The standalone moratorium has been a seldom used restructuring tool since its introduction under the Corporate Insolvency and Governance Act 2020.
It is intended to give struggling businesses breathing space for an initial period of 20 business days whilst they explore potential rescue or restructuring options, free from creditor or other legal action. However statistics published by the Insolvency Service indicate that between 26 June 2020 and 31 December 2021, just 15 such moratoriums were obtained in England and Wales. Hardly breath-taking numbers, but could that all be about to change?
Certainly the recent decision of the High Court in Minor Hotel Group v Dymant & Anor provides some welcome guidance to those considering using a moratorium and to the monitors who oversee them. This decision has attracted quite a lot of attention as it is first time when a court has considered an application to challenge a monitor’s decision not to terminate a Part A1 moratorium.
The case concerned members of the Corbin & King restaurant group which has been in and out of the news recently as its restaurants – among them The Wolseley in Piccadilly and Brasserie Zédel in Soho – have struggled to emerge from the pandemic.
The operating companies within the Corbin & King group (together, the “OpCos”) had provided guarantees and security in respect of two loans advanced to their ultimate parent company, Corbin & King Ltd (Topco) by the applicant, Minor Hotel Group MEA DMCC (MHG). Topco failed to repay one of these loan facilities when it fell due for repayment in 2020, and MHG served a notice of demand for repayment on Topco some 19 months later in January this year.
In the meantime, the directors of the OpCos were considering their position in light of their exposure under their guarantees of MHG’s loan to Topco. They sought the protection of a moratorium under Part A1 of the Insolvency Act 1986, and on 20 January this year the directors of the OpCos appointed the respondents of Teneo Financial Advisory Ltd as joint monitors of the OpCos. The following day MHG made demand of each of the OpCos under their guarantees, making them liable to pay £34m to MHG.
A Part A1 moratorium provides a payment holiday in respect of a company’s pre-moratorium debts. But section A18(3)(f) of the Insolvency Act 1986 excludes from this category any debts arising under a financial services contract. It was accepted that the guarantees from the OpCos were contracts involving financial services, and accordingly the question was whether, under section A38 of the Insolvency Act 1986, the monitors were bound to bring the moratoria to an end. That section provides that a monitor must bring a moratorium to an end if he thinks that the company is unable to pay any pre-moratorium debts for which they company does not enjoy a payment holiday.
Whilst the OpCos were not in a position to pay the debt, the monitors considered that the underlying loans would be repaid in full in the reasonably near future. This was based on an offer made by a third party to the administrators of TopCo, which was understood to involve the repayment of the loan in full. As such, the monitors elected not to terminate the moratoria, which was met with the present application by MHG to challenge the monitors’ decision.
High Court's decision
The High Court considered four points in relation to a monitor’s obligation to bring a moratorium to an end under section A38(1) of the Insolvency Act 1986.
- Firstly, there was the question of the OpCos ability “to pay” the relevant pre-moratorium debts – i.e. the sums demanded under the guarantee. The Court considered that it was wrong to focus solely upon the financial position of the OpCos and to ignore the prospect that their liability under the guarantees might fall away upon repayment of the relevant loans by Topco as the principal debtor.
- Secondly, the High Court considered the meaning of “is” in the legislation (i.e. whether a company is unable to pay the relevant pre-moratorium debt). The Court determined that a company is able to pay its debts if there is the immediate prospect of receiving third party funds or the company owns assets capable of immediate realisation. What is an “immediate” receipt or realisation was considered to be a matter of commercial judgment for the monitor.
- Thirdly, the High Court considered whether Topco was able to discharge the loans to relieve the OpCos from their liability under the guarantee (at the relevant time the monitor took the decision). The High Court considered that an earlier offer to the administrators of Topco to purchase Topco’s interests in the OpCos for a sum equal to Topco’s indebtedness was not one that allowed for an immediate realisation of funds. In particular, the administrators were bound to conduct a marketing exercise which would make an immediate realisation impossible. However, a revised third party offer did provide for an immediate prospect of repayment of the loans and the discharge of the OpCos’ liabilities under the guarantee. This offer would cause the monitors to “think” that the loan could be repaid. In summary, initially the monitors ought to have terminated the moratorium, but that position changed on receipt of the subsequent third party offer to Topco and the High Court accepted that the monitors’ decision not to terminate the moratoria was one which a reasonable monitor could have taken.
- Lastly, the High Court concluded that since the loan could be repaid in the short term following receipt of the revised third party offer, the application brought by MHG to terminate the moratorium should be dismissed on the basis that the moratorium would otherwise result in the rescue of the OpCos. In reaching its decision, the Court considered that the harm MHG would have suffered as a creditor would have been less significant than the harm suffered by the OpCo’s if MHG was permitted to pursue insolvency proceedings against them.
The High Court’s willingness to adopt a purposive interpretation of the legislation is to be welcomed – particularly the recognition that monitors should be able to take into account a range of factors when deciding whether or not to terminate a moratorium. Whilst relatively unused so far, we anticipate that more debtors will start to use the standalone moratorium in the coming months as economic challenges continue to mount and people become more familiar with the process.