Expected Changes to the UK Corporate Moratorium

The three year review of CIGA (the Corporate Insolvency and Governance Act) published by the Insolvency Service suggests that we might see changes to the corporate moratorium process – will these address concerns about the process and encourage more insolvency practitioners to recommend its use?

The moratorium aims to protect companies from enforcement action to give a struggling business opportunity to seek advice, negotiate with creditors and agree plans.  In practice (partly due to the support measures from the Government that we saw during the pandemic) it has only been used by about 40 companies to date.

For the most part, where it has been used, it would appear that it has been used successfully to either rescue the company as a going concern – in some instances by giving a company time to refinance – or to give breathing space to file a CVA.   There are also examples of where it hasn’t led to a rescue or restructuring, but in those instances the monitor can and has terminated the moratorium. But take up has been lower than anticipated.

Of note, is how much moratoriums costs.  On average, the estimated costs of producing the eligibility report and legal materials was £13.7k and the costs of monitoring were reported to be between £1k to £3k a day.

The report flags the following as potentially deterring use of the moratorium:

  • perceived reputational risk to insolvency practitioners (IPs) should the company not be rescued
  • potential criminal penalties for actions taken by IPs when acting as a monitor
  • uncertainty about fee recovery in a subsequent insolvency given the alteration of priority debts
  • lack of clarity and guidance around the “financial services” exemption
  • eligibility criteria limiting take up for mid-market and larger companies

Given that a moratorium is more likely to be used by an SME, where (other than HMRC) the company’s biggest creditor is likely to be its lender, a moratorium is not seen as an effective tool because it does not impose a stay on actions by financial creditors.

In light of some of these difficulties, the report suggests that the legislation is refined in the following ways

  • amending eligibility criteria to allow large, mid-market and larger SME companies to use the procedure
  • amending the creditor priority in a subsequent insolvency procedure
  • clarifying the definition of “financial services” to clarify which services are within the definition

If these changes are made, this could lead to more use of the moratorium, but there is no commitment to make these changes yet – and if they are to be made, there will need to be further consultation before the legislation can be changed. 

As such, any potential changes that could make moratoriums more accessible to more companies are unlikely to happen for quite some time.

Other recommendations include guidance for IPs to address concern about reputation risk and to clarify the role of monitor.

LexBlog

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