The Government has introduced the ability for cash strapped businesses to apply for a new kind of moratorium. The moratorium will last for an initial period of 20 business days and may be extended on application for a further 20 business days. Any additional extension thereafter can only be obtained with the consent of the majority creditors or with the permission of the court.
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Excluded companies: Certain types of companies will not be able to benefit from this standalone moratorium regime (for example, certain regulated firms including insurers, banks, investment bank, investment firms, payment service providers, exchanges, clearing houses, and other entities such as securitisation companies, participants in certain capital market arrangements with debt value equal to or exceeding £10M, and public-private partnership project companies).
This moratorium will not override the provisions of the The International Interests in Aircraft Equipment (Cape Town Convention) Regulations 2015 relating to any interest in an aircraft registered on the International Registry, meaning that creditors who have registered their interest in such aircraft will remain unaffected by changes to the insolvency regimes to the extent of any interest so-registered.
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If a moratorium is granted, the company will benefit from a “payment holiday” (unless the debt or liability arises from a “contract or other instrument involving financial services”, including certain capital market arrangements, loans, financial leases, guarantees, securities contracts and trade commodities contracts). Creditor enforcement will be suspended for the duration of the moratorium including the creditor’s ability to enforce any security granted by the company or to initiate legal proceedings. The moratorium also prevents a creditor from taking action to crystallise any floating charge it holds or to restrict disposal of property by the company, remedies which would have otherwise been available to creditors. During the moratorium, landlords and mortgagees are also specifically prevented from exercising their right of forfeiture by peaceable re-entry, without court permission.
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Tips for creditors: The moratorium does not prevent a creditor from declaring a default, exercising its right to accelerate a debt or making a demand for payment. It also does not prevent a creditor from exercising security over financial collateral, including security granted over shares of the company.
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For companies that are not yet subject to a winding-up petition, an application for a moratorium needs to be filed at court (a simple process akin to the current process for filing an out-of-court administration application) and the directors of the company must confirm that the company is, or is likely to become, unable to pay its debts. Foreign registered companies may also be granted a moratorium if the court determines that granting a moratorium will likely produce a better result for the creditors “as a whole”.
Specific court permission will be required if a company wishes to apply for a moratorium whilst a winding up application against the company remains outstanding, or if that company was subject to an insolvency procedure within the past 12 months.
During the moratorium, directors remain largely in control of the company’s operations, however creditors will derive some comfort from the requirement that the company’s operations will be subject to oversight by a court appointed “monitor” (who must be a licensed insolvency practitioner). At the inception of the application process, the monitor must confirm whether, in its view, a moratorium will likely result in the rescue of the company as a going concern. The company’s continued compliance with the qualifying conditions will also be monitored throughout the period of the moratorium. Monitors are required to act independently and impartially when performing their duties and certain dealings during the moratorium can only be entered into with the monitor’s prior consent, for example if the company wishes to grant any new security or dispose of its property. Creditors should note, however, that contravention of such restrictions does not necessarily render the transaction void or unenforceable.
Details of the moratorium must be published on the company’s website and a notice must be prominently displayed on at the company’s premises. A moratorium will need to be registered at Companies House and notice will need to be given to every creditor of the company (that the monitor is aware of).
It is envisaged that in practice, some level of consultation with key stakeholders including creditors will be entered into before the monitor can make a determination of whether the company has satisfied all qualifying conditions. Importantly the above described regime is designed to encourage companies and their stakeholders to genuinely consider alternative methods of restructuring and rescuing the business in the long run.
5. New restructuring regime for distressed companies and cross-class creditor cram down
To encourage effective debt restructuring and support rescue finance, the Government has introduced a separate ability of a company to enter into a restructuring plan in addition to the existing routes for entering into a CVA or scheme of arrangement.
The Bill does not provide for any particular types of entities to be excluded from the restructuring regime, although future regulations may introduce exclusions in the future.
Under the proposed laws, a distressed company, its creditors or shareholders will be able to propose a restructuring plan with the company’s creditors if the company has, or is likely to encounter, financial difficulties that are affecting, or will or may affect, its ability to carry on business as a going concern. The restructuring plan must be a compromise or arrangement with the purpose of eliminating, reducing, preventing or mitigating the effect of financial difficulties. It is anticipated that the restructuring plan will be a flexible tool with a wide range of potential applications. A plan can include debt write-down or debt postponement as well as other matters such as a change in the management team or selling off loss-making parts of the company. It can also have potential cross border restructuring application.
Unlike company voluntary arrangements and schemes of arrangement under the existing insolvency regime, the key (and somewhat controversial) aspect of this proposal is the inclusion of a cross-class cram down provision. Under the cram down provision, dissenting classes of creditors would be bound to a restructuring plan sanctioned by the court if at least 75% of creditors (in value) consent to the plan. However, dissenting creditors can be reassured that cram down will only be approved by the court if the dissenting creditors will not be in a worse off position than they would have been in if the restructuring had not been approved by the court and the compromise has been agreed by at least 75% of the creditors who would have received a payment or otherwise would have a genuine economic interest in the company if the restructuring had not been approved by the court.
It is envisaged that the new restructuring vehicle will be complemented by the new standalone moratorium discussed above, together designed to buy companies additional time to prepare acceptable proposals to its creditors. This alleviates the need for companies to rely on judicial discretion for similar protection (as under a scheme of arrangement).
King & Wood Mallesons’ Banking & Finance team are available to discuss your queries on all areas of finance and financial markets law, please contact Khai Nguyen in our London office.