This article explores how a debtor company can use the Moratorium process to delay a Petitioning Creditor and potentially avoid being wound up.
For those who regularly deal with insolvent entities, there is a well-trodden path whereby the debtor company (the Company) can try to delay a winding up petition. Here, the Company's Counsel attends the first hearing date of the Petition asking for more time but expressing their confidence that their client has "a plan to resolve all of this very soon". The typical result is that Counsel secures a first adjournment. However, the Company's Counsel saying similar things at the adjourned hearing will find the Court to be far less sympathetic but again, adjournment are reasonably commonplace. If the Company manages to make it to a third hearing of the Petition, absent concrete evidence of a near immediate payment of the Petitioned Debt, the winding up order is often made. However, assurances of "progress" by the Company in raising the required funds can still secure a further adjournment, without any real certainty as to whether the Petitioning Creditor will be paid in full or at all.
But what if the Company has a credible plan to discharge the Petitioned Debt but it needs more than just a few more weeks? One answer is that it should consider applying for an A4 Moratorium. A successful Moratorium Application can delay an ongoing winding up process for 6 months or more, potentially enabling the Company avoid being wound up.
If there is no Winding Up process afoot, a Moratorium can be obtained swiftly and cheaply. The relevant documents which need to be filed are straightforward, and the Moratorium comes into force as soon as these documents are filed at Court; no Court fee is payable. Critically, the Court has no discretion pursuant to A3(2) of the Insolvency Act 1986 (the Act). As long as the application is procedurally correct and has the support of a Monitor, it will be granted.
The same cannot be said, however, where a Moratorium Application is being made by a Company that is the subject of an outstanding winding-up petition. In this case, the application is required to be determined having been served the Petitioning Creditor (Respondent).
On hearing the application under Section A4, the Court can: (1) make an order that the company should be subject to a moratorium; or (2) make any other order which it thinks fit.
The Court may only make an order for a moratorium "…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)" (Section A4 (5) of the Act), echoing the statutory purpose test in Administrations that appears Schedule B1 3(1)(b)
The case of Re Grove Independent School Ltd [2023] EWHC 2546 (Ch) (the Grove School) gives helpful guidance as to how a Court will consider Section A4 (5). ICC Judge Greenwood held that Section A4 (5) required an assessment of the likely outcome if a moratorium were ordered versus the likely outcome in liquidation without a prior moratorium. On the balance of probabilities, if granting a moratorium would achieve a better result (and if the evidence presented to the Court reflects this position), then the Court can grant one. The Judge noted that this analysis should be conducted in a "broad fashion… in accordance with the commercial realities".
If a moratorium is ordered, it will initially be for a period of 20 business days. The moratorium can, with relative ease, be extended for a further 20 business days by the directors filing a notice with the Court under Section A10 of the Act. If a company wishes to seek a further extension, it must seek the consent of its creditors. During the moratorium period, the outstanding winding-up petition will be stayed pending the expiry of the moratorium. If the Monitors believe during any period of a Moratorium that the statutory purpose can no longer be achieved then they have the power to terminate it forthwith (A38).
We were recently instructed by a Petitioning Creditor which was then faced by such a Moratorium application, which came before Chief ICC Judge Briggs, who noted how infrequent such A4 applications are.
The position taken by the Applicant was that the fact that Monitors has endorsed the application was sufficient for the Court to grant the Moratorium. As the Monitors were Officers of the Court, their view as to whether the proposed Moratorium would achieve the statutory objective was determinative of the issue.
However, the Court accepted that there was a critical difference between the A3 process (without a winding up petition being afoot) and the A4 one. If the winding up petition could be thwarted by filing a Moratorium Application supported by a Monitor, then there would be no need for A4 as A3 would apply to all Moratorium Applications irrespective of whether a Petition was ongoing. The fact that A4 requires a Court hearing necessarily provides that the Court has a discretion to exercise and therefore, it is not bound to agree with the view of the proposed Monitor(s).
The outcome of this Section A4 hearing and Chief ICC Judge Briggs' comments offered the following helpful insights into how courts may treat Section A4 applications:
- If the Court is satisfied that a company has made an application for a moratorium for the genuine purpose of enabling the company to take advice or consider actions relating to restructuring or other insolvency procedures, they are more likely than not to make an order for a moratorium;
- If a debt has remained unpaid for a long period of time, a Judge may take this into account at the Section A4 hearing. However, if the applicant has strong evidence to show that a moratorium will more likely than not result in a better outcome for creditors, this will likely negate the negative implications relating to delays in payment of an unpaid debt;
- The Court is more likely than not to make an order for a moratorium unless there is a complete lack of evidence showing that a moratorium would achieve a better result for creditors; and
- It is always advisable to have good documentary evidence showing that a moratorium will result in a better outcome for creditors. Such documentary evidence may include witness statements, emails or reports from financial advisory companies and correspondence from interested investors. Direct evidence from lenders or investors with details about the relevant timescale before funds will be made available to the Applicant will be of significant assistance to the Court.
Conclusion
For creditors, a Moratorium can understandably be a frustrating mechanism, particularly where payment of a debt has remained unpaid for a long period of time and a winding-up petition is finally presented. It adds delay and will require yet further legal costs to be incurred.
However, a creditor should take some comfort from the fact that the Moratorium is for a temporary period and will only be granted by the Court if there is credible documentary evidence that the petitioned debt will be paid in full, together with costs.
Therefore, whilst the A4 Moratorium process can provide a final stay of execution for a debtor Company, it comes with safeguards for the Petitioning Creditor. These come in the form of the Monitors and the Court, each of whom independently have the power to bring the Moratorium to a conclusion, allowing a winding up order to be made.
