A new moratorium process introduced in the recently enacted Corporate Insolvency and Governance Bill (CIG) is a welcomed addition to the array of tools insolvency practitioners have at their disposal. However, the scope of the ‘monitor’ position within the new process could hinder its use.
The CIG bill received royal ascent late last month and made its way through the legislative process at lighting speed in just over a month. It put into law both temporary and permanent changes to UK insolvency law.
One of the significant permanent changes is the introduction of a new moratorium process. The moratorium would allow firms in a distressed position time to review their financial situation, providing the board creditor protection while they assess the viability of the business.
“[The moratorium] can be best characterised as a stepping stone. It allows a company to have some breathing space for 20 working days initially. This is extendable for another 20 working days by the company directors or up to a year, if approved by creditors”, says Duncan Swift, past president at R3.
“The moratorium is an opportunity for the company to assess the financial circumstances that it finds itself in.”
Swift adds that because the moratorium is not tied to a formal insolvency process, it allows companies a bit more flexibility when addressing their financial situation.
“This free standing moratorium gives management more time to consider the options available and not to have ‘pre-decide’ whether to go in administration or into a company voluntary arrangements (CVA).”
Blair Nimmo, global head of insolvency at KPMG says the moratorium provides for yet another option that insolvency practitioners can use to save a business, giving them room to maneuver.
“It would be horrendous for businesses to fail simply because they didn’t have a period of time to properly pursue different solutions, such as the sale or refinance of the businesses, whether it’s a re-negotiation of a contract, or new creditors and etc. It would be bad if a perfectly viable business fell because of lack of time.”
High requirements may limit its use
As the step right before more formal insolvency procedures, many in-distress businesses would be inclined to use the new moratorium as it allows for ‘debtor in possession’, where the company directors remain in control. This is contrast to an administration, where an insolvency practitioner takes over the business. But the new moratorium still requires an insolvency practitioner to ‘monitor’ the process to verify it is not being abused and requirements to enter into one are also fairly high.
“Companies are only able to use [the moratorium] if they can convince a monitor that the company can be rescued”, says Jo Windsor, partner at Linklaters. “Those practitioners who will take the monitor role are going to need to talk to a company’s management and be satisfied there is a way forward because they have to essentially sign off and say ‘it is likely on the facts at the moment, the company can survive.’”
Given how new the moratorium is, there in still debate within the industry on how and when this new process can be used.
Nimmo says that the role of the monitor needs to be better outlined in order for the new procedure to be used more extensively. “The role of the monitor has to be very carefully defined. What are the specific responsibilities of a monitor? It looks to be a light touch role but that will only be proven as appointments progress.”
Swift agrees, adding that most of the concerns surround how closely a monitor must observe a business.
“How much information is a monitor who is not auditing the company need to review in order to fulfill the monitor’s responsibilities? What amount of information is reasonably required? The wording [of the bill] passed in the matter of about six weeks. There is a lot of digestion going on in the profession, and of those corporates who might use it”.
Due to the need to almost guarantee that a business will survive a moratorium, insolvency practitioners may be apprehensive in becoming the monitor of an in-distress company says Roger Elford, partner at Charles Russell Speechlys.
“In order to get a moratorium, a monitor must effectively sign a declaration stating that they consider that the imposition of a moratorium will reasonably likely result in the rescue of the company as a going concern.”
“If the directors of a company needs a moratorium very urgently, the monitor/ insolvency practitioner at that point isn’t looking under the ‘bonnet’ of the business. They don’t know whether the moratorium by itself will be enough to rescue the company or whether other insolvency tools like CVAs would provide for a better outcome. Without that knowledge, practitioners will be reluctant to sign off on a moratorium”
He adds that companies stand a better chance of entering into a moratorium if they have time to better brief potential monitors and also have a more concrete plan as to how the moratorium will help them continue trading.
Windsor takes a slightly different view saying the monitor is meant to filter out financial unviable businesses.
“The monitor is intended to act as a gatekeeper to prevent this from being abused. This is all about saving companies which are viable, but are facing hostile creditor action.”
Clarity will come with time as firms begin to use the new moratorium. Cases will make their way through court, with those judgements helping to provide precedence onto the purview and responsibilities of the monitor’s role. The problem however, is nobody want to be first.
“Nobody wants to be the first one in court, they don’t want to be the guinea pig”, says Elford. “We’re seeing firms take different approaches. You have some accounting firms who will be quite risk adverse, there in house compliance and legal, concerned about the risks. Whereas there are insolvency practitioners who may be a bit more commercially minded, they are more fleet of foot and prepared to pay that risk.”
Despite the uncertainty to how the moratorium will be used within the UK’s insolvency landscape, Swift says the expectation is that the new process will be used in its hundreds if not thousands per annuum.
But with thousands of businesses expected to use the new moratorium and even with the declaration monitors have to sign, Nimmo says its inevitable that some businesses who use the moratorium will end up needing more formal insolvency procedures.
“In theory, it’s supposed to avoid a more formal insolvency process. It’s supposed to be a process by which you can ensure the survival of the company as a going concern, without administration, CVAs or etc.”.
“Even if the moratorium ultimately leads to formal insolvency, I wouldn’t criticise the process. At the end of the day, any company entering into a moratorium will be at best, stressed and at worse, in distress. When you deal with stressed and distressed companies you are inevitably going to get failures.”