The Corporate Insolvency and Governance Bill (the “Bill”) was published on 20 May 2020 and introduced a new debtor-in-possession moratorium to give companies breathing space in order to try to rescue the company as a going concern. The Bill went through the House of Commons on 3 June and passed through the House of Lords on 23 June. The Bill was back before the House of Commons today and is likely to receive Royal Assent next week (at which point the Bill will become law).

Our last blog on the moratorium focused on the key provisions that secured lenders should be aware of and the impact on qualifying floating charge holders (“QFCH”). This blog will consider the changes made to the Bill as it has passed through Parliament and the impact of these changes on secured lenders.

Acceleration of Debt

In our last blog, we highlighted that lenders may be able to accelerate their debt in a moratorium (whether automatically or by notice). As the Bill was drafted, if the entire debt was accelerated it would have become due and payable during the moratorium period (and therefore if the company could not pay the debt, the moratorium would have to be terminated). If a lender took this approach, any accelerated debt would also receive a “super-priority” status in any subsequent administration or liquidation and could not be compromised or “crammed down” in any subsequent CVA or restructuring plan (by subsequent, we mean within 12 weeks of the moratorium ending).

There was considerable concern surrounding this in the market and in Parliament, as this effectively gave lenders (a) the power to end the moratorium and (b) provided them with a fixed charge-like security for accelerated debt, allowing what may ordinarily be a floating charge recovery in a subsequent insolvency to rank ahead of administration expenses and preferential creditors, for example.

An amendment was therefore moved to remove the ability for a lender to accelerate their debt during a moratorium. This was not accepted, therefore it appears that  lenders are still able to accelerate their debt and effectively end the moratorium (as the company would be unlikely to be able to pay the debts due in the moratorium).

However, one amendment that was agreed, was to remove the priority of accelerated debt if the company enters into liquidation or administration within 12 weeks following the end of the moratorium. This change means that while non-accelerated bank debt falling due and payable during the moratorium retains “super-priority”, accelerated debt is carved out and will no longer be paid on a super-priority basis.  Instead (and assuming there are sufficient realisations) it will be paid as part of floating charge distributions.

In addition, because of this carve out, any accelerated debt can also now be compromised and/or crammed up in a subsequent Restructuring Plan.

Co-authored by Emily Davis