There has been significant focus on the Government’s new Corporate Insolvency and Governance Bill, which has finally brought about the additions to the insolvency legislation we have been promised for the last five or more years.
I am not going to delve into the detail at this stage but rather focus on the intention and potential use-cases for this new procedure.
The principle is fairly straight-forward; a company will approach an insolvency practitioner to act as Monitor and providing both the Monitor and the directors believe the company can be rescued as a going-concern, a form will be filed with the Court, at which point the company gains a moratorium of 20 business days.
During the moratorium, no legal or recovery action can be taken against that company, which at the moment mirrors the rules in administration.
Creditors are notified of the moratorium and whilst the company can trade as normal it is unable to borrow money without disclosing its status and is not permitted to sell assets (outside of normal trade) without the Monitor’s consent.
The intention is that the company uses this time to ‘sort itself out’ so that it can reappear from the moratorium in a much better state.
By way of a bit of background, current global pandemics aside, the real reason the government was keen on providing a moratorium process was to improve the UK’s rankings on the World Bank ratings on places in the world to do business, especially in a post-Brexit world. These things are likely to be of more importance to UK Plc than has been the case in the past.
The idea is to provide a restructuring solution analogous to Chapter 11 in the US, with the moratorium providing breathing space for the directors to assess the situation and make changes to a business that enables it to return to profitable trading.
When talking to clients I often describe the current insolvency procedures in terms of a journey from the dark into the light, with compulsory liquidation being the dark and a company voluntary arrangement (CVA) previously having been our lightest option available.
The moratorium will sit on the lightest side of this scale as it leaves the directors in control of the company with only very light oversight provided by the Monitor.
What is the moratorium meant to be?
Firstly, we ought to talk about what the moratorium isn’t (or at least what it is not intended to be). It is not seen as a pre-cursor to another insolvency process, for example, to give time to prepare for a creditors’ voluntary liquidation, although I have seen commentary to the contrary. The only exception to this provided in the legislation is a CVA.
The Bill, as currently drafted, is clear that the moment the directors (or the Monitor) see that it is no longer likely that the company will continue as a going concern, the moratorium should be brought to an end.
The principle here is clear, this is not about recycling businesses (through pre-packs or other sales) it is about rescuing that legal entity. This rescue strategy is currently available and has been for many years through an administration.
In fact, the priority purpose, or reason, for applying for an administration is the rescue of the company as a going-concern.
Why aren’t companies using administration to get some ‘breathing space’?
Over the last 10 years, I have talked to many companies about using the administration process for this, to provide breathing space for one reason or another, and in every single case, it has not been used.
Whilst some of that is undoubtedly because in an administration control of the business passes from the directors to the administrator, the biggest reason has been the realisation that it would be difficult for a company to recover its reputation with suppliers and customers after having ‘gone bust’.
The moratorium provides a much lighter touch than administration, not least because the directors remain in control.
However, the company will still have to broadcast its new status to all its creditors, suppliers, customers, on its website, Companies House and every printed or electronic correspondence etc, so it would seem the usefulness of the process will hinge on how the business community perceive it and most importantly how successful the first few high-profile moratoria are. When you look at the press coverage over Hertz’s filing for Chapter 11 in the US there is not a lot of positive comment about rescue!
That places a high onus on the insolvency community to use this process with care and caution and only in the ‘right’ places.
What kind of company is right for this process?
Despite the name of the Bill, I think we are best served by trying to divorce the process from insolvency.
Really, we are talking about otherwise successful businesses, which have suffered some sort of catastrophic event that has caused a significant cashflow problem, such that it needs some time to get itself back in order or find finance to get back on track.
The reality is, I struggle to see circumstances where 20 days becomes that crucial for a company which is otherwise ‘fine’. Such grace from creditors can usually be negotiated or bought.
Of course, having applied for an initial 20 days it is then extended (by up to a year) with the consent of creditors. Perhaps it is my lack of imagination but it is difficult to see common circumstances where a company is:
- ‘likely’ to continue as a going-concern,
- needs protection from the moratorium,
- needs that protection for the next 12 months, and
- can convince creditors that this is the best solution for them.
- It seems we are going to be talking about a small fraction of the restructurings we see in the UK.
The alternative use case I alluded to earlier, is as a pre-cursor to a CVA. This I can see being useful.
You may be aware that this is the legislature’s second attempt at this, as a small companies’ moratorium was introduced with the Enterprise Act back in 2002 but was so badly thought-out that I have never seen it used.
The moratorium is certainly an improvement, the biggest problem with its predecessor was that it held the insolvency practitioner accountable for the actions of the directors whilst giving him or her no powers to intervene.
Not something my peers and I relished – we can live with being personally liable for our own acts and dealings but responsibility for other people’s is not something most practitioners would be comfortable with.
With the moratorium, the Monitor is still required to be an insolvency practitioner, and to oversee the conduct of the company but this is much more light-touch and doesn’t have the onerous downsides if things go wrong.
In fact, the Monitor’s key role, other than approving certain payments, is to form an opinion as to whether the company is likely to be rescued as a going-concern or not, which if you are helping a company draw together CVA proposals you are likely to have a reasonable handle on in any event.
The CVA route seems to be a welcome addition to our tool kit and I am sure it will enable some rescues where an administration would otherwise have been necessary to stave off creditor pressure.