Where a company faces a creditors winding up petition in England and Wales, one potential option available to the company directors is to issue an application in court (a 'Moratorium Application') and obtain a moratorium order in respect to the company.

In respect to such Moratorium Applications, and the test to be applied, there is now the relatively recent authority of Re Grove Independent School [2023] EWHC 2546 (Ch) ('Grove'), a decision of ICC Judge Greenwood handed down on 24.2.23. For a quick recap on what a moratorium order is, see the end of this article.

Grove

In Grove, Grove Independent School Limited (the 'Company') owned and operated an independent school (200 pupils, aged from 3 months to 13 years; with 50 staff). A service which the Court said '...fulfils an important social function' (paragraph 3)

HMRC presented (18.1.23) a creditors winding up petition against the Company, for arrears of tax built up during the Covid pandemic period (the 'Petition')[1] . The Petition was advertised (notice given) on 17.2.23 and the first hearing of the Petition was listed for 1.3.23. The Petition debt of £655,971.90 and the Company did not dispute it.

The directors of a Company issued a Moratorium Application to the Court, under Part A1 of the Insolvency Act 1986 ('the 1986 Act'), seeking an moratorium order.

The basis for the Moratorium Application (as summarised by the Judge) was:

'...the Company needs the protection of a moratorium to enable it to continue to trade whilst at the same time allowing for it to “refinance”, which is what it says it wishes and hopes to do.' (paragraph 3)

but that subsequently, '...the Company has cut its operating costs, and has instructed FRP Advisory Trading Ltd (“FRP”) to assist in refinancing. Through FRP, and with their assistance, it has been in contact with various commercial brokers to arrange short term bridging finance, ultimately to be replaced, it is hoped, by new longer term facilities.' (paragraph 5)

The Moratorium Application came before ICC Judge Greenwood on 24.2.23 (the 'Judge'). HMRC had been notified of the Moratorium Application but HMRC were not represented at the 24.2.23 hearing.

The Law

The Judge in Grove turned to '..the scheme of the legislation in respect of moratoria' (paragraph 6) and:

(1) set out a summary of the background and context, at paragraph 7:

'The power of the court to order a moratorium was one of the three permanent measures introduced by the Corporate Insolvency and Governance Act 2020. In relation to the nature of the moratorium procedure, respectfully, I agree with the notes in Doyle, Keay and Curl: Annotated Insolvency Legislation 2022 (10 th Edition) at p.19, where it is said, amongst other things:

“Part A1 is innovative in two ways. First, it provides for the first freestanding moratorium in UK insolvency law. Secondly, it introduces for the first time in UK law a debtor-in-possession procedure, which bears some similarities to the US Chapter 11 model, by which the company (as debtor) remains under control of and management by the company’s directors, subject to oversight by a monitor who must be a licensed insolvency practitioner.

The single purpose of the new procedure is facilitating the rescue of the entity of the company debtor, rather than the company’s business or the realisation of its assets; such an outcome is often the purpose underpinning a CVA, but far less commonly the purpose of an administration. The scheme of Part A1 is to achieve that purpose by affording the company, which must be insolvent or likely to become insolvent, a temporary breathing space - initially by way of an extendable 20 day period - during which the company is protected from creditor claims by way of what is termed a payment holiday (although other non-monetary and proprietary claims are also barred), subject to certain exceptions stipulated in s.A18(3), and can seek to reorganise itself at what is envisaged is relatively low cost subject to what has been termed ‘light touch oversight by a monitor’.

“There is no stipulated outcome or exit route from the moratorium procedure; in one extreme a company may need no more than breathing space for a limited period to stabilise itself financially whereas, at the other, it may be that the process culminates in an insolvency procedure, most likely, but not necessarily, a CVA.”'

