Mike Jervis and Rachael Wilkinson
The Bill introduces a standalone moratorium, which leaves the current management to run the business on a day-to-day basis. It is a welcome addition to the toolkit of restructuring professionals. It gives struggling businesses formal breathing space to pursue a rescue plan and curtails certain creditor rights including the right to bring legal action. This is particularly vital in the current environment to ensure that businesses struggling as a direct result of COVID-19 have the opportunity to survive.
While a company seeking a moratorium must pass the standard insolvency test “is or is likely to become unable to pay its debt”, it is clear that the moratorium is not intended to delay an inevitable failure. In order to obtain a moratorium the Monitor must confirm it is likely to result in the rescue of the company as a going concern, although there is a temporary relaxation of this due to COVID-19 by the addition of the words “or would do so if it were not for any worsening of the financial position of the company for reasons relating to coronavirus”. In addition there are further checkpoints in the Bill where the going concern confirmation has to be reaffirmed, including extensions to the initial 20 day period, the granting of security or disposal of certain assets during the mortarium.
Certain companies are ineligible for the moratorium in particular, those who have been subject to an insolvency procedure in the previous 12 months, including a CVA. Certain financial services businesses such as banks, insurance companies and payment institutions are also ineligible. The Bill also excludes companies subject to capital market arrangements, the definition of which is broadly drafted. This follows earlier precedents such as those in the so-called Enterprise Act, showing that government is wary of amending insolvency provisions in structured finance cases for fear of alienating investors. The flip side is that the moratorium is unlikely to be a suitable tool for achieving complex financial restructurings.
The moratorium gives companies a payment holiday for pre-moratorium debts that fall due during the moratorium period and will give companies financial breathing space to pursue a restructure, refinance or CVA with the extension of the Ipso facto principle further assisting this. Certain debts such as wages and salaries, including holiday pay and redundancy payments, are not included in the payment holiday and businesses will need to ensure that payment is made for goods and services supplied during the moratorium, including rent and amounts due under finance contracts. The latter is of particular importance as it captures both loan interest and capital repayments due during the moratorium period.
While it is expected that most companies would seek to take full advantage of the payment holiday, the legislation provides a restriction on payments the company can voluntarily make to creditors for which there is a payment holiday. The maximum payment a company can make (per creditor), without the consent of the Monitor or the Court being the greater of £5,000 or 1% of the pre-mortarium debts. This is an important control to ensure that individual creditors are not preferred and will be particularly relevant in group situations where one company within a larger group is subject to the moratorium.
The moratorium also presents an interesting position for holders of a floating charge, there is no requirement to obtain consent or give prior notice of a moratorium application to a floating charge holder and once in force the moratorium prevents the crystallisation of floating charges. Indeed floating charge assets can continue to be sold in the normal course of business without any consents from the charge holder(s). While this may appear to erode the power of the secured creditor, in practice it is unlikely a restructuring will be successfully achieved without engagement with and support of the secured creditors, in particular as loan interest and capital repayments are excluded from the payment holiday. The ability to grant security during the moratorium period, with the consent of the Monitor gives an option for lenders to provide additional support, where appropriate. Understanding the cash needs of the business and engagement with lenders through the moratorium period will, therefore, be essential for both the directors and the Monitor. In addition, as survival of the corporate entity is the objective, ensuring matters such as redundancy and tax are viewed through the lens of a going concern will be important to achieving a sustainable restructure.
The initial moratorium period is 20 days with the directors having the ability to file for a further 20-day period without reference to the creditors. We expect that it will be challenging for most businesses to achieve a successful rescue in the initial 20 day period and that an extension will be required in most cases. For more complex situations there is the option to extend the moratorium by up to one year with the consent of the creditors or the court. In addition, there are specific provisions to extend the moratorium where a CVA is proposed.
In summary, for those companies that are eligible for the moratorium, together with the other provisions of the Bill, it will offer an opportunity to rescue the company with the aim of this leading to a better outcome for creditors than an administration or liquidation. But early engagement with key stakeholders and a clear understanding of the short term cash flow will be critical.
Russell Downs and Rob Lewis
The Monitor is the first new legislative role since the Administrator and the individual must be a licenced Insolvency Practitioner to perform the role.
They are clearly invested in the success of the debtor and their role, put simply, is to provide an independent regular check “for the purpose of forming a view as to whether it remains likely that the moratorium will result in the rescue of the company as a going concern”. This includes signing off specific actions taken by directors to test that those actions mean a successful outcome remains likely to occur.
In reality, any PwC individuals working as Monitors will work very closely with management, directors, any company advisors and all creditors with a financial interest in the company, to help pull together a restructuring solution that will enable the company to continue as a going concern and also deliver a better outcome for creditors than the insolvency alternatives.
