that the company is able to pay its continuing liabilities as they fall due and that the prospect of the rescue of the company as a going concern remains likely. The continuing liabilities are not only those arising by reason of fresh purchases and other commitments while the moratorium is in force, but also certain liabilities arising from pre-moratorium contracts, from which there will be no payment holiday, including interest on pre-existing lending.
Therefore, in order to access the Corporate Insolvency and Governance Bill moratorium, it will be crucial that the company can show it has sufficient funding to meet these liabilities. Funding is likely to be one of the key concerns of any prospective monitor.
Could a company use the new ‘Restructuring Plan’ to exit a moratorium?
The Corporate Insolvency and Governance Bill also contains a new Part 26A of the Companies Act (the Restructuring Plan), creating a variant of the long-standing Part 26 scheme of arrangement. This new creditor cram-down procedure is directed at companies in financial difficulty and could be used as an exit from a moratorium.
It is, however, remarkably similar to the existing scheme of arrangement in requiring the division of the affected groups into classes - fertile ground for litigation in itself - a court hearing to order the meetings and a second court hearing to sanction the scheme. Although the court will be able to overrule a dissenting class if no-one in that class will be worse off than in the likely alternative, the process appears to be as cumbersome and costly as the existing scheme of arrangement, and so, as currently, may struggle to find a market outside the large PLC sector.
Corporate Insolvency and Governance Bill - in summary
Although the huge uncertainties that overhang the economy make it difficult to know where any company will be in a few weeks’ time and what its ultimate prospects may be, it is not too early for boards of directors to begin conversations with advisers and stakeholders that include scenario planning, at least, perhaps moving to detailed work on a chosen route to rescue, so that a suitable company may be in a position to file for a moratorium as soon as the legislation comes into force.
It is not known at this stage if the current temporary restrictions on winding up proceedings and landlord enforcement will be removed at the same time as the moratorium becomes available, but it appears that any overlap will not exceed one month. If the directors wait until the moratorium is actually available before starting the planning process, it may be too late.