"Debtor-In-Possession" Processes And Moratoria In English Restructuring And Insolvency Law: A Hesitant Journey

• Published date: 18 December 2023
• Subject Matter: Corporate/Commercial Law, Insolvency/Bankruptcy/Re-structuring, Financial Restructuring, Corporate and Company Law, Directors and Officers, Insolvency/Bankruptcy
• Law Firm: Proskauer Rose LLP
• Author: Adrian Cohen and Antonia A. Pegg

This article explores the efficacy of the relatively new moratorium procedure introduced under the Corporate Insolvency and Governance Act 2020 and whether the existing domestic legislation already housed a more effective debtor-in-possession rehabilitative procedure in the form of the "light-touch" administration and if so, why it has thus far been largely overlooked.

KEY POINTS

• Moratoria undoubtedly play an important role in company/business rescue. However, management may be disincentivised from making use of moratoria at an early stage of distress if their use is conditional on ceding control to an insolvency practitioner.
• Processes enabling debtors to benefit from a moratorium whilst allowing management to remain in control might encourage them to seek advice at an earlier stage of the debtor's distress and ultimately, preserve value.
• This article considers whether
  • (i) the standalone moratorium introduced by the Corporate Insolvency and Governance Act 2020 achieves this objective or whether the legislature's concern to protect the rights of creditors has weakened its efficacy; and
  • (ii) "light-touch" administration provides a more effective "debtor-in-possession" rehabilitative procedure.

INTRODUCTION

Over the last few years, there has been a renewed focus on moratoria in the restructuring and insolvency field both domestically and in Europe, coupled with a shift away from creditor-led processes towards debtor-in-possession regimes that enable the management of a debtor to remain in possession and control of its assets and business operations. This shift has resulted in significant reforms to English and European legislation. Whilst there is a consensus that moratoria and debtor-in-possession features in restructuring regimes can be instrumental in preserving value in viable but distressed businesses, the legislature has had to be mindful to ensure that these features do not interfere with the rights of individual creditors to such an extent that they would damage the confidence of the credit industry and the functioning of credit markets or increase what is often called "moral hazard" (or "bad behaviour") by debtor management. This article explores the efficacy of the relatively new moratorium procedure introduced under the Corporate Insolvency and Governance Act 2020 (CIGA) and whether the existing domestic legislation already housed a more effective debtor-in-possession rehabilitative procedure in the form of the "light-touch" administration and if so, why it has thus far been largely overlooked.

A HISTORY OF MORATORIA

England was traditionally a secured creditor friendly jurisdiction, especially during the late Victorian period with the development of the floating charge and the power of a secured creditor, usually a bank, to appoint a receiver or manager to the business and assets of a corporate debtor. On the one side the position of the secured creditor has slowly been eroded, for example with the increasing difficulties around securing a fixed charge on book debts and constraints on appointing an administrative receiver and on the other, debtors have increasingly benefited from moratoria, cross-class cram down (through the restructuring plan introduced by CIGA (RP)) and the potential for "light touch" administrations. The reality is more complex with a reluctance to deny secured creditors the substance of their bargaining position, which means that sometimes innovations such as the new moratorium procedure (as discussed below) feel, depending on one's perspective, more like "two steps forward and one step backwards".

Since the late twentieth century, moratoria have existed in common law, statute, agreed codes of conduct and in other guises. A moratorium provides a financially distressed debtor with a "breathing space", preventing its assets from being appropriated by creditors enforcing their rights, individually or collectively, in the run-up to a consensual solution or restructuring, which could hamper the debtor's ability to carry on its business and reduce its value as a going concern, particularly where the creditor's objectives or interests conflict with those of the general body of creditors. In the late 1970s, the London corporate banking market developed an approach to company workouts known as the "London Approach", the main tenets of which included that banks, on hearing that a company to which they had exposure was in financial difficulty, would remain for the time being supportive, keep their facilities in place and not rush to appoint receivers.¹ This approach provided the foundation for the guidance and best practice developed by INSOL International for out-of-court workout negotiations between a debtor business and multiple creditors, which include the principle that when a business is in financial difficulties, its creditors "standstill" for sufficient time for proposals for resolving the business' financial difficulties to be formulated and assessed.

The Insolvency Act 2000 gave the moratorium statutory force. It introduced provision (now revoked) for companies in financial difficulties to access an optional moratorium in conjunction with the company voluntary arrangement procedure (CVA) available under the Insolvency Act 1986 (IA 1986) although this moratorium could only be accessed by small and medium sized companies and was criticised for being "burdensome in nature for the insolvency practitioner acting as nominee ... bureaucratic and carrying a risk of personal liability".² Just over a decade later, Bluecrest Mercantile BV v Vietnam Shipbuilding Group³ established that the court has jurisdiction to order a stay of...