New business rescue moratorium in response to COVID-19

The Business Secretary announced that legislation would be introduced to amend the existing insolvency laws in England and Wales in response to COVID-19 on 28 March 2020. The Government previously consulted on changes to the insolvency regime and announced plans in August 2018 to introduce new insolvency restructuring procedures.

Our insolvency experts take a look at the proposed ‘business rescue moratorium’ (the “moratorium”).

This new legislation will implement those proposed changes, which will likely include the following:

• A ‘business rescue moratorium’ will become available for companies. This will prevent creditors from taking enforcement action against the company while it seeks a rescue or restructure. It will also allow the company to continue to access the supplies of goods and services necessary for it to continue trading. Together this is intended to give a company ‘breathing room’, which might allow it to avoid insolvency.
• The moratorium will use an out-of-court process, overseen by a licensed insolvency practitioner (acting as a “monitor”).
• It will not be available for companies that are already insolvent and have entered into a normal moratorium, an administration or a CVA in the previous 12 months.
• A company seeking the business rescue moratorium would need to have ‘legitimate reasons’ for doing so, such as becoming insolvent if it were not granted. It is for the monitor to determine whether this condition has been satisfied. The company must also show that it has sufficient funds to carry on business during the moratorium, and that rescue is more likely than not.
• The business rescue moratorium will initially be for 28 days. This can be extended by a further 28 days if the monitor is satisfied that the qualifying conditions continue to be met. If extended, the company’s creditors must be notified of the extension.
• Where there remains a good prospect of achieving a better outcome for creditors than might otherwise be possible, the moratorium may be extended further. However, this further extension will have to be approved by 50% in value of both the secured and unsecured creditors. Where it would not be practical to obtain creditor consent, the company could also apply to the Court for a further extension.
• Creditors can apply to the Court at any time to challenge the business rescue moratorium while it is in place. The grounds for challenging the moratorium are that the qualifying conditions are not being satisfied, or that it is causing unfair prejudice.

The Government has confirmed that legislation to introduce these amendments will be introduced in Parliament at the earliest opportunity. However, as Parliament is in recess until 21 April 2020 it is unclear when this will actually be.

This article has been co-written by Paul Caldicott and James Helps, if you have any queries, please contact Paul or Katie James.