I’m sure we’ve all been flooded with articles on the new moratorium process. Therefore, I am avoiding the usual broad-brush approach here. Instead, I hope to draw out some of the niggly complexities and awkward practical consequences of the new provisions… although, to be honest, the closer we look, the more we find…
Jo made an early start on listing some issues in her Technical Update issued earlier this month. If you’d like a copy, please drop us a line at firstname.lastname@example.org.
Of course, you all know where to find the Corporate Insolvency & Governance Act 2020 (“CIGA”), but for completeness, it is available at: www.legislation.gov.uk/ukpga/2020/12/contents/enacted. The references in brackets in this article are to provisions in CIGA, unless otherwise stated.
The Insolvency Service’s Guidance for Monitors is available at: www.gov.uk/government/publications/insolvency-act-1986-part-a1-moratorium-guidance-for-monitors.
In brief, this article looks at:
- The need for speed and tenacity in monitoring
- When monitors might do more than just monitor and how they get paid for this
- The dangerous timeline of seeking creditors’ consent to an extension
- A mixed bag of CIGA drafting issues
- The consequences for SIP9 compliance
- The ethics of a subsequent appointment
- The practicalities of a subsequent appointment
Monitors Must Monitor, not Supervise
Over the years, I’ve seen several CVA files with seemingly half-hearted or sporadic efforts to extract information, and sometimes even payments, from directors. A deadline may come and go, a chaser or two might be sent, and at worst efforts simply fizzle away. The defence is run: but I have discretion… the CVA isn’t strictly in default… it is in creditors’ interests to keep the CVA ticking over even if there’s not 100% compliance, rather than see the company go into liquidation.
This approach will not work in a moratorium: the monitor needs to stay keen, the information flow needs to be far swifter and more frequent. A monitor must end the moratorium if they think that, by reason of a directors’ failure to provide information, the monitor is unable properly to carry out their functions (A38(1)(c)). This is not a discretionary power, it’s a “must”, and if a monitor lets things slide, I think they open themselves up to a challenge (A42).
The termination-by-monitor provision (A38) also states that the monitor must bring the moratorium to an end when “the monitor thinks that the moratorium is no longer likely to result in the rescue of the company as a going concern” (albeit that this is modified in these coronavirus times) or when they think “that the company is unable to pay any moratorium debts or non-payment holiday pre-moratorium debts that have fallen due” (subject to the tweak in para 37 Sch 4).
This seems to call for a continual process, not a periodic one. Of course, monitors are going to have a periodic approach to reviewing the company’s position, checking that the required debts have been paid when they fell due, checking the company’s prospects going forward and making sure that the rescue strategy remains on track. But surely we are talking days here, not several weeks or months.
Therefore, getting the directors geared up to provide information quickly and regularly and ensuring that you have the internal resources of a disciplined team to keep up the pace are vital.
Not all Fees are “Monitors’ Fees”
Over recent years, several IPs have discovered to their loss the idiosyncrasies of R6.7 and R3.1, which restrict what they can be paid for after appointment in relation to pre-CVL and pre-administration costs. CIGA has given us another trap like this.
CIGA requires the directors to complete several tasks during the moratorium such as notifying the monitor before they take steps to go into another insolvency process (A24), when the moratorium ends. Worryingly, the directors are also responsible for extending the moratorium. The InsS Guidance states:
“Directors may not be familiar with the rules surrounding decision making in insolvency procedures and whilst it is not part of a monitor’s statutory duty to assist directors in obtaining the consent of creditors they may choose to do so in an advisory capacity.”
Yep, InsS, I think you can rest assured that no monitor is going to trust a director to run a creditors’ decision procedure without the IP’s strong oversight, as the decision procedure rules are so complex (and made more complex by CIGA’s special voting rules)!
Thus, moratorium extensions will work in a similar way to S100 decision processes: strictly speaking, the director is tasked with the job, but they instruct an IP – almost inevitably the monitor – to do the work for them. But, as the IP is not carrying out this work in their capacity as monitor, payment will not be classed as the “monitor’s fees”, at least not unless your letter of engagement makes it so. Therefore, you need to ensure that you have a letter of engagement signed to cover this “advisory capacity” work.
In brief, the timescales of a moratorium are:
- The first 20 business days are granted on commencement
- This can be extended by a further 20 business days by the director filing a simple form with the court
- The moratorium can be extended for period(s) up to the anniversary by getting creditors’ consent via a decision procedure
- The moratorium can be extended for any length by a court order
In general, the IR16 apply as regards decision procedures, so we’re looking at decisions by correspondence/electronic or a virtual meeting.
What happens if creditors ask for a physical meeting? What if they say “no” or they simply don’t vote at all? What if you want to adjourn the virtual meeting, but the moratorium will end in the next day or two?
With these scenarios in mind (and especially as the director needs to sign the docs), you would do well to start a decision procedure long before the moratorium is due to end.
It would have helped if the CIGA had provided that moratoria receive an automatic extension where the decision procedure’s conclusion is delayed, in the same way as an automatic extension is given where a CVA proposal is pending (A14), but hey ho.
One timescale in the CIGA simply does not work. The decision procedure requires five calendar days’ notice, but R15.6(1) (IR16) has not been disapplied, so it seems that creditors have 5 business days from delivery of the notice in which to request a physical meeting. How does that work then??
It might help, therefore, to hold virtual meetings instead of trusting that creditors will be content with a vote by correspondence/electronic. At least a virtual meeting is a moderately useful forum for airing grievances and concerns. Of course, virtual meetings also do not suffer the there’s-no-changing-a-cast-vote issue of the other procedures either, so this might also help if there’s any horse-trading to be done.
