How can distressed companies use the Part A1 moratorium?

Moratoriums can be a helpful tool for eligible companies to use alongside other restructuring mechanisms such as restructuring plans. In our insight we provide an overview of the process and what directors must consider.

What is the Part A1 moratorium?

The Part A1 moratorium (Moratorium) was introduced by the Corporate Insolvency and Governance Act 2020 (CIGA 2020) to give financially distressed companies breathing space from enforcement action from certain creditors (not including financial creditors).

During the Moratorium, companies can reorganise their affairs, seek new investment or pursue other rescue options. While similar in some ways to the existing statutory moratorium for administrations, it is an entirely separate process.

The monitor’s role

The Moratorium is a director-led process which allows directors to remain in control of the company and heavily involved in its potential rescue, effectively making it a ‘debtor in possession’ procedure. This supports its aim of trying to facilitate a rescue, as directors are familiar with the company and are often best placed to turn things around.

An insolvency practitioner will be appointed as ‘monitor’ to oversee the Moratorium and supervise the directors. The monitor has a duty to protect all creditor interests and support the integrity of the Moratorium by ensuring it remains likely to result in the company’s rescue. The monitor must bring the Moratorium to an end if the rescue of the company is no longer likely or if the company is unable to pay the debts that it needs to.

As an officer of the court, the monitor must act independently, impartially and with integrity. Creditors have the right to apply to the court to challenge the monitor’s conduct and decisions if the monitor has ‘unfairly harmed’ the applicant’s interests.

Eligibility

With the aim of the Moratorium being to rescue companies, rather than simply delaying an inevitable insolvency, it is no surprise that the Government included conditions that a company must satisfy to qualify for entry to a Moratorium. In brief, a company will be eligible to enter a Moratorium unless one of the following applies:

• it has already been in a Moratorium in the last 12 months;
• it has been subject to a voluntary arrangement in the last 12 months;
• it has been in administration in the last 12 months;
• there is a provisional liquidator appointed;
• the company is being wound up; or
• there is a ‘relevant petition’ for the winding up of the company pending, for example this will include public interest petitions.

There are also several types of excluded companies, which generally relate to finance, insurance, financial services, banking and securities exchanges.

Method

Providing the company is not subject to an outstanding winding up petition and is not an overseas company, the directors can obtain a Moratorium by filing the following documents with the court:

• a notice that the directors wish to obtain a Moratorium;
• a statement from the proposed monitor that they are a qualified person and consent to act (similar to out of Court administrator appointments);
• a statement from the proposed monitor confirming that the company is an eligible company;
• a statement from the directors that the company is or is likely to become unable to pay its debts; and
• a statement from the proposed monitor that in the proposed monitor’s view, it is likely that a Moratorium would result in the rescue of the company as a going concern.

As in an administration, the statements must not be made more than five days before the notices and statements are filed at court.

If the company is subject to a winding up petition or is an overseas company, the directors must apply to court with the relevant documents listed above. The court can only make an order if it is satisfied that the Moratorium would 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 the Moratorium. Therefore, there is an extra hurdle to overcome with a court application.

The directors should notify the monitor as soon as the Moratorium comes into force. The monitor must then notify certain people including the Registrar of Companies and, importantly, every creditor of the company of whose claim the monitor is aware.

Length

A Moratorium will last for an initial period of 20 business days and directors can unilaterally obtain a further 20 business day period. This means that a company can obtain a total of 40 business days without creditor consent.

Alternatively, the directors can obtain an extension of up to one year if they are able to obtain creditors’ consent. The court may also extend the Moratorium for as long as it sees fit.

Impact on creditors during the Moratorium

The Moratorium has a number of far-reaching provisions that impact creditors, these include, but are not limited to the following:

1. Creditors cannot start or conclude insolvency proceedings. This includes holders of a qualifying floating charge.
2. Except with the permission of the court, no steps can be taken to enforce any security (with certain exceptions) over the company’s property or to repossess any goods in the company’s possession under a hire-purchase agreement.
3. Security granted by the company during the Moratorium can only be enforced with permission of the court and if the monitor consented to granting it originally.
4. Floating charges are restricted from crystallising into fixed charges.
5. If a creditor has a pre-Moratorium debt (debt or other liability which has fallen due before the commencement of the Moratorium or during the Moratorium but under an obligation incurred prior to it) the company gets a payment holiday. It is worth noting that payments for goods and services supplied during the Moratorium and sums due under contracts entered into during this period, remain payable, such as rent. Amounts due under financial contracts are also not suspended, and a company will remain liable to make these payments (e.g. of capital and interest) during the Moratorium.

Exit

Ideally, at the end of the Moratorium the company will be rescued. However, where this has not been possible, the company may end up in administration or liquidation after the Moratorium, in which case the Moratorium would be considered to have failed.

A company can exit from the Moratorium in the following ways:

• through the expiry of the initial or extended period of the Moratorium;
• through the entry into another insolvency procedure (for example administration, CVA or liquidation);
• through the termination by the monitor, if they form the view that it will not result in the company’s rescue; or
• through termination by the court.

Breathing space or a waste of space?

Although the Moratorium has great potential to support businesses and offer much needed breathing space from certain creditors, in reality the uptake has been relatively disappointing. In its early days, this may have been a result of businesses choosing to rely on the range of temporary support measures offered in response to the COVID-19 pandemic. As more time passes and uptake remains mediocre, these temporary support measures are clearly no longer to blame. Instead, other factors such as the strict eligibility criteria and reluctance of monitors to give the necessary certainties that the Moratorium remains likely to result in a rescue may be contributing factors. This is likely particularly the case for companies in the later stages of distress. It remains to be seen if Moratoriums will become more widely implemented in the future, or if a relaxation of eligibility requirements will be necessary to increase use.

As mentioned above, the Moratorium only protects companies from certain types of creditors which do not include financial debts. The legislation includes various ‘non-payment holiday pre-Moratorium debts’ which is drafted very widely. Companies under extreme financial distress may not be able to afford to continue to pay these debts and so may not view the Moratorium as a realistic option.

That being said, as a whole, Moratoriums can be a very helpful tool for eligible companies to use alongside other restructuring mechanisms such as restructuring plans. Given that businesses across the UK continue to feel the pinch and prices remain on the rise, Moratoriums should be seen as an attractive option for businesses needing a period of protection in order to implement a rescue plan. Directors will no doubt be drawn to the quick and relatively cheap method of obtaining and extending a Moratorium, while also being allowed to remain in control of the company.