company insolvency pro bono scheme

Written by Angelique Tek, BVS LLM, City Law School

Introduction:

This article elucidates the test applied by the court in deciding whether to grant an order for Part A1 moratorium (“Part A1 moratorium”) under the Insolvency Act 1986 (IA 1986), also known as a standalone moratorium, to companies subject to winding-up petitions.

Part A1 moratorium is an insolvency process to provide financially distressed companies a temporary short period of protection from creditor enforcement actions, thus affording the companies “breathing space” to re-organise their affairs and rescue their companies. The moratorium lasts for an initial 20 business days, extendable for another 20 days without creditor consent, or longer with consent, by filing relevant statements with the court. It can also be extended further on application to the court.

Re Grove Independent School Ltd [2023] EWHC 2546 (Ch) (“Re Grove”) decided by ICC Judge Greenwood provides some guidance on the test the court will apply when exercising its discretion to grant an order for a Part A1 moratorium.

Facts:

In Re Grove, an independent school faced financial difficulties due to COVID-19, leading to significant arrears with HMRC. On 18 January 2023, HMRC presented a winding-up petition for £655,971.90. The company’s directors applied for a moratorium under IA 1986 in the hope of facilitating refinancing whilst continuing operations.

Test for Granting Part A1 Moratorium under Insolvency Act 1986:

In deciding whether to grant an order for a moratorium, the court considered Part A1. Firstly, the company must meet the criteria for being an “eligible company” under sA2 of the Act read together with Schedule ZA1.

Secondly, as this concerned a company subject to a winding-up petition, sA4(4) provided that the court had the discretion to decide whether to grant an order. However, sA4(5) narrowed that discretion. SA4(5) provided that a moratorium could only be ordered if the court was satisfied that the company would achieve a substantively better result for the company’s creditors than would be likely if the company were wound up without having first become subject to a moratorium. Thirdly, the test at sA4(5) had to be understood alongside sA6, which provided that, in deciding the question, the court would have certain documents and evidence. This would include a statement from the proposed monitor under sA6(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.  A monitor is a licensed insolvency practitioner who oversees a company’s moratorium and monitors its ability to continue to pay its remaining debts during the moratorium period.

Accordingly, sA4(5) requires the court to compare two alternative future outcomes. First, it must assess the probable outcome for the company’s creditors if a moratorium is granted. Second, it must assess the probable outcome for the creditors in the event of liquidation without a prior moratorium. This means that the court could only grant a moratorium if it is satisfied that the probable outcome with the moratorium is, on the whole, “better” than the probable outcome with liquidation. The court must be satisfied on the balance of probabilities that the outcome with the moratorium would be better, and not merely that there was a “real prospect” that it would be better.

Furthermore, the test for a moratorium application under sA4 differs from that for an administration order. For an administration order, the court must determine if it is “reasonably likely” to achieve its purpose, interpreted as having a “real prospect” of its achievement. In contrast, the moratorium test has a higher threshold, requiring the court to be satisfied that the rescue is “likely”, not just “reasonably likely”. Therefore, the court had to be satisfied that a moratorium would be more likely than not to achieve a better outcome than liquidation.

Judgment:

In Grove’s judgment, the court exercised its discretion and granted a Part A1 moratorium.

1. The court found that the company met the criteria for being an “eligible company” under Schedule ZA1, as it:

a. is incorporated in England and Wales under the Companies Act 2006;

b. was not subject to a moratorium and has not been in one in the past 12 months;

c. was not undergoing any “current insolvency procedure”, such as a company voluntary arrangement (CVA) or administration within the last 12 months, and

d. does not belong to any specified sectors that would render it ineligible for a moratorium.

2. The court determined that granting a moratorium would, on the balance of probabilities, likely achieve a better outcome for creditors, than immediate liquidation.  The director’s evidence showed the company can self-fund during the moratorium, and recent accounts indicated a balance sheet surplus of approximately £2 million, with freehold property valued at £4.25 million based on a 2018 valuation. This property offers potential for both short-term refinancing to address HMRC and other aged debts, as well as long-term refinancing.  The court concluded that liquidation would likely worsen creditors’ positions by resulting in the business’ collapse, the school’s closure, and additional claims against the company, leading to unnecessary expense and delays in payment obligations.

3. The proposed monitors were of the professional opinion that the moratorium was likely to lead to the rescue of the company as a going concern.

Thoughts for Law Students:

Interestingly, the court took into account the school’s social function in pupils’ education. This suggests that the nature of a company’s business may be relevant in the assessment for granting a moratorium. Also of interest was the support expressed by the other secured creditor, Lloyds Bank, for the moratorium application. This suggests that, without such support, a monitor may struggle to believe that the moratorium would yield a better outcome for the creditors.

A more balanced approach that includes the perspectives of all affected parties could enhance the effectiveness of the moratorium process and ensure that it fulfils its intended purpose of facilitating genuine company recovery.

Edited by Darian Murray-Griffiths