Corbin & King: Should secured lenders be worried about the new moratorium?

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In early 2020 the Government put forward a package of reforms to Restructuring and Insolvency law to support businesses against the headwinds of the pandemic and lock down.

These tools have seen limited use as restrictions against creditor action, the Government’s package of financial support and generally supportive lenders have protected companies. Now, as we return (hopefully) to business as usual, it is likely that these tools will see more use.

A recent example is the effective use of the moratorium to secure a refinancing of the Corbin & King restaurant group. Moratorium protection was sought after the group’s secured creditor had demanded repayment of its debt and then 19 months later appointed administrators to the holding company within the Group. At that stage the secured creditor did not seek to appoint administrators to the operating companies in large part due to the anticipated damage to the trading businesses. The moratorium for the operating companies prevented administrators being appointed over them and allowed time for a refinancing of the secured debt to be finalised, despite the secured creditor seeking a court declaration that the moratorium should be terminated.

While a moratorium prevents a secured creditor taking enforcement action, such as appointing administrators, the debt itself is not subject to the moratorium and remains due and payable. This was an area of particular interest for secured creditors when the moratorium was being considered by parliament. It was thought that where a secured creditor did not support the aim of the moratorium, that lack of support would make it difficult for the monitors to conclude that the moratorium would be successful and that as such it should be terminated, or at least not extended beyond its initial 20 business day period.

So how did the Corbin & King moratorium survive the opposition of the secured creditor?

Two factors here seem to have been of particular importance to the Monitors, Rob Harding and Benjamin Dymant of Teneo, and subsequently the court in upholding the moratorium:

  1. In seeking to enforce its debt, the secured creditor’s main aim may have been to maximise its equity value by retaining control. There was no evidence to suggest that the debt was impaired or ultimately at risk of not being repaid.
  2. In relation to the repayment of the secured debt, a refinancing offer had been made that was sufficient to repay the existing secured debt in full. This offer was considered capable of being implemented quickly.

As such, the Monitors appear to have concluded that while immediate repayment of the demanded debt was not possible, there was a realistic prospect that the funding could be secured before the moratorium need to be extended. The court stressed the difference between the debts needing to be repaid and needing to be repaid when due. This gave a degree of flexibility to the operating companies and the Monitors because it allowed them to consider the ability of the main obligor, the holding company, to repay the secured debt and hence relieve the operating companies of their liability under the guarantees.

The court also left open whether the Monitors could have formed a view that the moratorium could be extended beyond its initial period if the refinancing had not yet completed. That assessment would have needed to be made based on the relevant facts at the time, if an extension had been required.

So what does this mean for a secured creditor?

While it is clear that a monitor is not immediately required to terminate a moratorium when faced with opposition from a secured creditor, they do need a strong basis for continuing.

In Corbin & King, there was a prospect of a full refinancing, which most secured creditors would see as an acceptable outcome.  As such you would typically expect there to be alignment between company, secured creditors and the monitors when there is a realistic prospect of a refinancing being finalised in short order.

Where there is not such a clear route to discharging the secured debt, then where a secured creditor opposes a moratorium, monitors will likely find it harder to take an appointment in the first instance or to continue or extend a moratorium.

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