Jo and I have spent far too long debating the following questions:
- A17(2) requires the monitor to notify creditors of the end of the moratorium in several situations, but we can find no notification requirements if the moratorium simply ends because it has run out of time. The InsS Guidance states that “there is no requirement for the monitor to notify creditors or the registrar of companies that the moratorium has ended on expiry of the initial period of 20 business days”. Ok, but what about where a longer moratorium ends through the effluxion of time? And does anyone ever tell the court (or for that matter, the PPF, Pensions Regulator, FCA or PRA)?
- Court notification of the end of the moratorium also appears lacking in other situations: when a CVA proposal has been disposed of (A14); when a court order’s deadline had been reached (A15); and when the company enters an insolvency procedure (A16). Was this intentional?
- There also doesn’t appear to be any duty on the monitor to notify relevant persons of the end of the moratorium where a court order under A15(2) has specified a time limit (or event) after which the moratorium is ended. Maybe this is why there is no Companies House form to record this end event?
- What exactly does A24(2) mean, where it requires the directors to notify the monitor before “they recommend that the company passes a resolution for voluntary winding up under section 84(1)(b)”? Is this triggered when the director issues notices to members or would this occur earlier, e.g. when they instruct an IP to help?
- Why on earth do we have different prescribed content for the proposed monitor’s consent to act in A6(1)(b) and para 17 Sch 4? Do we need both (e.g. that the IP “is a qualified person” and they certify that they are “qualified to act as an insolvency practitioner in relation to the company”)? And does a monitor act in relation to the moratorium (A6) or the company (para 17)??
- A28 requires the monitor’s (or the court’s) consent if the company wants to pay certain pre-moratorium creditors. A28(1) states that, with such consent, “the company may make one or more relevant payments to a person that (in total) exceed the specified maximum amount”. The “specified maximum amount” is defined in A28(2) as £5,000 or 1% of certain liabilities, but do these thresholds relate to “payments to a person… (in total)” or to payments to all such persons in total? I think that A28(1)’s grammar leads to a meaning of payments to the person in question, but the InsS’ Guidance states that “total payments shall not exceed…”, which gives the impression that the thresholds relate to payments to all such persons. Which is it?
SIP9 applies to “all forms of proceedings under the Insolvency Act 1986”, but clearly it was not written with moratoria in mind. Does it create any difficulties if we assume that we need to follow it (and assuming that its references to “office holder” include a monitor)?
Well, for a start, it means that we all need to draft a Creditors’ Guide to Fees, which will say… erm… not a lot, as fees are a matter for the IP and the company, apart from a couple of rights to challenge. Of what rights should we inform “other interested parties”? What about the requirements to justify why a fixed fee is considered fair and reasonable or to cover the “key issues of concern” such as what work we are proposing to do, the anticipated financial benefit to creditors? Is there any expectation by RPBs that we comply with these requirements even if compliance is required only in spirit?
I know that there’s a SIP9 consultation going on, but when do we think we might see a revised SIP9 come into force..? Could the RPBs issue some clarification in the meantime?
This is another area where RPB guidance would be very welcome. In my view, the InsS Guidance does a poor job in helping IPs observe the Code of Ethics. It states:
“The monitor is not prevented from taking up a subsequent appointment subject to the insolvency practitioner making an assessment of any threats to compliance with the fundamental principles. Practitioners may find it helpful to refer to section 2520 of the Code of Ethics that deals with “Examples relating to previous or existing insolvency appointments” in terms of how any subsequent insolvency appointments following appointment as monitor (as administrator or liquidator for example) may be treated. The monitor should satisfy themselves that they have identified any threats to compliance with the fundamental principles and have been able to put in place appropriate safeguards to reduce any threats to an acceptable level.”
My heart always sinks when someone in the profession goes straight to the Code’s examples to see whether they or their boss can take an appointment. At best, I think that it’s lazy, but at worst it may mean that they don’t really get it. My heart similarly sank when I read the InsS’ emphasis on the Code’s examples.
Agreeing to act as a monitor has immediate consequences, including an immediate change in priority of liabilities in a subsequent liquidation or administration. Some of those given an automatic leg-up may be connected to the company; they could be directors or shareholders. The IP who becomes monitor probably advised the company on its options. Then there are the during-moratorium self-review and self-interest threats: whether the monitor failed to terminate promptly; whether their fees were excessive; whether it was the right decision to consent to certain payments or to security being granted; and whether they have any outstanding fees thus making themselves a creditor. All these threats need to be taken seriously and cannot be ticked off simply by seeing that there is normally no reason why an administrator may not take a subsequent liquidation appointment.
But who would want a subsequent appointment?
Surely the CIGA’s shifted priorities would make any IP think twice about taking on a subsequent liquidation or administration! Would you want to risk discovering a whole host of unpaid moratorium liabilities and pre-moratorium claims ranking ahead, not only of your fees, but also of all the expenses of the liquidation or administration (paras 13 and 31 Sch 3)? And, if you are an administrator, you must make a distribution to those creditors (para 31 Sch 3)!
I think that directors/monitors would be hard-pressed to find an independent IP willing to pick up such a murky can of worms. It seems to me that the Official Receivers may find themselves with a delightful new source of work. Perhaps that’s why the InsS made sure that the ORs’ fees take priority over them all (para 13 Sch 3)!
The Marketing Bit
Jo and I have rolled out a large part of our moratorium document pack: all the statutory docs are there – to get in to a moratorium, extend it and exit it (although we do still have the nagging questions above) – and we are in the process of topping and tailing the pack to include items like file notes to record the key decisions, which should become available in the next week or so.
The moratorium pack is available at no extra cost to all our document pack subscribers and we shall continue to update it at no further cost to these clients. We are also happy to provide the moratorium pack as a standalone purchase – as-is when complete – for £2,000+VAT.
If you would like more information, please contact us at email@example.com.