The UK government introduced the Corporate Insolvency and Governance Bill (CIGB) to Parliament on 20 May 2020. As well as including temporary measures to help support businesses affected by COVID-19, it proposes significant permanent changes to UK insolvency law. These proposed permanent changes include a new company moratorium: a mechanism to give a company in financial difficulty a temporary breathing space against creditor action, during which the directors remain in control, but overseen by a monitor.
This note provides high-level answers to some of the key questions parties to lending transactions are likely to have about the moratorium, based on the current form of the Bill. It focuses on the proposed new provisions applying within Great Britain – the CIGB includes separate (but substantially similar) provisions for Northern Ireland. For an overview of the CIGB (including a general overview of the proposed moratorium), see our note Text of the long-awaited Corporate Insolvency and Governance Bill officially published by Parliament.
1. Will all companies incorporated in England and Wales and in Scotland be potentially eligible for a moratorium?
Most companies will be eligible, but there is a long and complex list of exclusions. Non-eligible companies include those subject to specialist insolvency regimes (such as banks and insurers) and those that are, or have recently been, subject to insolvency proceedings. It appears that at least some companies that have issued listed bonds may not be eligible, although the drafting of this exclusion is somewhat opaque.
Some overseas companies may also be eligible, but an overseas company will need to apply to court to become subject to a moratorium.
2. If a borrower or other "obligor" company becomes subject to a moratorium, is this likely to trigger an event of default under its facility agreement(s)?
This will obviously depend on the drafting of the Events of Default clause in the relevant facility agreement. However, the declaration of a moratorium is an event of default in the LMA facility agreements, and is fairly standard.
3. If a borrower becomes subject to a moratorium, must it still pay amounts falling due for payment under a facility agreement during the moratorium?
Yes. The moratorium provides a payment holiday for a wide range of "pre-moratorium debts". This includes amounts becoming due and payable during the moratorium under contracts entered into before the moratorium, as well as amounts that became due and payable before the moratorium. However, this payment holiday does not apply to certain types of debts, including those arising under "a contract or other instrument involving financial services". This includes loan agreements, derivative contracts and a broad range of other types of financing contracts and instruments.
4. If a borrower becomes subject to a moratorium, does this prevent a lender/agent from accelerating a loan following an event of default?
No. The moratorium prevents the enforcement of security, the commencement of insolvency proceedings or other legal proceedings against the company, and the forfeiture of any lease. It does not prevent the acceleration of a loan. This is the case whether an event of default has occurred on account of the moratorium, or on some other ground. The follow-up enforcement action a lender can take while the company remains in moratorium is limited (see above). However, if a company is unable to pay an amount due that is not subject to a payment holiday, the monitor must bring the moratorium to an end. This does appear to limit significantly the extent of the protection provided by a moratorium, at least in respect of financial liabilities.
5. What about the new rules on "ipso facto" clauses?
The CIGB provides that, where a supply contract gives a party a right to terminate or "do[ing] any other thing" on account of another party entering into a moratorium or other "relevant insolvency procedure", that right will be of no effect. However, this does not apply to contracts for loans, financial leasing, swaps and other derivatives, and a broad range of other financial services and products. So, if a moratorium or other insolvency procedure is an event of default under the facility agreement, these rules should not affect lenders' acceleration rights that arise as a result.
6. If a guarantor becomes subject to a moratorium, does this prevent a lender/agent from making a demand under the guarantee?
Contracts for the provision of financial services, which are excluded from the payment holiday (see question 3 above), include those "providing guarantees and commitments". Whether this applies to all types of guarantees is not clear. However, this suggests that if a guarantor of a loan becomes subject to a moratorium, the payment holiday would not apply to payments under the guarantee. The moratorium also does not prevent a party from making a demand for payment against the relevant company.
7. Does a moratorium prevent a lender/security agent from enforcing security?
Yes, permission of the court is required to enforce any security granted before the moratorium unless (broadly) the security is a financial collateral arrangement – as is the case in an administration. So, for example, if the company subject to the moratorium has subsidiaries, it may still be possible to enforce security over the company's shares in that subsidiary during the moratorium.
8. Does a moratorium prevent a lender/security agent from taking any other action to protect its security?
During a moratorium, a floating charge cannot be crystallised, or any other step taken to restrict the disposal of floating charge property. Security documents creating floating charges usually provide that the security holder may crystallise the floating charge by notice following an event of default. A security holder will not be able to exercise this right during a moratorium. This prohibition is likely to apply to any step taken by a security holder to obtain greater control over a floating charge asset, even if that step does not expressly mention crystallisation or a restriction on disposals. This might include, for example, the security holder delivering a "control notice" to an account bank or other contractual counterparty, requiring that counterparty to pay and take instruction from the security holder rather than the company.
9. Does a moratorium prevent a lender/finance party exercising a contractual set-off right under a facility agreement or other finance document?
No. As is the case with the moratorium on administration, there is no prohibition on enforcing contractual set-off rights.
10. How will I know if a company is subject to a moratorium?
The monitor appointed to the moratorium must send a notice to Companies House and to all known creditors as soon as reasonably practicable after it has received notice that the moratorium has come into force. The monitor must also notify Companies House and all known creditors when the moratorium ends or if it is extended. So, a search against a company at the Companies House register should reveal whether it is subject to a moratorium, subject to any delays in filing or in updating the register.
The information above is not a comprehensive summary. The CIGB may be subject to change before becoming law. Specific advice and guidance should be sought as required.