Status - In force - Permanent. Key features as follows:
‘‘Debtor in possession’’ process
The directors remain in control of the company during the moratorium, which is overseen throughout by a ‘‘monitor’’. This mechanism is designed to facilitate company rescue and is not intended to be a gateway to formal insolvency proceedings.
Role of the monitor
The monitor will be a licenced insolvency practitioner whose duty is to protect all creditor interests and to support the integrity of the moratorium, by ensuring that the moratorium remains likely to result in the company’s rescue throughout the process. The monitor’s consent will be required for certain acts, including granting security and disposing of assets. Any creditor may apply to court to challenge the monitor’s conduct if the monitor has ‘‘unfairly harmed’’ the applicant’s interests.
Upon entry into the moratorium, the company obtains the benefit of a payment holiday for certain pre-moratorium debts, and has a window (initially 20 business days) whereby it cannot be pursued for such sums, or be subject to any legal proceedings. The directors can unilaterally extend this period for an additional 20 business days, and any further extension (up to one year) is subject to creditor consent. The court may also extend the moratorium for as long as it sees fit.
Debts not subject to a payment holiday
Payments for goods/services supplied during the moratorium, and sums due under contracts entered into during this period, remain payable, such as rent.
Amounts due under a financial contract are also not suspended, and a company will remain liable to make these payments (e.g. of capital and interest) during the moratorium.
Entry into the moratorium
This is done by filing relevant documents at court for most English companies, or by an application to court for overseas companies or those subject to a winding-up petition. Entry requires the monitor to confirm the moratorium is likely to result in the rescue of the company as a going concern.
Other key provisions of the moratorium include:
- creditors are restricted from enforcing security, and the company cannot take on further debt without the monitor’s consent;
- floating charges cannot crystallise; and
- provisions within contracts providing for a moratorium to be an insolvency event are void.
Effect of moratorium upon subsequent insolvency proceedings
Where a company enters formal insolvency proceedings (e.g. liquidation/administration) within 12 weeks of the moratorium ending, certain debts, such as rent, the monitor’s expenses, goods/services supplied during the moratorium and financial service contracts (but excluding accelerated debt) achieve super priority status, and will rank only behind fixed charge holders upon a company’s insolvency.
Lenders can take comfort from the fact that the moratorium must be brought to an end if the monitor forms the view that it will not result in the company’s rescue. However, as this is a director controlled process, lenders will only be notified after the company enters the moratorium.
As security enforcement is restricted and floating charges will not crystallise during the moratorium, lenders should factor this into their credit approval processes. However, it is likely that entry into the moratorium will be an event of default under a financial contract (remember, these contracts are excluded from the moratorium provisions) which will enable a lender to accelerate its debt. If the borrower cannot pay, the monitor must bring the moratorium to an end, thereby enabling the lender the ability to enforce its security.
Unsecured lending accelerated during the moratorium will not have super priority status upon insolvency, and so lenders cannot accelerate their debt during the moratorium to benefit in this manner.
Moratorium carve-outs mean it is unlikely to be a suitable tool for companies with capital market arrangements and complex financial structures – the moratorium is aimed primarily at SMEs and the mid-market.
As companies will still have to make payments under financial contracts, use of the moratorium will likely require lender support.
The Loan Market Association has stated that it will not amend any of its documents to take CIGA provisions into account. However, lenders should review insolvency-related events of default in their facility agreements to ensure they expressly capture the new moratorium.