A key provision of the Act is a new ‘debtor in possession’ Moratorium procedure which gives a business 20 business days’ protection from certain creditor action. (This is as opposed to the previous ‘creditor in possession’).
A ‘monitor’ will need to oversee the moratorium, but they will leave the existing management to run the company’s day-to-day business. The monitor’s role is to support the integrity of the moratorium process and ensure that the creditors’ interests are protected. The monitor requires directors to provide any information they need to carry out their functions and will exercise their professional judgement to satisfy themselves of the accuracy of the information provided by the directors – and can ask for further information, as and when they require it. If directors do not comply, the monitor can file a notice at court to bring the moratorium to an end.
The monitor must be a Licenced Insolvency Practitioner. However, it is the company directors who will be in charge of the business. The main benefit of this is that, under the previous rules, it was the bank who was in charge; and their focus often seemed to be to recover their money, rather than the longer-term aim of helping the business to recover. Also, whenever it was required, the banks would appoint their chosen Insolvency Practitioner whose statutory objective was to maximise realisations, not to rescue the business.
Under these new rules, the directors will be able to choose which Insolvency Practitioner they want to appoint – although the Insolvency Practitioner will only be responsible for checking that the company is eligible for the moratorium and is likely to be rescued as a going concern. The day-to-day management of the business remains with the directors.
After day 15 of the initial period, if the directors still need time to formulate a turnaround plan, they can extend the moratorium period by a further 20 business days, without having to get the approval of creditors. Any further extension would need the approval of the creditors or the Court. The moratorium can be extended up to a year with creditor support or by Court order. This means it can act as a vital lifeline for a business which is struggling as a result of the Covid-19 crisis, providing enough breathing space for the shape of the post-pandemic recovery to become apparent and the company’s long-term survival to be secured.
The Act also provides temporary relief (currently until 30 September 2020, but potentially extendable by further legislation) from being subject to a winding up petition and from wrongful trading provisions where a business can demonstrate that its difficulties have arisen due to the Covid-19 pandemic.
During the moratorium period certain conditions apply, including:
• no petition can be presented for the winding up of the company
• no order may be made for the winding up of the company
• no administration application may be made in respect of the company
…except by the directors of the company (in which case, they must notify the monitor).
The full guidance from the Government on how to apply for breathing space to work out a rescue plan for your company under these new rules can be found here.
