Damian McElholm, Banking & Finance Senior Associate, Eversheds Sutherland Belfast
As we approach the end of another quarter, a potentially difficult time for businesses in the current climate with bills needing paid, we are also embracing landmark changes to restructuring and insolvency legislation. The Corporate Insolvency and Governance Act 2020 (the “Act”) has now gained Royal Assent.
The Act contains a mixture of temporary and permanent measures which have generally been welcomed as a means of providing options to companies impacted by the worst effects of the Coronavirus pandemic. For those that need protection and support, these changes will feel long overdue.
One of the prevailing permanent measures introduced in the Act is the new standalone moratorium. This will give breathing space to the directors of companies in financial difficulty to explore options for a rescue or restructure of the company where appropriate. The aim of the process is that such companies will emerge as a going concern safeguarded by the fact that an insolvency practitioner, acting as a monitor, will keep a watchful eye on the process. The monitor must also form, and continue to hold, the opinion that the company can in fact be rescued as a going concern. Getting insolvency practitioners comfortable with that proposition in circumstances where financial and other information may well be limited will certainly be an interesting challenge to overcome in the coming months.
If implemented, a moratorium will give struggling businesses an initial 20 business day period to consider a rescue plan, which will be extendable by the directors of the company for a further 20 business days or, with creditor consent, up to one year. It is a flexible process with the company remaining under the control of its directors but with their actions and decisions being overseen by the monitor.
The moratorium will also restrict creditors from recovering and enforcing debts during its implementation period. This is not a simple one hat fits all scenario and as such there remain lots of uncertainties surrounding the detailed workings of how the moratorium will work in practice. For example, unsecured creditors and suppliers have already expressed some anxiousness about the introduction of the moratorium due to the fact that it will prevent recovery of their debts. However, the fact that the process can only be implemented by companies confirmed as being able to emerge as a going concern and coupled with the role that the monitor will play in the process should hopefully provide sufficient comfort to those key players to embrace the new process.
It is also notable that secured creditors are prevented from enforcing their existing security during the moratorium without the permission of the Court. Despite this, the Act requires liabilities in respect of most lending arrangements to be serviced during the moratorium. Inevitably, support from a company’s secured creditors will be essential to it continuing as a going concern so they will no doubt continue to have a significant influence in the success of any moratorium process.
Taking all of this in the round, the potential to enter a moratorium outside of a formal insolvency process may be an attractive and advantageous means of buying some breathing space for companies experiencing financial difficulties. The challenge facing directors of such companies will be to appropriately manage all of the company’s stakeholders during the process. It will be interesting to note in the coming months just how successfully companies can manoeuvre the moratorium to ensure that viable companies remain operational and play their important role in the restarting of the local economy.