Given the Monitor will need to consent to; a) any property disposals in excess of the usual course of business, b) granting of any security, c) certain payments (e.g. payment for pre-moratorium debts in excess of £5,000 or 1% of the outstanding value claim value) and, d) any proposal to extend the period of the moratorium beyond the initial 20 business days, they will need to be kept fully informed by the directors. Furthermore, the monitor can terminate the Moratorium at any point if they no longer consider a successful outcome likely or if they do not have enough information to be able to perform their role.
The Insolvency Practitioners here at PwC believe this role will be a pivotal element of future restructurings for eligible companies and we will look to implement it, in the right situations, as part of our ongoing offering
Ed MacNamara and Issy Gross
The new Restructuring Plan has been designed based on the existing Scheme of Arrangement process but with new provisions aimed at making it easier to be imposed on a dissenting class of creditors and/or members with no economic interest in the company. To be eligible the company must be facing, or likely to start facing, financial difficulties and to be proposing a compromise or arrangement to eliminate, reduce or prevent those financial difficulties. The type of companies that can use this tool is much wider than that of the moratorium as the capital market restrictions do not apply here. The application can be made by the company, the creditors or, if relevant, an Administrator or Liquidator.
This process gives the court reasonably far reaching powers to agree Restructuring Plans based on the principles below, including the compromise of debt, the transfers of property, amalgamation of companies, transfer of policies and the dissolution of companies.
The Restructuring Plan will be sanctioned by the Court if it is a compromise or arrangement that: a) is approved by 75% (by value) of creditors/members who have an economic interest in the company, and, b) provides that any dissenting creditors would not be any worse off than the most likely alternative scenario should the plan not be accepted (decision on whether the creditor is any worse off and what the most likely alternative is is decided by the Court). It is worthy of note that the Bill refers to “the most likely alternative scenario” and therefore careful consideration will need to be given to what that alternative might be, with liquidation not always being the appropriate alternative (as opposed to the CVA process where the comparator is always Liquidation).
The inclusion of both (a) and (b) gives the Court the ability to take a view on the proposed Plan and impose it on dissenting groups of creditors (‘cramming them down’). This ability to cram down does not just apply to financial creditors but operational creditors as well (including landlords) and could potentially be very interesting in respect of pension scheme deficits. This is a significant additional tool in the restructuring tool kit, as it can make the lives of those holding nuisance value claims or any out of the money stakeholders much more difficult in terms of aggravating a restructure.
In addition, we can envisage scenarios where it can be used in combination with administration to cleanse the company of any onerous obligations.
The major carve out to the ability to compromise debts based on the 75% voting threshold is in respect of creditors incurred during a moratorium, if the moratorium ended within 12 weeks of the proposed Restructuring Plan. If that is the case, the moratorium creditor cannot be crammed down and instead, each must consent individually to the plan if their debt is to be compromised. There is also a carve out for cramming down aircraft related interests, which is an interesting addition given the current economic situation in the aviation industry.
In summary, this is an exciting new tool which we hope will smooth the restructuring process and facilitate the ‘in the money’ parties coming together to create a solution in the best interest of all creditors.
Zelf Hussain and Jane Steer
The Bill creates a tool (the moratorium) which will help companies transition into a CVA. There is even a specific reference for the initial moratorium period being extended to finalise a pending CVA proposal.
In the past companies were at risk of creditor action preventing the consideration of a CVA. This now provides management with breathing space to pull together a restructuring plan that all stakeholders can consider without the threat of being wound up. The moratorium provides up to 40 days protection, without the need for creditor approval. There are also specific provisions in the Bill where a company has proposed a CVA which can further extend the moratorium through the period of proposal and voting until the end of the challenge period giving businesses up to 4 months of protection in total. Ultimately this should create greater opportunities to save companies as a going concern.
CVAs are a very useful tool in the overall restructuring process and in these current times they are even more relevant and applicable.
However, in recent times CVAs have received criticism for how they have been used. This was due to their high failure rate linked to the fact that they were rarely used alongside any proper operational restructuring; no commitment from the supervisor of the CVA on the success of any CVA plan or strategy; and too narrowly being focused on disenfranchising landlords.
How can they work well?
CVAs can work well when they are part of a well constructed restructuring plan which has the buy-in of all stakeholders and is not just simply looking to target one group.
CVAs are a formalisation of an agreement between the company and its creditors to help compromise current and future liabilities with the ultimate aim of saving the business. Therefore, for it to be successful, it needs to be implemented as part of a wider operational restructuring process which the creditors need to believe in. Given that the directors of the company will continue to retain control of the business and deliver on these restructuring plans, creditors need to be assured that the plans are robust and have confidence in management's ability to deliver them.
