I\u2019m sure we\u2019ve all been flooded with articles on the new moratorium process.\u00a0 Therefore, I am avoiding the usual broad-brush approach here.\u00a0 Instead, I hope to draw out some of the niggly complexities and awkward practical consequences of the new provisions\u2026 although, to be honest, the closer we look, the more we find\u2026<\/p>\n
Jo made an early start on listing some issues in her Technical Update issued earlier this month.\u00a0 If you\u2019d like a copy, please drop us a line at info@thecompliancealliance.co.uk<\/a>.<\/p>\n Of course, you all know where to find the Corporate Insolvency & Governance Act 2020 (\u201cCIGA\u201d), but for completeness, it is available at: \u00a0www.legislation.gov.uk\/ukpga\/2020\/12\/contents\/enacted<\/a>.\u00a0 The references in brackets in this article are to provisions in CIGA, unless otherwise stated.<\/p>\n The Insolvency Service\u2019s Guidance for Monitors is available at: www.gov.uk\/government\/publications\/insolvency-act-1986-part-a1-moratorium-guidance-for-monitors<\/a>.<\/p>\n In brief, this article looks at:<\/p>\n <\/p>\n Monitors Must Monitor, not Supervise<\/u><\/strong><\/p>\n Over the years, I\u2019ve seen several CVA files with seemingly half-hearted or sporadic efforts to extract information, and sometimes even payments, from directors.\u00a0 A deadline may come and go, a chaser or two might be sent, and at worst efforts simply fizzle away.\u00a0 The defence is run: but I have discretion\u2026 the CVA isn\u2019t strictly in default\u2026 it is in creditors\u2019 interests to keep the CVA ticking over even if there\u2019s not 100% compliance, rather than see the company go into liquidation.<\/p>\n 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.\u00a0 A monitor must end the moratorium if they think that, by reason of a directors\u2019 failure to provide information, the monitor is unable properly to carry out their functions (A38(1)(c)).\u00a0\u00a0 This is not a discretionary power, it\u2019s a \u201cmust\u201d, and if a monitor lets things slide, I think they open themselves up to a challenge (A42).<\/p>\n The termination-by-monitor provision (A38) also states that the monitor must bring the moratorium to an end when \u201cthe monitor thinks that the moratorium is no longer likely to result in the rescue of the company as a going concern\u201d (albeit that this is modified in these coronavirus times) or when they think \u201cthat the company is unable to pay any moratorium debts or non-payment holiday pre-moratorium debts that have fallen due\u201d (subject to the tweak in para 37 Sch 4).<\/p>\n This seems to call for a continual process, not a periodic one.\u00a0 Of course, monitors are <\/em>going to have a periodic approach to reviewing the company\u2019s position, checking that the required debts have been paid when they fell due, checking the company\u2019s prospects going forward and making sure that the rescue strategy remains on track.\u00a0 But surely we are talking days <\/em>here, not several weeks or months.<\/p>\n 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.<\/p>\n <\/p>\n Not all Fees are \u201cMonitors\u2019 Fees\u201d<\/u><\/strong><\/p>\n 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.\u00a0 CIGA has given us another trap like this.<\/p>\n 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.\u00a0 Worryingly, the directors are also responsible for extending the moratorium.\u00a0 The InsS Guidance states:<\/p>\n “Directors may not be familiar with the rules surrounding decision making in insolvency procedures and whilst it is not part of a monitor\u2019s statutory duty to assist directors in obtaining the consent of creditors they may choose to do so in an advisory capacity.”<\/em><\/p>\n Yep, InsS, I think you can rest assured that no monitor is going to trust a director to run a creditors\u2019 decision procedure without the IP\u2019s strong <\/em>oversight, as the decision procedure rules are so<\/em> complex (and made more complex by CIGA\u2019s special voting rules)!<\/p>\n 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 \u2013 almost inevitably the monitor \u2013 to do the work for them.\u00a0 But, as the IP is not carrying out this work in their capacity as monitor, payment will not be classed as the \u201cmonitor\u2019s fees\u201d, at least not unless your letter of engagement makes it so.\u00a0 Therefore, you need to ensure that you have a letter of engagement signed to cover this \u201cadvisory capacity\u201d work.<\/p>\n <\/p>\n Tight Timings<\/u><\/strong><\/p>\n In brief, the timescales of a moratorium are:<\/p>\n In general, the IR16 apply as regards decision procedures, so we\u2019re looking at decisions by correspondence\/electronic or a virtual meeting.<\/p>\n What happens if creditors ask for a physical meeting?\u00a0 What if they say \u201cno\u201d or they simply don\u2019t vote at all?\u00a0 What if you want to adjourn the virtual meeting, but the moratorium will end in the next day or two?<\/p>\n 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.<\/p>\n It would have helped if the CIGA had provided that moratoria receive an automatic extension where the decision procedure\u2019s conclusion is delayed, in the same way as an automatic extension is given where a CVA proposal is pending (A14), but hey ho.