Minor Hotel Group MEA DMCC v Dymant and others [2022] EWHC 340 (Ch)
The Corporate Insolvency and Governance Act 2020 (CIGA) came into force in June 2020 and introduced significant changes to insolvency law. This included the new procedure under Part A1 of the Insolvency Act 1986 (the Act) that allows financially distressed companies to obtain a temporary moratorium from enforcement actions or insolvency proceedings related to certain debts that have fallen due (A1 Moratorium).
However, despite its potential advantages, the uptake of the A1 Moratorium continues to be minimal.
In this article, we outline the main advantages and disadvantages of A1 Moratorium, and discuss the key takeaways from Minor Hotel Group MEA DMCC v Dymant [2022] EWHC 340 (Ch).
A1 Moratorium – Advantages and Disadvantages
The A1 Moratorium has a number of obvious advantages which, on its face, make it an attractive option for directors to consider:
- Swift and cost-effective implementation: The documents which need to be filed are straightforward, and the A1 Moratorium comes into force upon filing at Court, with no court fee payable.
- Ability to extend: Subject to certain conditions, it can be extended by a further 20 business days from the initial 20-day period without creditor consent or court permission.
- Director control: Unlike administration, directors retain effective control over the company whilst the A1 Moratorium is in force, with an appointed monitor ensuring that the rescue of the company as a going concern remains likely throughout.
However, an A1 Moratorium does not provide a company with protection from all of its debts. Instead, the Act designates a number of "non-payment holiday pre-moratorium debts" which fall outside the scope of the A1 Moratorium. This includes any "debts or other liabilities arising under a contract or other instrument involving financial services" (Financial Debts) – effectively encompassing most forms of commercial lending.
In essence, this means that any company which is contemplating an A1 Moratorium needs to be aware that:
- this will not normally provide any protection from lenders (especially qualifying charge holders) who are still able to enforce a Financial Debt either before or during this period; and
- the very act of entering into an A1 Moratorium (which is still a formal insolvency process) could inadvertently trigger a default clause in a financial contract – meaning that a Financial Debt which was not otherwise due then becomes immediately payable and aggravates the company's distress.
- The Act also lacks detailed guidance on how monitors should exercise their responsibilities, making it challenging to certify that the moratorium will achieve its objective. Monitors may face conflicting legal opinions regarding whether certain debts have fallen due, and their decisions are open to challenge by creditors, directors, and members. This can expose monitors to potential liability if their decisions are contested.
- This is exactly what happened in Minor Hotel Group MEA DMCC v Dymant [2022] EWHC 340 (Ch).
Minor Hotel Group MEA DMCC v Dymant [2022] EWHC 340 (Ch)
In this case, the parent company in the Corbin & King group (TopCo), operating several high-profile restaurants, faced financial difficulties and defaulted on a significant loan facility (the Loan). The operating companies in the group (OpCos) applied for A1 Moratoriums to prevent creditor enforcement actions, after being exposed under guarantees linked to Loan.
MHG, the lender, challenged the A1 Moratoriums, arguing that the monitors should terminate them due to the OpCos' inability to pay the Loan (which, as was accepted by all parties, were excluded from the A1 Moratorium due to it being a Financial Debt).
In response, the monitors referred to an offer which had been made during the A1 Moratorium by a third party investor to TopCo to buy various holdings to the value of the Loan.
Accordingly, the main issue for the Court to consider was whether the monitors were entitled to "think" in these circumstances that the OpCos were able to pay the debts owed to MHG (as, otherwise, the monitors had a duty to terminate the A1 Moratoriums).
The Court refused MHG's application, finding that:
- A company "is able" to pay a presently due pre-moratorium Financial Debt if, being itself unable to pay out of current cash resources, it had the immediate prospect of receiving third party funds or owned assets capable of immediate realisation.
- What is an “immediate” receipt or realisation is a matter of commercial judgment for the monitor (as to which the monitor is allowed considerable latitude) bearing in mind that anything over 5 business days requires specific assessment.
- In this respect, the monitors were entitled to take into account the ability of TopCo to discharge the Loan.
In a further interesting twist to this case, the Court held that the monitors should have terminated the A1 Moratorium at the time the application was made (because it was obvious at that time that an immediate realisation of funds was impossible). Despite this, the Court still declined to terminate the A1 Moratorium at the application hearing, because the position had changed since. In coming to that decision, the Court assessed that "the harm suffered by MHG as creditor to be less significant than the harm suffered by the OpCos if MHG was enabled to commence insolvency proceedings against them having regard to the fact (i) that each was trading successfully and (ii) that there was an immediate prospect of the Loan being repaid and their guarantee liabilities evaporating."
Key takeaways
The above case demonstrates that the existence of Financial Debts (at least in the case of guaranteed liabilities) is not necessarily an insurmountable barrier to obtaining, and then continuing, an A1 Moratorium.
The Court may also be prepared to exercise its discretion to allow an A1 Moratorium to continue, even in circumstances where a monitor should have terminated an A1 Moratorium earlier (providing that the position subsequently changes).
Accordingly, whilst its effectiveness is still limited by its exclusions and the lack of clarity in the legislation, the A1 Moratorium continues to offer a potentially useful short-term recovery tool, providing that the monitors believe (in good faith) that there is a realistic prospect of any Financial Debts being paid by the company (or its parent company, in the case of any guaranteed liabilities), and that the company can be rescued as a going concern.
As a matter of best practice, a monitor should be:
- regularly assessing and recording the basis on which they have concluded that the A1 Moratorium can remain in force (or should be ended), quite possibly on a daily basis, depending on the specific underlying circumstances; and
- requesting all of the information from the company which they consider is necessary to carry out the above and all of its other functions under the Act (and making sure this information is provided).
Invariably, this will require an open and candid line of communication with the company's directors, which we recognise may be challenging given the financial pressure the company will already be under and that the directors' attention is likely to be focussed on formulating a viable rescue plan within a very short space of time.
Nevertheless, it is important that the company is made aware that:
- the Monitor is an officer of the Court, with the duty to act with integrity and independently from the company; and
- if the Monitor is unable to carry out their functions because the directors do not provide the information requested for this purpose, then the Monitor must bring the A1 Moratorium to an end under Section A38 of the Act.
