Contributed by Tom Bannister and Lauren Pflueger (Akin Gump)
Corbin & King: First Judicial Consideration of the English Moratorium
In June 2020, the Corporate Insolvency and Governance Act 2020 (the Act) introduced a new standalone moratorium process in England, alongside the restructuring plan and certain temporary measures in response to the pandemic.
Over 18 months later, in early February 2022, the English court considered (and clarified) certain of the legislative provisions relating to the moratorium. It was the first time that a case concerning the moratorium was before the court, and it provides welcome guidance, which we consider below.
The Moratorium: An Overview
The Act introduced a new Part A1 into the English Insolvency Act 1986 (the IA86). That new part enables an eligible company to obtain a moratorium on creditor action and a payment holiday for many of its pre-moratorium debts.
The moratorium is available to eligible companies (being companies registered under the English Companies Act 2006) and overseas companies. While eligible overseas companies must apply to court to enter a moratorium, in many cases, eligible English companies are able to enter a moratorium simply by filing documents at court. In each case, the directors must be of the view that the company is, or is likely to become, unable to pay its debts.
The key objective of the standalone moratorium is to rescue the company. A “monitor” is appointed at the outset of the procedure and their role is to monitor the company’s affairs on an ongoing basis so that he or she may form a view as to whether it remains likely that the moratorium will result in the rescue of the company as a going concern. If the monitor considers that this is no longer likely, he or she must immediately terminate the moratorium. To help the monitor form that view, the directors (who remain in place during the moratorium) must provide the monitor with any information that the monitor requires in order to carry out their functions. The moratorium runs for an initial period of 20 business days, but that period may be extended by the directors for up to an aggregate period of 40 business days, or, with creditor consent, for up to an aggregate period of one year, or by application to court. The monitor does not need to consent to any extension, but he or she must continue to be satisfied that it is likely that the moratorium will result in the rescue of the company as a going concern.
The legislation generally provides that, during a moratorium, the debtor will have a payment holiday for pre-moratorium debts, subject to certain exceptions. A “pre-moratorium debt” includes a debt which the company has become (or may become) subject to during the moratorium by reason of an obligation incurred before the moratorium. There is, however, no payment holiday in respect of “debts or other liabilities arising under a contract or other instrument involving financial services”, which would include most commercial lending arrangements. This is an obvious limitation on the practical usefulness of the procedure.
Corbin & King: The Facts
The Corbin & King group operated nine restaurants in the UK. The group structure consisted of Corbin & King Limited (the TopCo), two intermediate holding companies and eight asset/restaurant operating businesses (the holding companies and asset owning companies, the OpCos). The majority shareholder in the Topco was MI Squared Ltd (MIS), a Thai company, and the minority shareholders included Christopher Corbin and Jeremy King.
An associate company of MIS, Minor Hotel Group MEA DMCC (MHG), had lent TopCo £14.25 million under a facility maturing in May 2020 and £20 million under a loan maturing in 2024. TopCo had granted security over its assets in respect of the £20 million loan and each of the OpCos had guaranteed that loan. Minor International plc (Minor) held shares in both MIS and MHG.
In 2020, TopCo failed to repay the c.£14 million facility to MHG, causing an Event of Default under the £20 million loan and resulting in TopCo owing MHG just over £34 million. MHG only demanded that amount on 19 January 2022 (19 months after it fell due). Very shortly thereafter, a third party investor made an offer to Minor to acquire its interests in the group for a sum equal to the loan: £20 million. But Minor rejected the offer and instead, on 25 January 2022 and in reliance on its security, MHG appointed partners at FRP Advisory as administrators of TopCo.
In the circumstances, the directors of the OpCos had been considering whether the protection of Part A1 moratoria should be sought. After forming the view that the OpCos could be rescued as going concerns (a pre-requisite for a moratorium), on 20 January 2022, Teneo representatives were appointed as monitors of each of the OpCos. On 21 January 2022, MHG made demand of each of the OpCos under their guarantees.
Corbin & King: Judicial Consideration
On 28 January 2022, MHG applied to the court for orders terminating the moratoria on the basis that a failure of the monitors to terminate the moratoria had unfairly harmed MHG’s interests.
Under the provisions introduced to the IA86 by the Act, a monitor must bring a moratorium to an end if the monitor thinks that the company is unable to pay any pre-moratorium debt for which the company does not have a payment holiday during the moratorium.
As noted above, a “pre-moratorium debt” includes a debt which the company has become (or may become) subject to during the moratorium under an obligation incurred before the moratorium. Here, the pre-moratorium debt arose from MHG’s guarantee demands on 21 January 2022, one day after the moratorium started. The guarantees were an obligation incurred prior to the moratorium and so the debt owed under the guarantees was a “pre-moratorium debt”. It was agreed that the guarantees of commercial lending arrangements constituted contracts involving financial services and, as a result, no payment holiday in respect of the guarantees was afforded to the OpCos.
This lack of payment holiday meant that the monitors had to consider whether to bring the moratoria to an end (on the basis that they thought the OpCos would not be able to pay that debt). But the monitors did not end the moratoria and instead resisted MHG’s application to terminate the moratoria. The monitors concluded that it was likely that the OpCos would be rescued as going concerns and the loan to which the guarantees related would likely be repaid in the near term.
The judge dismissed MHG’s application and allowed the moratoria to continue. In doing so, the court held that it was reasonable for the monitors to conclude that the loan was capable of repayment, given that a third party had made an offer of immediately available interim funding that was sufficient to discharge the loan. That offer of funding was reportedly obtained and the group’s facilities were refinanced, allowing the OpCos to exit the moratoria and continue to trade.
The Moratorium: What does the future hold?
When the moratorium process was introduced in June 2020, the government anticipated that around 1,250 moratoria would be proposed each year. By contrast, in the period since its introduction to the end of 2021, only 15 moratoria had been proposed. While the restructuring community may not have been as quick to make use of the moratorium procedure as the government had hoped, the court’s judgment in connection with the Corbin & King moratoria provides some clarity on the approach monitors should take, and the factors to bear in mind, when the question of terminating a moratorium for (possible) inability to pay pre-moratorium debts arises.