<\/p>\n <\/p>\n Impossible Timescale<\/u><\/strong><\/p>\n One timescale in the CIGA simply does not work.\u00a0 The decision procedure requires five calendar days\u2019 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.\u00a0 How does that work then??<\/p>\n It might help, therefore, to hold virtual meetings instead of trusting that creditors will be content with a vote by correspondence\/electronic.\u00a0 At least a virtual meeting is a moderately useful forum for airing grievances and concerns.\u00a0 Of course, virtual meetings also do not suffer the there\u2019s-no-changing-a-cast-vote issue of the other procedures either, so this might also help if there\u2019s any horse-trading to be done.<\/p>\n <\/p>\n General Fuzziness<\/u><\/strong><\/p>\n Jo and I have laboured far too long on these questions:<\/p>\n <\/p>\n SIP9<\/u><\/strong><\/p>\n SIP9 applies to \u201call forms of proceedings under the Insolvency Act 1986\u201d, but clearly it was not written with moratoria in mind.\u00a0 Does it create any difficulties if we assume that we need to follow it (and assuming that its references to \u201coffice holder\u201d include a monitor)?<\/p>\n Well, for a start, it means that we all need to draft a Creditors\u2019 Guide to Fees, which will say\u2026 erm\u2026 not a lot, as fees are a matter for the IP and the company, apart from a couple of rights to challenge.\u00a0 Of what rights should we inform \u201cother interested parties\u201d?\u00a0 What about the requirements to justify why a fixed fee is considered fair and reasonable or to cover the \u201ckey issues of concern\u201d such as what work we are proposing to do, the anticipated financial benefit to creditors?\u00a0 Is there any expectation by RPBs that we comply with these requirements even if compliance is required only in spirit<\/em>?<\/p>\n I know that there\u2019s a SIP9 consultation going on, but when do we think we might see a revised SIP9 come into force..?\u00a0 Could the RPBs issue some clarification in the meantime?<\/p>\n <\/p>\n Ethical Threats<\/u><\/strong><\/p>\n This is another area where RPB guidance would be very welcome.\u00a0 In my view, the InsS Guidance does a poor job in helping IPs observe the Code of Ethics.\u00a0 It states:<\/p>\n \u201cThe 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.\u00a0 Practitioners may find it helpful to refer to section 2520 of the Code of Ethics that deals with \u201cExamples relating to previous or existing insolvency appointments\u201d 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.\u201d<\/em><\/p>\n My heart always sinks when someone in the profession goes straight to the Code\u2019s examples to see whether they or their boss can take an appointment.\u00a0 At best, I think that it\u2019s lazy, but at worst it may mean that they don\u2019t really get it.\u00a0 My heart similarly sank when I read the InsS’ emphasis on the Code\u2019s examples.<\/p>\n Agreeing to act as a monitor has immediate consequences, including an immediate change in priority of liabilities in a subsequent liquidation or administration.\u00a0 Some of those given an automatic leg-up may be connected to the company; they could be directors or shareholders.\u00a0 The IP who becomes monitor probably advised the company on its options.\u00a0 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.\u00a0 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.<\/p>\n <\/p>\n But who would want<\/em> a subsequent appointment?<\/u><\/strong><\/p>\n Surely the CIGA\u2019s shifted priorities would make any IP think twice about taking on a subsequent liquidation or administration!\u00a0 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)?\u00a0 And, if you are an administrator, you must <\/em>make a distribution to those creditors (para 31 Sch 3)!<\/p>\n I think that directors\/monitors would be hard-pressed to find an independent IP willing to pick up such a murky can of worms.\u00a0 It seems to me that the Official Receivers may find themselves with a delightful new source of work.\u00a0 Perhaps that\u2019s why the InsS made sure that the ORs\u2019 fees take priority over them all (para 13 Sch 3)!<\/p>\n <\/p>\n The Marketing Bit<\/u><\/strong><\/p>\n Jo and I have rolled out a large part of our moratorium document pack: all the statutory docs are there \u2013 to get in to a moratorium, extend it and exit it (although we do still have the nagging questions above) \u2013 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.<\/p>\n 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.\u00a0 We are also happy to provide the moratorium pack as a standalone purchase \u2013 as-is when complete \u2013 for \u00a32,000+VAT.<\/p>\n If you would like more information, please contact us at info@thecompliancealliance.co.uk<\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":" I\u2019m sure we\u2019ve all been flooded with articles on the new moratorium process.\u00a0 Therefore, I am avoiding the usual broad-brush approach here.\u00a0 Instead, I hope to draw out some of the niggly complexities and awkward practical consequences of the new … Continue reading \n
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