The Terminator: Termination guidance for CIGA Moratorium monitors

Case Law Update

Re Corbin & King Holdings Ltd and other companies; Minor Hotel Group MEA DMCC (a company incorporated under the laws of Dubai) v Dymant and another [2022] EWHC 340 (Ch)

The courts have given their first judgment on moratoriums under the Corporate Governance and Insolvency Act 2020 (CIGA), clarifying when monitors of moratoriums should terminate them because the company is unable to pay pre-moratorium debts. The case involved the company that operates restaurants including the Wolseley and the Delaunay in London. It’s a perfect example of a CIGA moratorium being used to constrain secured creditor action.

The key takeaways:

the monitor can factor in the possibility of third party funding to discharge critical debts and aid rescue as a going concern;
the monitor has a degree of latitude in judging whether to terminate (required if they think that the company is unable to pay debts to which the moratorium does not apply). However, that latitude is not unlimited. If the company doesn’t have the immediate prospect of receiving third party funds, or doesn’t have assets capable of immediate realisation, to discharge those debts the monitor must terminate, and
the court will conduct a ‘balance of harm’ excise when deciding whether to exercise its discretion to terminate a moratorium or not.

In this case Minor Hotel Group (Lender), an associate of the Corbin & King group’s parent company (Parent), had lent Parent a secured loan with secured guarantees granted by the operating companies (OpCos) and:

Parent failed to repay the loan when due and Lender served a demand;
a credit fund (Bidder) offered to buy Parent and OpCos for an amount equal to the loan. That offer was rejected and the directors of the OpCos implemented a CIGA moratorium;
Lender made demands against each of the OpCos under their guarantees and appointed administrators over Parent;
the Bidder made an offer to Parent’s administrators to purchase the OpCos. Lender put Parent’s administrators on notice that they would challenge any action by the administrators if they accepted the offer. Lender also applied to the court for orders terminating the moratoria of the OpCos, on the basis that the monitors’ failure to terminate them had unfairly harmed Lender’s interests, and Lender wished to appoint administrators over the OpCos; and
the OpCo guarantees were contracts involving financial services and therefore outside the moratorium, and the OpCos remained bound to pay them, which they could not. However, the monitors did not terminate the moratoria as they considered it likely that the OpCos would be rescued as a going concern and that the loan would be repaid in full in the reasonably near future.

Lender also sought an injunction to restrain repayment of the loan, arguing that accepting the Bidder’s offer would breach a shareholders’ agreement. That application was unsuccessful.

The court clarified the matters a monitor should consider as follows:

a monitor’s duty to terminate a moratorium arises once the monitor thinks that a particular state of affairs exists, which allows a degree of latitude. A decision will only be open to challenge if it was made in bad faith or was clearly perverse – if no reasonable monitor would have reached it.
the statutory test for monitors considering whether a company is unable to pay relevant debts involves a flexible and commercially realistic approach in the circumstances as a whole. In this case that included the Bidder’s offers, and TopCo’s subsequent ability to discharge the loan, thereby relieving the OpCos of their guarantee liability; and
the question to be addressed is whether the company is unable to pay a presently due pre-moratorium debt in respect of which it does not have a payment holiday. This is to be distinguished from the question of whether the company is unable to pay its debts as they fall due for the purposes of cash-flow insolvency (which introduces any element of futurity).

The court held that the monitors’ decisions in this case were ones which no reasonable monitor, who applied the correct test, would have reached. It was obvious that Parent’s administrators could not accept the Bidder’s offer to purchase OpCos without an open market sale process – which made immediate realisation impossible. In contrast, a later revised offer of interim funding to replace the loan could have properly caused the monitors to think that the loan was able to be repaid.

However, the court still had a discretion to terminate the moratorium, even if it reached the view that the monitors ought to have done so. Conducting a balancing exercise based on the facts at the hearing, the court assessed the harm suffered by Lender to be less than the harm suffered by the OpCos if Lender was able to commence insolvency proceedings; given that each OpCo was trading successfully and there was an immediate prospect of the loan being repaid and the OpCos’ guarantee liabilities falling away. Accordingly, the court decided to allow the OpCo moratoria to continue. In reality the loan was then actually repaid and the OpCos rescued as going concerns.

Following the rationale of this judgment the following guide appears to be a sensible start for a monitor considering whether a company is able to pay pre-moratorium debts that are due and not caught by the payment holiday and whether they should terminate a moratorium:

the company should be considered able to pay debts that are reasonably likely to be paid within five business days;
consider whether the company can pay the debt itself out of cash resources; and
if not, consider whether the company either has the immediate prospect of receiving third party funds or has assets capable of immediate realisation to pay it. Immediate receipt / realisation is a matter of commercial judgment – although anything over five business days will require specific assessment. Consideration should also be given to whether the debt will be discharged by co-obligors.