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The New Moratorium – A Lender’s Perspective29th June 2020 Corporate Recovery and Insolvency
The Corporate Insolvency and Governance Bill received Royal Assent on 26 June 2020 and became the Corporate Insolvency and Governance Act 2020 (the CIGA). The CIGA introduces temporary measures in response to COVID-19 and some long-awaited permanent measures as part of the Government’s planned insolvency reform.
One of these permanent measures is a new statutory moratorium which is designed to protect companies in financial distress, who want to explore rescue options, without a need for them to commence insolvency proceedings.
The introduction of the new moratorium marks a shift from the current insolvency procedures available in England and Wales, which on the whole are predominantly creditor-led procedures, to a more US-style debtor-led process.
In a nutshell, the moratorium initially lasts for 20 business days, however, it can be extended by the directors for a further 20 business days and for a period up to 12 months with the consent of the court or the company's creditors. The directors will remain in control of the company throughout the moratorium but the process is overseen by a ‘monitor’ who is a licensed insolvency practitioner.
This note provides answers to some key questions Lenders are likely to have about their enforcement rights and the new moratorium (in its current form).
Q: Who is eligible for the new moratorium?
A: Most companies incorporated in England and Wales will be eligible but there is a list of excluded companies such as banks, insurers and companies who have recently been subject to insolvency proceedings.
Q: Will I have control over the moratorium?
A: Not initially. The directors of a company can file a notice with the court triggering the commencement of the moratorium without any requirement to provide prior notice to, or obtain the consent of, its lender and the moratorium can be extended for a further 20 business days by the directors.
The moratorium can be extended beyond 40 business days but this will require the consent of the creditors (at least 50% of secured creditors in value and at least 50% of unsecured creditors in value) or order of the court.
The monitor must declare that it is likely that the company can be rescued as a going concern, although the CIGA does not require the pursuit of any particular outcome at the point at which the moratorium is invoked. The monitor must bring the moratorium to an end if there is no longer a likelihood that the company will be rescued as a going concern.
Whilst the lender has no control over the moratorium, the CIGA does provide the Lender with an ability to apply to court to challenge the actions (or omissions) of the directors of the company or the monitor if their interests are unfairly prejudiced.
Q: Can I enforce my security?
A: No. During the moratorium creditors cannot commence legal proceedings, enforce security or commence insolvency proceedings without permission of court and unlike an administrator, the monitor cannot consent.
Additionally, the ability to crystalise a floating charge is suspended or rendered ineffective and any provision in a floating charge purporting to impose restrictions on the disposal of the company's property or allowing the appointment of a receiver based on the moratorium is void.
Q: What options are available to me?
A: Any amounts falling due during the moratorium should be paid and no extension can be obtained by the directors unless all such sums have been paid.
The commencement of a moratorium is likely to be considered an event of default under your finance agreements which will allow you to accelerate the loan making the entirety of the debt payable during the moratorium period. The new “ipso facto” provisions in the CIGA do not apply where the supplier is a bank (or other financial institution) and where the contract is for a loan, leasing, swaps and other derivatives or other financial services.
If the company cannot pay the accelerated debt the monitor will be required to bring the moratorium to an end. At which point, the lender would be free to enforce its security in the usual way.
In addition, the moratorium does not restrict a lender's right to make demand against a guarantee nor does it affect any rights of set off.
Q: How will my debt rank in any post- moratorium insolvency?
A: Debts that are required to be paid during the moratorium are given super-priority in the event of the commencement of an insolvency process within 12 weeks from the ending of the moratorium. This would apply to the lender's debt, whether this is secured or unsecured.
Relevant accelerated debts (which are defined as pre-moratorium debts that fell due between the monitor giving their statement and the end of the moratorium by reason of an acceleration or early termination clause in a contract or other financial services instrument) are however excluded from super-priority status in a subsequent insolvency process.