Vol 7 (2010) - Issue 5

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The Government’s Restructuring Moratorium Proposal

The Government has launched a consultation process on proposals for a statutory restructuring moratorium aimed at promoting company rescue, with submissions due by 18 October 2010. It is hoped that the moratorium will increase the probability of rescuing viable companies which benefit from supportive creditors and capable management. In light of the wall of restructuring that is thought likely to occur in the foreseeable future and the negative impact that the costs and risks associated with a restructuring can have on an otherwise viable company the proposals are to be welcomed.

Why is a moratorium necessary?
Recently released statistics from the Insolvency Service, and other economic data, suggest that the economic outlook remains uncertain. Insolvency Statistics for the second quarter of 20101 reported that, although company liquidations in that period were down by 19.1% year-on-year, they were up 0.5% from the first quarter of 2010. That is the first quarterly increase in liquidations since their peak at the end of the second quarter of 2009. Administrations decreased over the same period by 0.77% on the previous quarter, but company voluntary arrangements increased by 13.7%, to a peak of 232.
As a result of the credit crunch and the ongoing economic concerns, many companies with highly leveraged and complex financial structures, put in place during the 'golden age' of leveraged buy-outs from 2004 to 2007, may now be unable to service their debts as currently structured. As has been evident recently, macroeconomic conditions can quickly become microeconomic and can detrimentally alter the credit position of borrowers trying to service significant debt burdens.
It is estimated that GBP 90 billion of loans made to leveraged buy-outs are expected to mature before 2015. Without the protection and 'breathing space' afforded by a moratorium, many viable entities may be forced into a formal insolvency process simply due to the costs and risks associated with attempting to achieve a consensual restructuring and the resulting constraints on their cash flow position.

What are the key features of the proposals?
The moratorium would not be available to failing companies or companies that are already insolvent. It is aimed primarily at larger companies with complex financial structures for whom the costs and risks of restructuring are perceived to be greatest due largely to the difficulties of dealing with often extensive and diverse lender groups and the ever present threat of dissenting creditor action. The proposed moratorium has the following key features:
– a court sanctioned initial 3-month moratorium period (extendable if necessary);
– to be eligible for a moratorium, companies must satisfy the (i) eligibility criteria (which exclude, for example, financial institutions and, subject to exceptions, companies that are subject to a winding up petition that has not been heard or dismissed), and (ii) qualifying conditions (which include, for example, that it has a viable business, its creditors are prepared to support a restructuring of its debts and it is likely to have sufficient funds to carry on its business during the moratorium);
– the company will remain under the control of its directors during the moratorium, akin to the US Chapter 11 'debtor in possession' concept; and
– as in a Chapter 11 process, debts incurred during the moratorium would have 'super-priority' status in any subsequent insolvency process.