(Note: as readers will have picked up, the section numbers in Part A1 have an 'a' before the section number, to signify it is from Part A1; for instance, s.A18 is the 18th section in Part A1)

(2) observed that '...there is no reported decision (at least, that I know or was told about) in respect of the test to be applied by the court on an application of this sort.' (paragraph 7)

(3) turned to the first test for obtaining an Part A1 moratorium, namely, that the Company must be an 'eligible' company for the purposes of Part A1:

'As to that test, the first point is that the company, in order for a moratorium to be ordered, must be an “eligible company” for the purposes of Part A1. By virtue of s.A2, that question is to be determined by reference to schedule ZA1 to the Act.' (paragraph 8)[2]

Pausing there, by paragraph 1 to schedule ZA1 to the 1986 Act, all companies are 'eligible' for Part A1 'unless it is excluded from being eligible by any of the following...'[3]

There is then a list of 14 types/situations were the company will not be 'eligible'. The list (given bullet points), gives an indication of the nature of the type/situation which renders a company ineligible (in brackets), as well as the paragraph number for the relevant provisions:

• paragraph 2 (current or recent insolvency procedure)[4];
• paragraph 2A (private registered providers of social housing)[5];
• paragraph 2B (a registered social landlord under Part 2 of the Housing (Scotland) Act 2010)[6];
• paragraph 3 (insurance companies)[7];
• paragraph 4 (banks)[8];
• paragraph 5 (electronic money institutions)[9];
• paragraph 6 (investment banks and investment firms)[10];
• paragraph 7 (market contracts, market charges, etc)[11];
• paragraph 8 (participants in designated systems)[12];
• paragraph 9 (payment institutions)[13];
• paragraph 10 (operators of payment systems, infrastructure providers etc)[14];
• paragraph 11 (recognised investment exchanges, clearing houses and CSDs)[15]
• paragraph 12 (securitisation companies)[16];
• paragraph 13 (parties to capital market arrangements)[17];
• paragraph 15 (public-private partnership project companies)[18];
• paragraph 18 (certain overseas companies)[19].

Each types/situations has detailed provision(s) available from the above footnotes. Paragraph 19 is an  'Interpretation of Schedule' provision[20].

(4) returned to Grove and, after finding that the Company was an 'eligible' company[21], the Judge in Grove considering the test as prescribed in s.A4, at paragraph 9 of Grove:

'In a case, such as this, where a winding-up petition has been presented, a moratorium can only be obtained by court order on an application under s.A4 of the Act. Section A4 states as follows:

“(1) This section applies to an eligible company that is subject to an outstanding winding-up petition.

(2) The directors of the company may apply to the court for a moratorium for the company.

(3) The application must be accompanied by the relevant documents (for the relevant documents, see section A6).

(4) On hearing the application the court may -

(a) make an order that the company should be subject to a moratorium, or

(b) make any other order which the court thinks appropriate.

(5) The court may make an order under subsection (4)(a) only if it is satisfied that a moratorium for the company would achieve a better result for the company’s creditors as a whole than would be likely if the company were wound up (without first being subject to a moratorium).” [bold added]

In summary then, the provisions are broadly structured as follows:

(a) Stage 1 - contains two principal gateway conditions:

(i) 'eligible' company; and

(ii) section A4(5) of the 1986 Act satisfied;

If both of those gateway conditions are satisfied, then:

(b) Stage 2 - discretionary stage - bestowed by s.A4(4) and the word 'may' in that provision.

(4) posed the question: 'What then is the relevant test to be applied by the court under s.A4?' (paragraph 10). Addressing this, the Judge in Grove said, from paragraphs 11 to 15:

'First, it seems to me that the court in any event has a discretion as to whether or not to make an order. That is clear from the permissive words of s.A4(4), “the court may make an order that the company should be subject to a moratorium”, or indeed, as I have said, make “any other” appropriate order of a variety unspecified by the language of the Act.

Second, by virtue of s.A4(5), the court’s discretion is narrowed in that it may only make an order for a moratorium if, as I have said, it is first satisfied that a moratorium for the company would achieve a better result for the company’s creditors as a whole than would be likely if the company were wound up without first being subject to a moratorium. The test at s.A4(5) must be read and understood alongside s.A6, which provides that in deciding the question the court will have certain documents and evidence, including a statement from the proposed monitor under s.A6(1)(e) that in the proposed monitor’s view “it is likely that a moratorium for the company would result in the rescue of the company as a going concern”.

