Corporate Insolvency and Governance Act 2020: the statutory moratorium process

Background

For companies facing short-term financial issues, a new statutory moratorium regime may provide a lifeline. The moratorium process, introduced by the Corporate Insolvency and Governance Act 2020, is intended to ‘give companies the breathing space and tools required to maximise their chance of survival’. A qualified insolvency practitioner (the moratorium monitor) is responsible for overseeing the process.

Defined benefit pension trustees may have mixed feelings about the new statutory regime. As set out below, among other measures there will be an impact on trustees’ ability to enforce security that may be in place during the moratorium period. In addition, it is possible due to the new ‘super-priority’ attaching to moratorium debts and certain pre-moratorium debts, that a pension scheme would recover less if a subsequent insolvency were to occur soon after the end of a moratorium. However, on the other hand, the moratorium regime may mean that a pension scheme that might otherwise enter the Pension Protection Fund (PPF) will remain attached to a viable company that emerges from temporary financial difficulty.

Payment holiday

Pre-moratorium debt holiday

Under the moratorium provisions, a company is granted a ‘payment holiday’. The payment holiday is in respect of pre-moratorium debt/liability. This is debt/liability to which a company: (a) became subject before the moratorium; or (b) becomes subject during the moratorium period but relating to an obligation incurred before the moratorium.

Exceptions

There are exceptions to the pre-moratorium debt payment holiday. In this context, the company will be obliged to continue paying the following pre-moratorium debts:

• the remuneration or expenses of the moratorium monitor that is overseeing the process;
• payments for goods or services supplied during the moratorium;
• rent in respect of the period during the moratorium;
• wages or salary arising under a contract of employment;
• redundancy payments; or
• debts that arise under a financial services contract or instrument.

Wages in the context above includes contributions to an occupational pension scheme. This would not, in our view, include any deficit reduction payments under a schedule of contributions.

Moratorium debts

No payment holiday applies to moratorium debt/liability, i.e. debt/liability arising during, or relating to the moratorium period (and unconnected to an obligation incurred before the moratorium). If the company cannot keep up with its moratorium debts, or the exceptional pre-moratorium debts listed above (i.e. the pre-moratorium debts for which it does not have a payment holiday), the monitor is obliged to end the moratorium.

Process and criteria

In relation to a company that is not subject to a winding-up petition and is not an overseas company, the directors may obtain a moratorium by filing relevant documents at court. The moratorium comes into force when the company files the documentation. The relevant documents include:

• a statement from the directors that, in their view, the company is, or is likely to become, unable to pay its debts; and
• a statement from the proposed monitor that, in the proposed monitor’s view, it is likely that a moratorium for the company would result in the rescue of the company as a going concern.

For overseas companies or a company that is subject to an outstanding winding-up petition, an application to court is required (i.e. not just filing of documents at court). If the application is successful, the moratorium takes effect from when the court makes the order.

The initial period of the moratorium is 20 business days beginning with the business day after the day on which the moratorium comes into force. Depending on the circumstances, the moratorium may be:

• extended for a further 20 business days by the directors filing prescribed documents at court during the final five days of the initial period;
• extended with the consent of the creditors to an agreed date (which must be before the end of one year from the start of the initial moratorium period) by filing prescribed documents at court;
• extended with the permission of the court to a date decided by the court, following an application by the directors; or
• terminated by the monitor on the basis that, for example, the objective of rescuing the company as a going concern has been achieved, or it is no longer likely that the company will be rescued.

There are also provisions to extend the moratorium if a company initiates a company voluntary arrangement (CVA), scheme of arrangement or a restructuring plan. In the case of a CVA, the moratorium is automatically extended until the CVA proposal is implemented, accepted/rejected or withdrawn.

Temporary provisions

The new legislation contains temporary provisions, the aim of which are to address the extra financial pressure that may arise from the COVID-19 situation. In that context, some of the requirements that are set out above in relation to the moratorium process are relaxed. For example, for a temporary period (currently up to 30 March 2021), a company that is subject to an existing winding-up petition, may avail of a moratorium without applying to court, i.e. it can access the moratorium through the process of filing prescribed documentation at court without making an application.

