In a recent paper, I analyse the introduction of a restructuring moratorium into the UK by the Corporate Insolvency and Governance Act 2020. This is one of a number of permanent measures introduced by the 2020 Act that are intended to facilitate the rescue of financially distressed but viable companies. The introduction of these measures was prompted by the financial problems arising from the COVID-19 pandemic, but the restructuring moratorium has its foundations in a set of 2018 Government proposals and a 2016 Insolvency Service consultation paper.
A number of jurisdictions have introduced reforms to their debt restructuring regimes in recent years, often based on the US Chapter 11 procedure which many regard as the ‘gold standard’ of restructuring mechanisms. These include the 2017 debt restructuring reforms introduced in Singapore and the EU’s recent Restructuring Directive (Directive 2019/1023). The inclusion of a restructuring moratorium is a consistent feature in these reforms. This paper compares the UK restructuring moratorium with those introduced elsewhere and assesses whether it will be a valuable tool for financially distressed companies.
Moratoria have existed as integral aspects of mechanisms such as US Chapter 11 and UK administration for some time but the existence of a broad moratorium for use in conjunction with restructuring mechanisms is new in the UK. Moratoria are traditionally regarded as having two benefits. The first is to deal with the ‘common pool’ problem. If there is no stay, then creditors may seize assets that are useful for the carrying on of the debtor’s business and this could jeopardise the prospects of a successful restructuring. Central to this is the notion that a business consists of assets and relationships that are worth more collectively than if they are dissipated. The second is that a moratorium can deal with the ‘anti-commons’ problem, ie it can block actions by individual creditors who are seeking to frustrate the wishes of the majority. While moratoria can be potentially very valuable in promoting the rescue of a company or business, a balance is required between the benefits to the company and the creditors as a whole on the one hand and the rights of the individual creditors on the other.
The Corporate Insolvency and Governance Act 2020 introduces a new Part A1 into the Insolvency Act 1986. This provides a restructuring moratorium that is standalone and is not a precursor to an insolvency process, although it can be used in that way. It is available to be used alongside restructuring processes including schemes of arrangement, Company Voluntary Arrangement (CVAs) and the new restructuring plans (or ‘super schemes’) introduced into Part 26A of the Companies Act 2006 by the 2020 Act. In contrast to the moratorium attached to administration, the restructuring moratorium is debtor-in-possession and allows directors to continue to run a company, subject to the appointment of a licensed insolvency practitioner (the monitor) and certain other restrictions. The paper analyses the content of the restructuring moratorium in detail. Broadly, the effect is to impose both a constraint on the ability of creditors to assert their debt claims against the company and a constraint on initiating insolvency proceedings and other legal processes, complemented by restraints on ipso facto clauses.
Given that moratoria involve a significant constraint on creditors’ legal rights, they can be justified only where the imposition can be regarded as beneficial to the creditors as a whole, in order to rescue a viable (albeit financially distressed) business. One concern is that they can be used by directors to prop up a company which is not economically viable and is not capable of rescue, and that the moratorium simply prolongs the moment when the company’s difficulties are dealt with, while the company continues to lose money in the meantime. Another is that directors may utilise a restructuring to shake off liabilities which the company is capable of meeting. A number of protections are introduced by the Corporate Insolvency and Governance Act 2020 to deal with these concerns, including a limit on the length of the moratorium (20 days, extendable for a further 20 days without creditor consent), various eligibility requirements, the role of the monitor, a restriction on the availability of the moratorium to certain companies only, and the ability of creditors to challenge the moratorium in certain circumstances.
Ultimately it is argued that the constraints and limitations placed on the moratorium, for creditor protection and other reasons, limit the potential value of this mechanism to a significant extent and that the necessary balance has not been achieved. Many companies will therefore have to continue to look elsewhere for protection from creditors seeking to disrupt their restructurings.
Jennifer Payne is the Linklaters Professor of Corporate Finance Law, University of Oxford.