Court backs monitors over creditor challenge to group’s rescue attempts

• Monitors had been appointed to various companies in the Corbin & King restaurant group that had each entered into a moratorium under Part A1 of the Insolvency Act 1986;
• The moratorium is a new insolvency procedure intended to give struggling businesses a temporary breathing space to implement a rescue plan;
• A secured creditor applied to the court for orders terminating the moratoria on the basis that the failure of the monitors to terminate the moratoria had unfairly harmed its interests, but its application was refused;
• Minor Hotel Group MEA DMCC v Dymant & Anor [2022] EWHC 340 (Ch)

Moratorium process

The Corporate Insolvency and Governance Act 2020 introduced a moratorium process that was intended to give struggling businesses a temporary breathing space to implement a rescue plan. During the period of the moratorium no legal action can be taken against the company without the court’s permission. The moratorium is overseen by an insolvency practitioner appointed as “monitor”.

While the moratorium process provides the company with a payment holiday from various types of debts, one type of debt from which there is no payment holiday is a debt arising under a contract involving financial services, which includes most commercial lending arrangements. There is also no restriction on a lender accelerating the borrower’s payment obligations in a moratorium process. If a monitor thinks that the borrower is unable to pay such debts to its lender then the monitor must bring the moratorium process to an end.

During the passage of the Bill through parliament, some commentators felt that these aspects negated many of the benefits of the moratorium process and that they would allow a lender to bring a moratorium to an abrupt end by accelerating the borrower’s liabilities under the loan agreement in the knowledge that the borrower would be unable to pay. However, the government maintained these provisions on the basis that it did not want to discourage lenders from lending to companies in financial difficulty. It was thought that the support of a company’s lenders was therefore a pre-requisite to a successful moratorium process.

The case

The Corbin & King group operates nine restaurants in England.

The ultimate holding company in the Corbin & King group (the parent company) was funded by a secured lender through two loan facilities (the loan), the second of which included acceleration provisions. The loan was guaranteed by two intermediate holding companies and eight operating or ‘asset owning’ restaurant businesses within the group (the OpCos). Those guarantees were secured by a debenture granted by each of the operating companies to the lender.

The parent company did not repay the loan when it fell due and the lender made demand for repayment. As soon as this demand was made, an offer was received from an investment fund to acquire the interests in the parent and the OpCos for a sum equal to the amount of the loan. However, this offer was refused.

On 20 January 2022 each of the OpCos entered into a moratorium process and, the following day, the lender made demand of each of the OpCos under their guarantees. This made the OpCos immediately liable to pay approximately £34 million to the lender.

On 25 January 2022 the lender appointed administrators over the parent.

The following day the fund made an offer to the administrators of the parent to buy the parent’s interests in the OpCos for a sum at least equal to the outstanding group debt. When the lender learned of this offer, it notified the administrators that if they accepted the offer, it would bring claims against the administrators personally.

On 28 January 2022 the lender applied to the court for orders terminating the moratoria of the OpCos on the basis that the failure of the monitors to terminate the moratoria had unfairly harmed its interests.

On 3 February 2022, the fund revised its offer such that it consisted of a time-limited cash offer of £45m for the parent’s interests in the OpCos and, crucially, a separate interim funding arrangement under which the fund would refinance the loan which would allow the OpCos’ payment obligations under the guarantees in favour of the lender to be released.

On 4 February 2022, the court hearing of the lender’s application took place.

The court’s decision

The monitors did not terminate the moratoria because they thought that the OpCos were able to pay the debts due to the lender under the guarantees. The test applied by the court was whether such ‘thinking’ was in bad faith or produced a result that was clearly perverse in the sense that no reasonable monitor could have reached it and was therefore irrational.

It was agreed by the parties that there was no bad faith on the part of the monitors, but the lender argued that the monitors’ thinking was irrational.

In deciding whether the OpCos were able to pay, the court said that a flexible and commercially realistic approach should be adopted taking into account the circumstances as a whole, including the prospect that the fund’s offers could allow the parent to repay the loan and therefore release the OpCos of their debts under the guarantees.

The court said that the OpCos would be considered able to pay their debts under the guarantees if one of three scenarios applied:

• they had the cash resources available to do so;
• they owned sufficient assets capable of immediate realisations; or
• they had the immediate prospect of receiving sufficient third party funds. The meaning of “immediate” was a matter of commercial judgment for the monitors bearing in mind that anything in excess of five business days requires specific assessment under the Act.

Neither of the first two scenarios applied to the OpCos because they did not have the required cash or other assets so it came down to whether there was an immediate prospect of them receiving sufficient third party funds.

The court said that the offer by the fund to buy the parent’s interests in the OpCos did not create an immediate prospect of the OpCos receiving third party funds because the administrators could not immediately accept such an offer as they would first need to conduct a marketing exercise and open sale, which would take time.

However, the revised offer made by the fund on 3 February 2022 of immediately available interim funding sufficient to refinance the loan did offer the prospect of the immediate receipt by the parent of funds sufficient to repay the loan which would release the OpCos of their debts under the guarantees. In light of that, the court said that it was justifiable for this offer to lead the monitors to think that the loan would be repaid.

The court retains discretion in relation to whether it should terminate a moratorium. In this case, the court considered the harm suffered by the lender, as creditor, to be less significant than the harm suffered by the OpCos if the moratoria were to be lifted and the OpCos were to enter into insolvency processes given, firstly, that each OpCo was trading successfully, and secondly that there was an immediate prospect of their guarantee liabilities being released.

The lender’s application was dismissed and, subsequently, the loan was successfully refinanced with the OpCos being rescued as going concerns.

Learning points

This case shows that the court is ready to give a degree of latitude to monitors in their decision making, particularly in fast-moving situations such as this one, and that there is a reluctance to allow a creditor to take enforcement action against a borrower when there is the prospect of a solvent solution for the debtor in the short-term. The case also provides useful guidance for monitors on how they should exercise their judgment in a scenario where a commercial lender seeks the termination of a moratorium but the monitor considers there to be a prospect of payment of the pre-moratorium debt in the short term.

To date there has been limited use of the moratorium procedure, in large part because it was unnecessary for many companies to do so in light of the significant restrictions that were placed on creditors as a result of the Covid-19 pandemic. As those restrictions near an end and in light of this favourable decision to monitors, we expect to see an increase in the number of moratoriums. These may be used as a precursor to a sale or refinancing outside of a process as happened with the OpCos. Alternatively, the moratorium may be used as a precursor to a company voluntary arrangement or restructuring plan.