In addition, there is a modification of the normal statement, which the monitor is required to give, that a moratorium for the company would, in its view, result in the rescue of the company as a going concern. The following extra wording applies during the temporary period: ‘or would do so if it were not for any worsening of the financial position of the company for reasons relating to coronavirus’.

Some of the effects on defined benefit pension schemes

Security/charges

During the moratorium, various restrictions on enforcement of security apply. For example, pension scheme trustees will not, without the permission of the court, be entitled to take steps to enforce security over the company’s property. No application to court can be made for permission to enforce security in relation to any pre-moratorium debts for which the company has a payment holiday (e.g. deficit recovery payments). 

In addition, during a moratorium period a company may dispose of secured property free from that security. A disposal can only occur with the permission of the court, and only if the court thinks that this will support the rescue of the company as a going concern. The company must apply the net proceeds of sale towards discharging the ‘sums secured’.

Administration and winding-up petitions

No party other than the directors can present a petition to court for the winding up of the company or apply for administration while the moratorium is ongoing. Clearly, trustees would rarely wish to present a winding-up petition. However, it is a potential tool in a pension scheme trustees’ negotiating arsenal, which will not now be available if a moratorium is in place.

It is also worth noting that even where a company is not subject to a moratorium process, temporary provisions prompted by the COVID-19 situation mean that no party can present a company winding-up petition based on a statutory demand served between 1 March 2020 and 31 March 2021, unless (broadly):

• coronavirus has not had a financial effect on the company, or
• the grounds for presenting the winding-up petition would have arisen even if COVID-19 had not had a financial effect on the company.

Challenges to the monitor’s actions

Creditors including pension scheme trustees may apply to court to challenge the actions of the monitor and/or the company directors. In the case of the monitor, a creditor can make an application on the ground that an act, omission or decision of the monitor during a moratorium has unfairly harmed the pension scheme’s interests. In making any order in relation to the monitor, the court must have regard to the need to safeguard the interests of any person who has dealt with the company in good faith and for value. This safeguard may be relevant in relation to any application by trustees connected to the sale of property over which pension scheme trustees have security.

The PPF is also entitled to apply to court to challenge the actions of the monitor and the directors, in the same way as the pension scheme creditor.

Super-priority of debts

If the moratorium process is unsuccessful, and a winding up of the company commences within 12 weeks of the moratorium ending, ‘super-priority’ will attach to the ‘moratorium debts’ and ‘priority pre-moratorium debts’. These debts, in addition to the fees or expenses of the official receiver, will rank ahead of all other claims except those of fixed charge creditors (to the extent that relevant fixed charged assets cover the fixed charge creditor’s claim).

In broad terms, ‘moratorium debts’ are debts/liability arising during, or relating to the moratorium period (and unconnected to an obligation incurred before the moratorium).

‘Priority pre-moratorium debts’ are:

• the remuneration or expenses of the moratorium monitor;
• payments for goods or services supplied during the moratorium;
• rent in respect of the period during the moratorium;
• wages or salary arising under a contract of employment relating to a period before or during the moratorium;
• a liability to make redundancy payments which fell due before or during the moratorium; or
• any pre-moratorium debt that arises under a financial services contract or instrument that fell due before or during the moratorium unless the debt only fell due as a result of an acceleration or early termination clause.

Earlier drafts of the legislation prior to enactment had set out that if a lender accelerated its debt during a moratorium period, this debt would form part of the super-priority debt mentioned above. However, following lobbying efforts including on behalf of pension schemes, this provision was changed and as set out above, accelerated debt does not now have ‘super-priority’.

Conclusion

Pension scheme trustees will no doubt be keeping a close eye on developments in this area. Given the financial impact of COVID-19, it may not be long before the first moratorium under the new legislation takes effect.

It is likely that many companies accessing a moratorium will be doing so as a precursor to a restructuring process. The legislation itself contains a new restructuring tool. The Pensions Regulator (TPR) acknowledges this in a recent statement where it envisages that companies will ‘apply for a moratorium so that they can explore rescue and restructuring options’. The monitor must notify TPR if a company with a defined benefit pension scheme accesses a moratorium. TPR states: ‘it will take a risk-based approach, reviewing and assessing the information we receive against a range of risk indicators’. Therefore, it will be important for companies to appreciate that the new moratorium and related restructuring options will not operate in a vacuum outside of wider pension law considerations.