Alison Curry examines the detail around monitor’s fees in the new moratorium provisions.
The new moratorium process outlined in the Corporate Insolvency and Governance Act has now come into effect, bringing a very welcome 40 or more days’ breathing space for companies while they and their professional advisers consider their restructuring options.
Thanks to campaigning from the profession, in particular R3, the Act has seen some shift from the original proposals first outlined in 2017, not least that the monitors of these moratoria must be licensed insolvency practitioners. Had this not been the case, it could have seriously eroded the vital role that insolvency professionals play in corporate restructuring, and we should be grateful to all those who campaigned.
The perennial issue
We will be constructing document packs and checklists now that the legislation has come into force and rolling out our compliance support and training offering. But as with any new legislation, the devil is invariably in the detail, and some of the detail raises concern, particularly around the perennially thorny issue of IP fees.
The monitor must be an IP and the monitor is expressly stated to be an officer of the court. However, while SIP 9 currently applies to “all forms of proceedings under the Insolvency Act”, it expressly refers to the fees of an insolvency office holder, and a monitor may not fall into that category. SIP 9 could usefully be amended to clarify this ambiguity and the current consultation on the revision of this SIP would be an opportunity to do so.
But even if the monitor’s fees are to be subject to SIP 9, what of their fees for advising the company and forming their opinion, prior to their formal appointment as monitor? Here the position becomes less clear.
Entering the moratorium gives the company a payment holiday from most of its pre-moratorium debts, subject to some exceptions. A key exclusion for obvious reasons is the remuneration and expenses of the monitor. However, the provision goes on to state that “the monitor’s remuneration or expenses does not include remuneration in respect of anything done by a proposed monitor before the moratorium begins”; so it would seem that any pre-appointment charges in relation to formulating the very opinion that kickstarts the moratorium are potentially subject to the payment holiday. IPs will, therefore, need to ensure that their engagement letters are very clear about what exactly the monitor’s fees include.
There are then restrictions on the company in making payments during the moratorium period in respect of pre-moratorium debts which are subject to a holiday, to the greater of £5,000 or 1% of its debts, subject to the monitor giving their permission for higher amounts to be paid. Could this place IPs in a rather conflicted position in giving permission to discharge their own pre-appointment costs?
But what if the monitor’s fees aren’t paid at all? The newly inserted sections 174A and SchB1 para 64A give super-priority to moratorium debts (i.e. those incurred during the moratorium period) and pre-moratorium debts for which no payment holiday is granted (i.e. the monitor’s fees). This super-priority applies in any succeeding winding up or administration proceedings commenced in the 12 weeks following the end of the moratorium. Further, a new s4A provides that any proposal for or modification to a CVA under which both the moratorium debts and the pre-moratorium debts for which the company did not have a payment holiday are to be paid other than in full is prohibited. So, it seems that the monitor will be paid ahead of any subsequently appointed office holder and IPs will need to check that there is not a prior monitor ranking ahead of them when taking a new instruction.
It appears that the only parties capable of challenging the monitor’s fees are a subsequently appointed liquidator or administrator and that challenge involves an application to court, which could be costly, and assumes an alternative IP in the succeeding role. Additionally, while the moratorium is in force, only the directors can instigate the winding up of the company or seek to appoint an administrator, so they get to choose their IP if that rescue proves impossible.
So, what if the monitor, on the evidence now available to them, changes their view about the viability of the company and recommends that the directors take steps to place it into liquidation or administration? The newly revised Ethics Code contains enhanced provisions around the potential conflicts presented by sequential appointments, but by no means precludes them. Nor does the new legislation.
Therefore, might we see the birth of the post-moratorium pre-pack, once it has become evident that the business, rather than the company can be saved, thereby justifying a shift from moratorium into administration? In some cases, no doubt this would be entirely justified, but the lack of external oversight in respect of fees may create the potential for abuse (both actual and perceived).
An amendment to the bill proposing the insertion of a new paragraph 74A into Schedule B1, requiring the use of the pre-pack pool in all pre-pack scenarios was withdrawn at committee stage, so it would seem that the pre-pack will survive unscathed into the new era of moratoria. Much will rest on the shoulders of IPs to use these new tools responsibly, and in the longer term, more will rest on the shoulders of regulators to ensure that they do so.
What are your views on the new moratorium and restructuring provisions?
Click here to take part in our short survey. It should take less than five minutes to complete. As well as receiving a summary of the findings, you will be entered into a prize draw for the chance to win a free ISS webinar and a £50 voucher to an online retail store. The survey will end on 24 June 2020. Please note that the survey will be temporarily unavailable from 8.00 am–8.00 pm on 3 July.
First published in the June 2020 edition of RECOVERY NEWS and reproduced with the permission of R3 and GTI Media.
Webinar – Corporate Insolvency and Governance Act 2020: An Introduction
In our One Hour Series webinar Technical Short: Corporate Insolvency and Governance Act 2020: An Introduction on 17 July we will summarise the changes and how they might be applied by the profession. Click here to book.