The first case to consider the requirement of a monitor to terminate a moratorium if they think a company is unable to pay certain debts was heard by the High Court on 4 February 2021. The case provides further clarity on the UK standalone moratorium process and is an example of a moratorium being used in order to restrain secured creditor action.
What is the moratorium process?
The standalone moratorium process was introduced pursuant to the Corporate Insolvency and Governance Act 2020 which added a new Part A1 to the Insolvency Act 1986. The moratorium process aims to afford breathing space to a company in financial distress in order that it can assess potential rescue and restructuring options without the threat of creditor action. The moratorium is therefore focused upon the rescue of the company as a going concern rather than on the realisation of assets.
The monitor must be an insolvency practitioner and throughout the moratorium they must monitor the company’s affairs in order to assess whether it remains likely that the moratorium will result in the company being rescued as a going concern. Should the monitor “think” (amongst other grounds) that (i) the company is unable to pay its pre-moratorium debts for which there is no payment holiday or (ii) it is not likely that the company will be rescued as a going concern, then the monitor must terminate the moratorium.
Background
This case involved the Corbin & King group which owns and operates some very well-known hotels such as the Wolseley and the Delauney as well as several restaurants. Corbin & King Limited ("TopCo") was provided its working capital through two loans (i) a £14.25 million facility which became due for repayment in May 2020 and (ii) a £20 million loan due for repayment in 2024 but which had provisions for acceleration (together, the "Loan") lent by Minor Hotel Group ("MHG").
TopCo failed to repay the £14.25 million facility which in turn was an event of default under the £20 million loan. The Loan was fully secured by guarantees over TopCo’s assets (including all its interests) in the two intermediate holding companies below it in the group structure and the eight operating or asset owning restaurant business below them (together, the "OpCos" ). MHG issued a notice of repayment 19 months after the failure to repay.
A credit fund, Knighthead Opportunities Capital Management LLC ("Knighthead"), made an offer to acquire interests in TopCo and the OpCos for an amount equalling the outstanding loan but this offer was rejected. The directors of the OpCos then decided to commence the standalone moratorium procedure in order to try and rescue the OpCos as a going concern and appointed Joint Monitors. The day after the appointment MHG made a demand against each of the OpCos pursuant to the guarantees. MHG also appointed Joint Administrators to TopCo.
Knighthead made a second offer to the Joint Administrators of TopCo to purchase the OpCos however MHG warned the Joint Administrators that should they accept this offer, MHG would claim against them personally, as their position was that the Joint Administrators were required first to run a full sales and marketing process. MHG also applied to the court to terminate the moratoria claiming the Joint Monitors should have terminated the moratoria as the OpCos were unable to pay the debts that were not subject to a payment holiday.
Pursuant to s.A38 of the Insolvency Act 1986 a monitor must terminate the moratorium if a company is unable to pay a pre-moratorium debt, being a debt which the company has become or may become subject to during the moratorium that relates to an obligation incurred prior to the moratorium being put in place unless there is a payment holiday.
There are certain categories of debt which are excluded from qualifying for a payment holiday and this includes "debts or other liabilities arising under a contract or other instrument involving financial services"1 and the debt due under loan would be included within this category. As such the OpCos were still liable to pay the amounts due under the guarantees but were unable to do so. Despite this the Joint Monitors did not terminate the moratoria because they submitted that the loan would be repaid in the reasonable near future (by virtue of agreeing an offer with Knighthead) and the OpCos could be rescued as going concerns.
The judgment
- The irrationality threshold
Mr Justice Norris considered the extent of the duty to terminate the moratorium when the monitor "thinks" that a certain state of affairs exists. He held that the use of the term "thinks" rather than "reasonably believes" (for example) indicated that Parliament intended for the monitor to have a degree of latitude. Therefore a monitor’s decision should only be challenged if it was made in bad faith or if the monitor’s thinking was so clearly perverse that no reasonable monitor would have reached it and therefore it was "irrational". - Inability to pay test
Mr Justice Norris assessed what was meant by whether the company is "able to pay its debts". It was held that there should be a degree of commercial thinking applied. Rule 1A.24 of the Insolvency Rules 2016 states that when deciding whether to bring a moratorium to an end the monitor must disregard debts that the monitor has reasonable grounds to believe are likely to be (i) paid or (ii) compounded to the satisfaction of the creditor within five business days of the decision.
As such the monitor could disregard any debts to be paid within 5 business days of their decision and Mr Justice Norris held that a company "is able" to pay a presently due pre-moratorium finance obligation if it has an immediate prospect of receiving third party funding or has assets which it can immediately realise to pay off the debts in question. What was deemed "immediate" was at the monitor’s discretion. - Monitors’ decision not to terminate the moratoria
The court held that the monitors’ decision not to terminate the moratoria at the request of MHG "fell on the wrong side of the line" of a decision that any reasonable monitor would make. The Joint Administrators of TopCo would not be able immediately to accept the Knighthead offer due to their obligation in practice to run a marketing process and an open sale. As such, there was no possibility of an immediate realisation which could fund repayment of the debts owed to MHG. However, a further offer made during the course of the hearing by Knighthead which involved providing immediate interim funding which could refinance the loan would provide cause for the monitor to "think" that the debt could be repaid. - Court’s discretion
It was held that if the court determined that the monitor ought to have terminated the moratorium, the court had discretion to order such termination taking into account the facts as at the date of the hearing. Mr Justice Norris held that the harm caused to MHG as a creditor was less than the harm that would be caused to the OpCos should MHG put them into an insolvency process. He also took into account that there was an immediate prospect of the loan being repaid due to the most recent Knighthead offer and that the OpCos had a chance of being rescued as a going concern.
Mr Justice Norris dismissed the application and allowed the moratoria to continue. Knighthead provided the funding as aforementioned and the loan was repaid allowing the OpCos to be rescued as going concerns.
