How will the “Covid Moratorium” work in practice?

A moratorium under the so-called temporary measures provisions of the Corporate Insolvency and Governance Act 2020 (“the Act”) is not quite the same as the moratorium we will have once those temporary provisions expire.

New procedures and temporary measures

A new moratorium procedure to give stressed and distressed companies a breathing space is a key part of the Act. But so too are the temporary measures, introduced to deal with the consequences of the COVID-19 pandemic. For moratoriums put in place by 30 September 2020, the new procedure is subject to temporary modification. We’re therefore considering here the practical implications of what we have available now, the modified “Covid moratorium”.

The Covid moratorium

A moratorium is a debtor-in-possession procedure for companies that are or are likely to become insolvent. The company’s directors remain in control and the company is legally protected against action by secured or unsecured creditors. A moratorium lasts 20 business days and can be extended. It is overseen by a monitor, a licensed insolvency practitioner, whose role is not to be involved in management of the company, but to ensure that the company continues to qualify for a moratorium.

Qualification for a moratorium

To be eligible for a moratorium or for the moratorium to be able to continue, a company must:

1. not be a bank or financial institution (as set out in Schedule 1 of the Act);
2. not be subject to an insolvency procedure;
3. in the monitor’s view, be likely as a result of the moratorium to be rescued as a going concern, but for the effects of coronavirus; and
4. pay moratorium debts as they fall due.

The attractions of a moratorium

A moratorium puts the company’s directors firmly in control, provided that the monitor’s view is that the company continues to qualify. Creditors cannot take enforcement action or bring legal proceedings. Only the directors can trigger an insolvency procedure, not a creditor (secured or unsecured) or the monitor. However, if in the monitor’s view the company fails to qualify for a moratorium, the monitor must end the moratorium. Otherwise it is for the directors to use the moratorium to further the interests of the company and its stakeholders in accordance with their directors’ duties. It is not necessary to rescue the company as a going concern; the moratorium may simply lead to a better outcome from a subsequent insolvency process.

Financial qualifications

It is unlikely to be difficult for a company considering a moratorium to show that it is or is likely to become insolvent.

The more challenging test for the company to pass and for the monitor to adjudicate is that, but for coronavirus, the moratorium would have been likely to lead to the rescue of the company as a going concern. This will require:

1. identifying the company’s financial position before coronavirus had any effect (probably straightforward);
2. projecting the company’s likely position from before coronavirus to the present on assumptions that disregard the effect of coronavirus (potentially difficult to satisfy the monitor that a particular result, or better, was likely); and
3. projecting forward from the present, adjusted for the effect of coronavirus, to show that a moratorium would have been likely to lead to rescue of the company as a going concern (potentially difficult to satisfy the monitor that rescue was likely).

Another challenge for companies considering a moratorium is the need for moratorium debts to be paid as they fall due, not least because cash flow difficulties are one of the primary consequences for companies of coronavirus.

Companies suitable for a moratorium

To be able to benefit from a moratorium, a company is likely to have been healthy before coronavirus and should now be either cash rich or cash generative. Those that are not suitable will need to consider an alternative insolvency procedure. In any event, stressed and distressed companies should seek professional assistance.

If any of the above resonated with you, please do not hesitate to contact me or one of the corporate restructuring partners.