On the 25 June 2020 the Corporate Insolvency and Governance Act (CIGA) came into force. Some long term measures were implemented in respect of the current COVID 19 situation but it also implemented some long term reforms creating new additions to the Insolvency Act and Companies Act. One of these new reforms is the Company Moratorium:
Company Moratorium
A new Part A1 and Schedule ZA1 been inserted into the Insolvency Act 1986.
The company moratorium is to enable a company in financial difficulties to obtain protection from its creditors taking action and to provide a “payment holiday” of its debts whilst it seeks to put in place some other sort of insolvency process or restructuring. The company moratorium is not a rescue procedure and at best should be considered as providing the company with “breathing space” to consider a suitable rescue procedure.
It is to be noted that this procedure only allows the company a “payment holiday” in respect of debts incurred pre-moratorium and not in respect of goods and services supplied during the moratorium. Further it does not apply to payments in respect of rent (in the period during the moratorium), wages, redundancy payments and financial services contracts such as bank loans (see further under “the position of the company’s lenders”).
An Insolvency Practitioner is appointed as the ‘Monitor’ of the company during the moratorium.
Eligibility criteria
This process is not available if a company has been involved in an insolvency process in the last 12 months, save that there has been some relaxing of the rules due to COVID 19 and during the period 26 June to 30 September 2020 a company will be eligible for a moratorium even if it was subject to a prior moratorium, administration or CVA (Creditors Voluntary Arrangement) in the previous 12 months.
Companies excluded from the moratorium procedure include insurance companies, banks, electronic money institutions, investment banks and firms and parties to capital market arrangements.
How to obtain a company moratorium
Providing the company is not the subject of a winding up petition and is not an oversees company the director(s) must file a document in court (the out of court process) similar to the current administration process but in the case of a company moratorium there is no need to give notice to a qualifying floating charge holder (QFCH) and there is no ability of the QFCH to take control over the process (although see under “the position of the company’s lenders”).
In addition to the document filed by the director(s) there must be a statement from the proposed Monitor that the company is eligible for a moratorium and that in the Monitor’s view it is likely that the moratorium will result in the rescue of the company as a going concern. However, this requirement has also been relaxed slightly due to COVID 19 during the period 26 June to 30 September 2020 so that the Monitor must only be of the view that a rescue would be possible were it not for any worsening of the financial position of the company for reasons relating to COVID19.
The company moratorium takes effect when the documents are filed with the court.
If the company is an oversees company or subject to an outstanding winding up petition then an application to the court will need to be made. If the company is subject to an outstanding winding up petition then the court will only make a moratorium order if it is satisfied that this will achieve a better result than a winding up of the company.
This rule has also been relaxed until 30 September 2020 in the case of non-oversees companies, subject to a winding up petition, where the out of court process must be used.
Who is in control of the company during the moratorium?
The directors remain in control of the management of the company during the moratorium, but the ‘Monitor’ monitors the affairs of the company and has to ensure that the company complies with the terms of the moratorium and must continue to assess whether the company is still likely to be rescued.
If the Monitor at any time considers that a rescue of the company is not possible then the moratorium must end.
How long does the moratorium remain in place?
The moratorium is initially for a period of 20 business days but it is possible to extend it for a further 20 business days without any consent or longer with the consent of the creditors or the court. It is however, only possible to extend if the company has paid all of its moratorium debts (those which were incurred and fell due during the moratorium) as well as any pre-moratorium debts which are not subject to a payment holiday.
If there is a CVA pending then the moratorium is automatically extended for the proposals to be dealt with.
Restrictions on company’s activities during a moratorium
A company must inform a provider of credit of more than £500 that a moratorium is in force and it will be an offence of the company and the directors if they do not do so.
The Monitor’s consent is required to enter into new security which will only be given if the Monitor considers that this will support the company’s rescue as a going concern.
The company may not pay pre-moratorium debts that are subject to a payment holiday unless one of the following applies:
- The maximum total paid is the greater of £5000 or 1% of the company’s total unsecured debts at the start of the moratorium
- The Monitor consents
- Payment is pursuant to a court order or court sanctioned disposal of HP or charge property
The position of the company’s lenders (financial services firms and contracts)
As financial services contracts including bank loans is one of the exceptions in respect of a payment holiday, these loans must continue to be paid. If they are not then they are still able to make demand under their facilities which could in any event bring the process to an end. It is therefore important that any lenders are on board with the moratorium process from the beginning.
Effect of moratorium on other company creditors (excluding lenders under financial services contracts)
Creditors cannot force a company into an insolvency process, landlords cannot forfeit without the permission of the court, security cannot be enforced without permission of the court (save financial services contracts) and legal processes cannot be commenced or continued without the permission of the court (save in respect of some employment claims).
Is it possible to challenge a company moratorium?
Creditors can apply to the court to challenge the Monitor’s or Directors’ actions if they consider that those actions have unfairly harmed the interests of creditors.
Subsequent Insolvency of the company
If during a 12-week period after the end of a moratorium a winding up petition is presented or resolution passed to wind the company up, or an administration commences then moratorium debts and priority pre-moratorium debts will have absolute priority over all other claims in the liquidation and in the case of an administration the administrator will be obliged to make a distribution to pay moratorium debts and priority pre-moratorium debts.
In relation to a CVA proposed during that 12 week period the proposal cannot compromise priority pre-moratorium debts and moratorium debts except with the relevant creditor's consent.
For help or guidance on insolvency or corporate governance matters, please speak to Leanne Schneider-Rose l.schneider-rose@sydneymitchell.co.uk 0808 166 8827
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