Is the Corporate Insolvency and Governance Act moratorium working?

New procedures and measures to rescue companies in financial distress as a result of the Covid-19 pandemic were introduced by the Corporate Insolvency and Governance Act 2020 (CIGA), which came into force on 26 June 2020, including a new standalone moratorium.

Before CIGA, the UK lacked a "debtor in possession" process under which the directors of a company are left in control to implement a rescue or restructuring with the benefit of a moratorium.

In a CIGA moratorium, a company is protected from various creditor actions in respect of pre-moratorium debts, but must continue to pay its moratorium debts in full. The company’s directors remain in control, but an independent monitor (who must be an insolvency practitioner) has oversight throughout and can terminate the CIGA moratorium in various circumstances.

Government statistics show that four companies obtained CIGA moratoriums between June and December 2020, although no further detail on those cases has yet emerged. Such low usage may be because the various temporary restrictions in force – on landlords and winding up petitions, and lenders and flexible stances on waivers and deferrals etc. – have negated, in the short term, the immediate need for a standalone moratorium.

Moreover, the CIGA moratorium has various limitations (and associated costs), which reduce its attractiveness. However, as and when the temporary restrictions are withdrawn and lenders start to address their underperforming books, more companies are likely to look at the CIGA moratorium.

The government recently put forward draft legislation that would extend its power to amend or relax insolvency or corporate governance laws for Covid-19-related reasons until 29 April 2022, so the temporary restrictions could be around for some time.

What is the effect?

During a CIGA moratorium:

• Creditors cannot petition for the winding up of the company.
• No winding up or administration proceedings or process can be progressed.
• No right of forfeiture can be exercised in relation to premises occupied by the company.
• Subject to some exceptions, there can be no enforcement of security over the company’s property.
• There can no repossession of goods.
• Subject to some exceptions, no "legal process" can be issued or continued against the company.

What companies are eligible?

The company must be, or likely to become, unable to pay its debts. No application can be made if the company has entered into a moratorium in the previous 12 months. In addition, some companies are not eligible for the procedure, including insurance companies, banks, or companies that are party to sizeable capital markets arrangements.

How is it obtained?

Provided there is no outstanding winding up petition against the company and the company is an English company, the directors can obtain a CIGA moratorium by filing the relevant documents at court. The directors must confirm that the company is or is likely to become unable to pay its debts.

Also, the proposed monitor must confirm that, in their view, it is likely that a CIGA moratorium for the company would result in the rescue of the company as a going concern (this statement may be qualified by 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").

To what debts does it apply?

Most pre-moratorium debts are made subject to the payment holiday.

Debts that remain payable in the moratorium fall into two categories: pre-moratorium debts that are excluded from the payment holiday; and moratorium debts.

Pre-moratorium debts that are excluded from the payment holiday are:

• The monitor’s remuneration or expenses.
• Goods or services supplied during the CIGA moratorium.
• Rent in respect of a period during the CIGA moratorium.
• Wages or salary arising under a contract of employment.
• Redundancy payments.
• Debts or other liabilities arising under a contact or other instrument involving financial services.

Pre-moratorium debts excluded from the payment holiday and moratorium debts must be paid in full during the CIGA moratorium, and confirmations that these debts have been paid have to be filed at court to support any extension to the moratorium period.

The monitor is required to terminate the CIGA moratorium if he or she considers that the company is unable to pay these debts.

What is its duration?

The initial period of the CIGA moratorium is 20 business days beginning with the business day after the CIGA moratorium comes into force, which is the date of the filing of the documents at court or the court order.

Can it be extended?

The CIGA moratorium can be extended for a further 20 business days without creditor consent by the directors filing with the court:

• A notice stating that they wish to extend the CIGA moratorium;
• A statement by the directors that the moratorium debts, and the pre-moratorium debts for which the company does not have a payment holiday, have been paid or discharged;
• A statement by the directors confirming that the company is, or is likely to become, unable to pay its pre-moratorium debts; and
• A statement from the monitor that in his or her view it remains likely that the CIGA moratorium will result in the rescue of the company as a going concern.

If the creditors (those who are not going to be paid during the CIGA moratorium because of the payment holiday) consent to an extension, the CIGA moratorium can be extended by the directors for a period of up to one year.

Alternatively, the directors can make an application to court after the 15th business day of the initial moratorium period for an extension of the period. The court will consider whether the extension is in the interests of the pre-moratorium creditors and whether the court considers that the rescue is likely.

What's the monitor's function?

The monitor is an officer of the court and must be an insolvency practitioner.

The monitor must bring the CIGA moratorium to an end by filing a notice at court if he or she thinks that:

• The CIGA moratorium is no longer likely to result in the rescue of the company as a going concern.
• The objective of rescue has been achieved.
• He or she is unable to carry out their functions as the directors have not provided them with the relevant information.
• The company is unable to pay moratorium debts which have fallen due or pre-moratorium debts for which the company does not have a payment holiday.

Osborne Clarke comment

As the CIGA moratorium has only been used four times, debtors are clearly not champing to use the process. There are some inherent limitations. The period of 20 to 40 business days may not be enough to prepare an "oven ready" restructuring and rescue, and, as a gating issue, the directors and monitor must be reasonably confident that such outcome can be achieved.

Moreover, the exclusion of financial services contracts (that is to say, bank debt) from the payments holiday limits the CIGA moratorium's usefulness (unless a company can get its lenders on board first). Also, various companies, including those subject to capital market arrangements, are also excluded. And the monitor's costs, and costs of submitting documents to court, will be expensive.

The various temporary restrictions (on landlords, regarding winding up petitions, and so on) have in the short term reduced the need for a standalone moratorium. But, as those temporary restrictions are gradually withdrawn, the CIGA moratorium might become more popular.

It seems that a CIGA moratorium might usefully be deployed when a restructuring is mostly agreed with a company’s main stakeholders, and a further short period is needed to marshal others. For example, when a company is almost ready to launch a scheme of arrangement or restructuring plan, but needs six to eight weeks to get that through the court.

If you would like to discuss this further, please do get in touch with me or any other member of the restructuring and insolvency team, or your usual Osborne Clarke contact.