UK: High Court rules on UK’s first disputed stand-alone moratorium process
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The first case to consider whether a monitor should end a moratorium if it believes a business is unable to pay certain debts was heard by the High Court on February 4, 2021. The case further clarifies the stand-alone moratorium process in the UK and is an example of a moratorium being used to restrict the action of a secured creditor.
What is the moratorium process?
The stand-alone moratorium process was introduced pursuant to the Corporate Insolvency and Governance Act 2020, which added a new Part A1 to the Insolvency Act 1986. The moratorium process is intended to give respite to a company in financial difficulty so that it can evaluate potential bailout and restructuring options without the threat of action from creditors. The moratorium is therefore focused on rescuing the business as a going concern rather than realizing assets.
The monitor must be an insolvency practitioner and throughout the moratorium must monitor the affairs of the business to assess whether it remains likely that the moratorium will result in the rescue of the business as a business in activity. If the controller “believes” (among other reasons) that (i) the company is unable to pay its pre-moratorium debts for which there is no payment holiday or (ii) it is unlikely that the business is rescued in ongoing concern, the monitor must end the moratorium.
This case concerned the Corbin & King group which owns and operates well-known hotels such as the Wolseley and the Delauney as well as several restaurants. Corbin & King Limited (“TopCo“) received its working capital through two loans (i) a £14.25m facility which became due in May 2020 and (ii) a £20m loan which was due to be repaid in 2024 but which included acceleration provisions (together, the “To lend“) on loan from Minor Hotel Group (“MHG“).
TopCo failed to repay the £14.25m facility, which in turn was an event of default under the £20m loan. The loan was fully collateralized by guarantees on TopCo’s assets (including all of its equity interests) in the two intermediate holding companies below in the group structure and the eight catering businesses operating or owning assets below (together , the “co-ops“). MHG issued a refund notice 19 months after the default.
A credit fund, Knighthead Opportunities Capital Management LLC (“knight’s head“), made an offer to acquire stakes in TopCo and the OpCos for an amount equal to the outstanding amount of the loan, but this offer was rejected. The directors of the OpCos then decided to initiate the autonomous moratorium procedure to try to save the OpCos as a going concern and appointed joint monitors. The day after the appointment, MHG filed a claim against each of the OpCos pursuant to the safeguards. MHG also appointed joint directors of TopCo.
Knighthead made a second offer to the joint directors of TopCo to buy the OpCos, but MHG warned the joint directors that if they accepted this offer, MHG would sue them personally, as their position was that the joint directors should first run a full sales and marketing process. MHG also asked the court to end the moratorium, saying the joint monitors should have ended the moratorium because the OpCos were unable to pay debts that were not subject to a payment holiday.
Under section A38 of the Insolvency Act 1986, a monitor must terminate the moratorium if a company is unable to pay a pre-moratorium debt, namely a debt to which the company has become or may be submitted during the moratorium and which relates to an obligation. incurred before the moratorium was put in place, unless there is a payment holiday.
Certain categories of debt are not eligible for a payment holiday, including “debts or other liabilities arising from a contract or other instrument involving financial services”1 and debt owed under the loan would be included in this category. As such, the OpCos were still obligated to pay the amounts owed under the guarantees, but were unable to do so. Despite this, the joint controllers did not end the moratorium as they asserted that the loan would be repaid in the reasonable near future (by accepting an offer with Knighthead) and that the OpCos could be saved as a going concern. .
- The threshold of irrationality
Justice Norris considered the scope of the obligation to end the moratorium when the monitor “believes” that a certain state of affairs exists. He argued that the use of the term “believes” rather than “reasonably believes” (for example) indicated that Parliament intended the monitor to have some latitude. Therefore, a controller’s decision should only be challenged if it was made in bad faith or if the controller’s thinking was so clearly perverse that no reasonable controller would have arrived at it and was therefore “irrational”. “.
- Inability to pay test
Justice Norris assessed what was meant by whether the company is “able to pay its debts”. It was felt that there should be some degree of business thinking applied. Rule 1A.24 of the Insolvency Rules 2016 states that when deciding to end a moratorium, the monitor must disregard debts which it reasonably believes are likely to be (i) paid or ( (ii) aggravated to the satisfaction of the creditor within five working days of the decision.
As such, the Monitor could disregard any debt to be paid within 5 business days of its decision and Justice Norris held that a company “is able” to pay a pre-moratorium funding obligation currently due if it has an immediate prospect of receiving third-party financing or has assets that it can realize immediately to repay the debts in question. What was considered “immediate” was at the controller’s discretion.
- Decision of the monitors not to lift the moratorium
The court held that the monitors’ decision not to end the moratoriums at MHG’s request”fell on the wrong side of the line“a decision that any reasonable monitor would make. TopCo’s joint administrators would not be able to immediately accept Knighthead’s offer due to their practical obligation to conduct a marketing process and an open sale. As such, there was no possibility of an immediate realization which could fund the repayment of debts owed to MHG. However, another offer made during the hearing by Knighthead which involved providing immediate bridge financing which could refinance the loan would give the monitor reason to “think” that the debt could be repaid.
- The discretion of the court
It was held that if the court determined that the monitor should have terminated the moratorium, the court had the discretion to order such termination taking into account the facts as of the date of the hearing. Justice Norris found that the harm to MHG as a creditor was less than the harm that would be caused to the OpCos if MHG brought them into insolvency proceedings. He also took into account that there was an immediate prospect of loan repayment due to Knighthead’s most recent offer and that the OpCos had a chance of being rescued as a going concern.
Justice Norris denied the request and allowed the moratorium to continue. Knighthead provided the financing as mentioned above and the loan was repaid allowing the OpCos to be saved as a going concern.
1. S.A18(4)(f) Insolvency Act 1986
Originally published March 31, 2022
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