As a matter of strict language, s.A4(5) seems to me to entail or invite a comparison between two alternative future (and therefore uncertain) outcomes. First, the result that would be achieved for the company’s creditors as a whole by the imposition of the moratorium; and second, the likely result for the company’s creditors as a whole of a liquidation but without a prior moratorium. Only if satisfied that the first is or would be “better” than the second, does the court have a discretion to make an order. Moreover, the language of the section suggests to me that the court must be satisfied on the balance of probabilities that the first is or would be the better alternative, not merely that there is a real prospect or possibility that it would be better.

Read as a whole, it seems to me that the Act requires the court to compare (a) the likely or probable outcome in the event of a moratorium being ordered, taking into account the proposed monitor’s evidence that it would be likely to result in the company’s rescue as a going concern, with (b) the likely or probable outcome in the event of a liquidation without a prior moratorium. If satisfied that from the perspective of the company’s unsecured creditors the first is or would on the balance of probabilities be better than the second, the court has got a discretion. It seems to me to envisage a comparison, a weighing, between two alternative futures, each based on an assessment of the likely or probable outcome. In most cases, if the view of the proposed monitor is accepted the court is likely to accept that it has a discretion - in other words, in most cases, the likelihood of rescue as a going concern will be better than the likely result of an immediate insolvent liquidation. In any event, given that the court has a discretion, given that it is being asked to compare two alternative but inevitably more or less uncertain futures, and given also the nature of the procedure involved, it is unlikely that what is envisaged by the Act is a profoundly technical exercise. The Insolvency Court is accustomed to dealing with financially distressed companies and will conduct the required comparison on the basis of the evidence before it in a broad fashion, in accordance with the commercial realities.

It follows, I should say, that I do not agree that the test under s.A4 is analogous to the test applied on an application for an administration order. In that context, the language is different. In that context the court must be satisfied that the order would be “reasonably likely to achieve the purpose of the administration” – not “likely” but “reasonably likely”. That expression has been construed to mean (see Auto Management Services Ltd v Oracle Fleet UK Ltd [2008] BCC 761) that there must be a “real prospect” of its achievement, which is not to say that there must be a more than 50 per cent chance. In the context of s.A4 however, the monitor must say that the company’s rescue is likely, not reasonably likely, and the court must be satisfied, as I have understood and construed it, that a moratorium would be more likely than not to achieve a better outcome than would be likely in a liquidation - not that it might do so or enjoys a real prospect of doing so. It must, as I have said, compare two different likely outcomes in or arising out of two different circumstances, and then it must be satisfied that the one would be better than the other.'[22]

Applying the Section A4 of the 1986 Act 'likely...better result' test - to the facts in Grove

On the facts of Grove, the Judge:

(1) noted that the proposed monitors had both '...certified that in their view the likely outcome of a moratorium is that the Company would be rescued as a going concern.' (paragraph 16);

(2) posed the question: 'Should I accept that view?' (paragraph 16). On this, he said:

'In my judgment, it is justified by reference to the evidence of [the Principal of the School operated by the Company/a director of the Company], and I do accept it.' (paragraph 16)

What then was [the Principal of the School operated by the Company/a director of the Company] evidence? It was (as summarised by the Judge) that:

(1) the Company can self-fund during the moratorium so that in any event, the position of creditors will not worsen;

(2) the most recent filed accounts of the Company for the period ending 31 December 2021 show a balance sheet surplus of approximately £2 million with freehold property valued at £4.25 million, albeit based on a 2018 valuation. So there was property allowing for the Company to refinance, both in the short term (to pay HMRC and other non-HMRC aged debts, and deal with the Petition) and beyond, in the longer term;

(3) Lloyds Bank, which is the Company’s only secured lender, is supportive of the Moratorium Application, and has informed FRP that it will keep the current facilities in place during the moratorium.

Drawing this together, the Judge said, at paragraph 16, that:

'On that basis it seems to me entirely sensible for the proposed monitors to have said that in their professional view the moratorium is likely to lead to the rescue of the Company as a going concern.'

