Corporate insolvency changes: what do they mean for landlords and tenants?
The government’s temporary changes to the insolvency rules to cater for Covid-19 – in particular the new restrictions on the presentation of winding-up petitions – have been well-publicised. These have now been packaged within an Act (the Corporate Insolvency and Governance Act (“CIGA”)) which also brought in significant, permanent changes to UK insolvency law.
Many tenants will want to explore whether these changes may assist them through the present difficult period. Landlords should therefore be aware of the new options available to tenant companies for dealing with financial difficulties – including the new moratorium which is available to them.
How much breathing space can a company get?
One of the permanent changes made by the CIGA is the introduction of a “Gateway Moratorium” – which offers greater control to the company’s directors than processes such as CVAs or administrations.
The purpose of the moratorium is to allow companies some breathing space in which to consider and implement rescue options while enforcement or other legal action is restricted. The effect of the moratorium is that there will be a payment holiday whilst it is in place for any debts incurred pre-moratorium except for the following six categories of debt:
- The monitor’s remuneration and expenses
- Goods and services supplied during the moratorium
- Rent for the period of the moratorium
- Wages and salary
- Redundancy payments
- Financial services contracts, including bank loans.
If a company fails to pay rent for the period during which the moratorium is in place, the monitor (see below) can terminate the moratorium. Indications are that rent will be payable during a moratorium on a daily basis as it is for companies in administration. Although it is unclear whether the obligation to pay rent extends to sums other than basic rent (but which are defined as rent in the Lease), it seems likely that service charges would be payable given a company’s obligation to pay for services supplied during the moratorium.
How does the moratorium affect a landlord’s remedies?
Once a moratorium is in place, no insolvency proceedings can be instituted against the company. Enforcement or other legal proceedings can only be brought with the court’s permission, which may be granted with conditions. As with certain insolvency procedures, the moratorium is therefore likely to restrict remedies such as forfeiture, CRAR etc. whilst it is in place.
How long does the moratorium last?
The moratorium lasts for an initial period of 20 business days from the date when the documents are filed/the order is made (as appropriate). Directors can apply to extend this period in a number of ways:
- Without creditor consent (note that only one extension of a further 20 business days can be achieved without creditor consent)
- With creditor consent (by a qualifying decision procedure)
- By court order
- If CVA proposals are still pending (and in this instance, the extension is automatic)
Options 1 to 3 mentioned above can only be achieved if all of the moratorium debts have been paid in full. This includes any pre-moratorium debts which were not subject to the “payment holiday” (see above).
Once the moratorium ends, the payment holiday will end and the company will be obliged to pay its debts on an ongoing basis. If the moratorium has been unsuccessful and the company enters into some form of insolvency process, then the company’s debts will be dealt with as part of that process.
Is the moratorium an insolvency process and how does a landlord find out about it?
Importantly, applying for the moratorium does not mean that the company has entered into any form of insolvency proceedings. However, there is an obligation to notify Companies House and all creditors of the moratorium so that it is a matter of public record, even if it is not a ‘formal’ insolvency procedure. The inclusion of financial services contracts in the list of liabilities that will not attract a payment holiday means that companies will likely have to garner their lenders’ support for a moratorium before seeking one.
Who is eligible for the moratorium and how does it work?
The eligibility criteria for a company wishing to obtain a moratorium are fairly wide. The key exclusions are for financial services companies or those who have been in a formal insolvency procedure or sought a moratorium in the last 12 months. (Update: The government announced on 24 September that there will be some changes to these exclusions to allow companies to enter into a moratorium even if they have been subject to an insolvency procedure in the previous 12 months.)
The process of obtaining a moratorium involves an application to court. The directors must make a statement that the company is, or is likely to become, unable to pay its debts. The CIGA introduces the role of a “monitor”, who must be a licensed insolvency practitioner, and who must make a statement that it is likely that a moratorium for the company would result in the rescue of the company as a going concern.
The role of the monitor is as an independent party to ensure that the company complies with the terms of the moratorium, but he or she is not in charge of the company’s affairs or management. The directors will remain in charge of running the business on a day-to-day basis. However, the monitor will need to approve sales of assets outside the normal course of business and any grant of new security over the company’s assets. The amount of debt which a company can pay without its monitor’s consent is £5,000 or 1% of the total debts owed to unsecured creditors and the monitor should only consent to a payment if it will support the rescue of the company as a going concern.
The moratorium will bind both secured and unsecured creditors, but it is open to a creditor to challenge the actions of the monitor and the directors, if he or she thinks that their actions have unfairly harmed their interest(s).
New restructuring plan
The CIGA introduces new provisions into the existing Companies Act 2006 for a regime for companies in financial difficulty to propose a restructuring arrangement with its members and/or creditors.
The new procedure is not dissimilar to a company voluntary arrangement but the key difference is that, with the new procedure, companies will have the advantage of being able to “cram down” (i.e. overrule) a dissenting class of voting creditors provided that the court gives permission for this. If the court approves the proposals, then they are binding on all creditors (both secured and unsecured) except if there was a moratorium in the last 12 weeks before the application to court was made. In those circumstances, the arrangement will not be binding on creditors whose debts arose during the moratorium and creditors who were not subject to the payment holiday without those creditors’ consent.
The CIGA makes other changes to insolvency laws, both with temporary and permanent effects.
This briefing note is not a substitute for legal advice on the specific circumstances of your case.
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