As moratorium debts will need to be settled as part of the moratorium the key focus for CVAs will be the pre-moratorium debts not subject to a payment holiday. We expect there will be some interesting timing issues on when the moratorium commences and the level of creditors that are therefore captured by the payment holiday, for example just prior to the month end payment run could be the point at which trade creditors peak.
In conclusion, CVAs are an extremely flexible restructuring tool which can be used to help companies reconfigure their business models to meet the new norm. Inevitably this challenge will require the input of all stakeholders of the business and won’t be a simple exercise of just reducing costs, it will need companies to consider more widely their business propositions. The new legislation is very useful in helping provide the mechanism to facilitate these discussions between the company and its stakeholders and ultimately saving the company.
David Kelly and Toby Banfield
All companies have key supplier relationships absent which the business would have great difficulty in continuing to trade. These key suppliers have in the past been able to use this leverage to gain a preferential position over other suppliers. These tactics have included demanding that pre insolvency arrears are met, prices are increased post insolvency or in some recent instances that the insolvency practitioner underwrite the redundancy costs the supplier would suffer as a consequence of the insolvency of the company.
The Bill has now extended the application of S233 to include all supply contracts with some carve outs for finance contracts. The extension applies to all relevant insolvency procedures which includes both the newly introduced moratorium as well as other insolvency processes such as administration or liquidation. The new provisions specifically prohibit suppliers being able to use an insolvency procedure as a means of terminating a supply contract with a company, although the ability to terminate by giving the required contractual notice or for other breaches is not affected. It also restricts the ability of suppliers to demand arrears are settled as a condition of ongoing supply.
In recognition of the impact that insolvency has on smaller suppliers, there is currently a COVID-19 temporary exemption for small businesses. These are defined as those that have sales of less than £10.2m, total assets less than £5.1m or less than 50 employees.
The Bill does offer some protection for suppliers by deeming that supplies made to a company during the moratorium must be paid for and one of the tests for any extension of a moratorium is that debts incurred during the moratorium have been paid or otherwise discharged. In the event of a subsequent insolvency there is priority afforded to any unpaid moratorium expenses.
Financial services and hire purchase contracts are expressly excluded from these extended provisions. We expect that credit card and merchant facilities will also be caught within the definition of financial services. Prior to COVID-19, one of the challenges for consumer-facing businesses was the actions of credit card companies increasing the level of cash hold back and restricting the free cash available to the corporate. There may potentially be some challenge in this area.
Overall the changes to these clauses are very welcome and should increase the liquidity available to directors during the moratorium period and insolvency practitioners who are trying to use the available cash to help maximise returns to creditors as a whole.
Please get in touch with David Kelly and Toby Banfield for further information.
Peter Dickens and Ross Connock
The COVID-19 pandemic has brought into sharp focus the responsibilities of directors. Directors are facing great challenges trying to assess the impact of the pandemic on their financial position and the extent to which the position will improve when lockdown is lifted and the markets slowly return to a more normal state. This makes it very difficult for directors to assess whether their actions continuing to trade are worsening the position of the company and its creditors or whether they are creating a better outcome for all.
Recognising these challenges, the Bill has introduced temporary measures to remove the threat of personal liability arising from wrongful trading for the period from 1 March 2020 to 30 June 2020 or one month after the Bill is passed into law (whichever is the latter).
Liquidators and administrators will not be able to take an action against an insolvent company’s directors for any losses to creditors resulting from continued trading during the period whilst the wrongful trading rules are suspended.
Hopefully these measures will remove the pressure on directors to place businesses into insolvency that might have had a reasonable prospect of surviving absent COVID-19.
Suspension of winding up petitions
David Baxendale and Mike Denny
Consistent with some of the other measures introduced to provide breathing space for companies affected by COVID-19, the Bill contains provisions to protect companies from threats from statutory demands or winding up petitions.
The Bill specifically prohibits the presenting of a winding up petition for registered and unregistered companies for the period from 27 April 2020 to 30 June 2020 unless the petitioning creditor is able to argue that COVID-19 had no financial effect on the company or that the grounds for the petition are not COVID-19 related.
Any winding up orders made after the 27 April 2020 where the financial pressures are COVID-19 related will be considered void.
These measures provide breathing space for companies and may enable them to use the moratorium in conjunction with these measures to develop and present a restructuring plan to creditors that will enable the company to continue as a going concern post restructure.
Please get in touch with David Baxendale and Mike Denny for further information.