The Judge continued, at paragraphs 17 and 18:

'If – in order to get to the point of having a discretion – one compares that probable outcome with the probable outcome of an insolvent liquidation (possibly as soon as next week) I accept what [the applicant directors' counsel] has said today, that a liquidation on the petition presented by HMRC would very likely be worse: a liquidation would be extremely damaging for the Company’s creditors; it would very likely lead to the collapse of the business, closure of the school (with chaos to parents and children) and to additional consequential staff and other claims which would arise as a result; it would likely lead to unnecessary expense and to delay in payment of obligations.

So it seems to me that in those circumstances I have got a discretion.'

In other words, the gateway condition contained in section A4(5) was found satisfied. Moving to the next stage (Stage 2), the Judge in Grove said, at paragraph 18:

'How should I exercise it? Having considered the evidence of [the Principal of the School operated by the Company/a director of the Company], I will exercise it in favour of ordering a moratorium. It seems to me that this is precisely the sort of case which these new provisions were designed to meet. The Company seeks and needs a short breathing space, and the possible alternative of an administration appears to me in this case to be unduly heavy handed and expensive. All that is required here is a short period, or what is rationally hoped will be a short period, in which to organise the necessary refunding. The continued trading will be under the supervision of the monitors of course, and I agree with [the applicant directors' counsel] that the light touch of a moratorium is better suited to the running of a school than would be an administration, and will to some degree avoid adverse publicity and unnecessary costs; an office holder running the school would be more disruptive than the role of the supervising monitors; I also take into account that this Company runs a school, and, as I say, a school which has a large number of pupils, and which therefore fulfils an important social function.'

Drawing the strings together, the Judge in Grove summarised the position as:

'In summary, the Company is an eligible company, and is subject to a winding-up petition based on substantial debt which it cannot immediately pay; the court has a discretion because when I come to compare the two relevant probable outcomes, it seems to me clear that the probable outcome of a moratorium would be better than the probable outcome of a simple insolvent liquidation; and finally, when it comes to exercising my discretion I do so in favour of the moratorium for the reasons that I have given, including that in this case the “light touch” envisaged by this part of the Insolvency Act would be particularly well suited to the situation in which the Company finds itself. In all the circumstances I will make the order which is sought by the directors, and (if material to specify the time) I make that order at 12.23 pm.' (paragraph 19).

The Moratorium

Though not dealt with in Grove, it might be helpful to address:

(1) what is a moratorium? and

(2) how long do they last?

(1) what is a moratorium?

Section A1(5) of the 1986 Act says 'Chapter 4 sets out the effects of a moratorium on the company and its creditors'. In Part A1, sections A18 to A33 (being Chapter 4 of Part A1) set out 'the main effects of a moratorium for a company' (s.A18(1) of the 1986 Act). The effects include  '...restrictions on the enforcement or payment of the debts that are defined by subsection (3) as pre-moratorium debts for which a company has a payment holiday during a moratorium.' (s.A18(2) of the 1986 Act). '[p]re-moratorium debts for which a company has a payment holiday during a moratorium' is a reference to the company's

'...pre-moratorium debts that have fallen due before the moratorium, or that fall due during the moratorium, except in so far as they consist of amounts payable in respect of

(a) the monitor’s remuneration or expenses,

(b) goods or services supplied during the moratorium,

(c) rent in respect of a period during the moratorium,

(d) wages or salary arising under a contract of employment,

(e) redundancy payments, or

(f) debts or other liabilities arising under a contract or other instrument involving financial services.' (s.A18(3) of the 1986 Act). Subsections provide further definitions for these.

Importantly, there are:

(a) restrictions on the company entering into other insolvency procedures. Section A20 is entitled 'Restrictions on insolvency proceedings etc' and s.A20(1) provides:

'During a moratorium-

(a) no petition may be presented for the winding up of the company, except by the directors,

(b) no resolution may be passed for the voluntary winding up of the company under section 84(1)(a),

(c) a resolution for the voluntary winding up of the company under section 84(1)(b) may be passed only if the resolution is recommended by the directors,

(d) no order may be made for the winding up of the company, except on a petition by the directors,

(e) no administration application may be made in respect of the company, except by the directors,

(f) no notice of intention to appoint an administrator of the company under paragraph 14 or 22(1) of Schedule B1 may be filed with the court,

(g) no administrator of the company may be appointed under paragraph 14 or 22(1) of Schedule B1, and

(h) no administrative receiver of the company may be appointed.' [bold added]

There are some exceptions to s.A20(1)(a), contained in subsections A20(2) and (3)[23].

(b) restrictions on the use of enforcement procedures and legal procedures against the company. Section A21 is entitled 'Restrictions on enforcement and legal proceedings' and s.A21(1) provides:

'During a moratorium-

(a) a landlord or other person to whom rent is payable may not exercise a right of forfeiture by peaceable re-entry in relation to premises let to the company, except with the permission of the court,

(b) [in relation to Scotland]

(c) no steps may be taken to enforce any security over the company’s property except–

(i) steps to enforce a collateral security charge (within the meaning of the Financial Markets and Insolvency (Settlement Finality) Regulations 1999 (S.I. 1999/2979)),

(ii) steps to enforce security created or otherwise arising under a financial collateral arrangement (within the meaning of regulation 3 of the Financial Collateral Arrangements (No. 2) Regulations 2003 (S.I. 2003/ 3226)), or

(iii) steps taken with the permission of the court,

(d) no steps may be taken to repossess goods in the company’s possession under any hire-purchase agreement, except with the permission of the court, and

(e) no legal process (including legal proceedings, execution, distress or diligence) may be instituted, carried out or continued against the company or its property except-

(i) employment tribunal proceedings or any legal process arising out of such proceedings,

(ii) proceedings, not within sub-paragraph (i), involving a claim between an employer and a worker, or

(iii) a legal process instituted, carried out or continued with the permission of the court.

Subsections in s.A21 provide further definitions / limitations on permission applications, for these'[24]

In addition, as to the effect of a moratorium order, there are:

(a) requirements that the company publicise in various places (website, at office, on business documentation) that the company is subject to a moratorium (s.A19 of the 1986 Act)

(b) provisions about floating charges (s.A19 of the 1986 Act)

(c) provisions about Enforcement of security granted during moratorium (s.A23 of the 1986 Act)

(d) provisions about Duty of directors to notify monitor of insolvency proceedings etc (s.A24 of the 1986 Act)

(e) provisions about Restrictions on obtaining credit (s.A25 of the 1986 Act)

(f) provisions about Restrictions on grant of security etc (s.A26 of the 1986 Act)

(g) provisions about Prohibition on entering into market contracts etc (s.A27 of the 1986 Act)

(h) provisions about Restrictions on payment of certain pre-moratorium debts (s.A28 of the 1986 Act)

(i) provisions about Restrictions on disposal of property (s.A29 of the 1986 Act)

(j) provisions about Restrictions on disposal of hire-purchase property (s.A30 of the 1986 Act)

(k) provisions about Disposal of charged property free from charge (s.A31 of the 1986 Act)

(l) provisions about Disposal of hire-purchase property (s.A32 of the 1986 Act)

(m) provisions about Contravention of certain requirements imposed under this Chapter (s.A33 of the 1986 Act)

(2) how long do they last?

The Initial Period is 20 days, but the Initial Period is: (1) terminable earlier; and (2) extendable (though only during the currency of the moratorium).

Section A1(4) of the 1986 Act states 'Chapter 3 sets out for how long a moratorium has effect'. Within Chapter 3 of Part A1 (s.A9 to A17), is section A9 of the 1986 Act, which is entitled 'End of the Moratorium', and s.A9(2) provides

'In this Chapter “the initial period” , in relation to a moratorium, means the period of 20 business days beginning with the business day after the day on which the moratorium comes into force.'[25]

and s.A9(1) provides:

'A moratorium ends at the end of the initial period unless it is extended, or comes to an end sooner, under or by virtue of a provision mentioned in subsection (3) or (4).'

Readers will want to consider all the sections between s.A9 to A17 of the 1986 Act.

SIMON HILL © 2023*

BARRISTER

33 BEDFORD ROW

NOTICE: This article is provided free of charge for information purposes only; it does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by any member of Chambers or by Chambers as a whole, or the Copyright holder. No attempt has been made to provide an exhaustive review/account of the law in this area. *Copyright is owned by Barrister Search Limited.