In a recent decision that will add some welcomed clarity to the imposition of Part A1 moratoriums over companies which have been presented with a winding-up petition, the High Court has reflected on the requirements of section A4 of the Insolvency Act 1986 (the “Act”) and confirmed the test that must be satisfied in order for it to make such an order.

In Grove Independent School Ltd, Re, 2023 WL 06795092 (2023), the court considered whether it had jurisdiction, and if so the threshold to be passed, for it to grant an order implementing a moratorium over The Grove Independent School Limited (the “Company”) in circumstances where a creditor, namely HMRC, had presented a winding-up petition against the Company.

Whilst the independent school sector had long faced significant financial pressures, the general reaction to the pandemic exacerbated these challenges and brought about additional pressures that the Company had difficulty dealing with. As a result of the ongoing pressures facing the Company, significant arrears of £655,971.90 had accrued owing to HMRC and on 18 January 2023, HMRC presented a winding-up petition against the Company. In response, the Company’s directors issued an urgent application requesting the court to grant an order implementing a moratorium over the Company whilst it, with the help of the proposed monitor FRP, sought to negotiate refinancing.

The court reflected on the construction of section A4 of the Act and concluded that it had a discretion to make such an order under sub-section (4) but that this discretion was narrowed by virtue of sub-section (5), requiring that the court only make an order for a moratorium in circumstances where it was satisfied that a moratorium would likely achieve a better result for the creditors as a whole than would be likely if the Company were wound up without first being subject to a moratorium. The court therefore concluded that for it to make such an order the court must first consider the likely outcomes of two scenarios:

1. the result that would likely be achieved for the creditors as a whole by the imposition of a moratorium; and
2. the result that would likely be achieved for the creditors as a whole without a prior moratorium.

Concluding that only in circumstances where the court was satisfied that the outcome for the creditors was likely to be better in the first scenario than it was in the second scenario does the court have a discretion to make an order granting a moratorium.

The court drew a distinction between the appropriate test to apply in the circumstances and the test that is applied to an application for an administration order, drawing particular attention to the inclusion of the phrase “reasonably likely” in applications for administration orders and not simply, “likely” as is the case for moratorium applications. Applying Auto Management Services Ltd v Oracle Fleet UK Ltd, the court considered the threshold in an application for a moratorium to be higher than that applicable to applications for administration orders, considering “likely” to mean on the balance of probability and not simply a real prospect of success.

The case confirms the established view that a moratorium may be a useful tool for Companies in need of a short breathing space to consider their available refinancing options. Importantly Lloyds Bank, being the secured creditor of the Company, confirmed its support for the application and that it would maintain the current facilities in place during the moratorium. This support may well have been vital to the application as the court could understandably take the view that without the support of lenders any order granting a moratorium could be short lived were the lender minded to accelerate the loan which would likely require the monitor to bring the moratorium to an end. Additionally, whilst it was always clear from the construction of section A4 of the Act that a winding up petition could be delayed by a court granting an order for a moratorium, the court has now established the required test which must be passed for an applicant to successfully seek a moratorium order. Given the clarity that the court has now provided in respect of section A4, and the seemingly increasing threats of winding up petitions as a tool for debt collection, will we now see an increase in court applications requesting an order for a moratorium as a tool to delay or extinguish those threats?

In summary:

• the court has jurisdiction to grant an order for a moratorium in circumstances where a winding-up petition has been presented by virtue of section A4(5) of the Act;
• the court must be satisfied that the likely outcome for the creditors as a whole would be improved by the imposition of a moratorium;
• the threshold required to be passed in order to satisfy the court is more stringent than the threshold required in respect of an application for an administration order requiring that the likelihood of a better outcome for creditors as a whole is beyond a real prospect and in fact, on the balance of probabilities;
• financial creditor support is vital. Should a moratorium order be granted without the support of financial creditors it is entirely plausible that a lender might accelerate payment which in turn is likely to mean that the monitor must bring the moratorium to an end if the company cannot pay; and
• will we now see an increase in applications to court requesting an order for a moratorium as a tool to delay or even extinguish threats of a winder?

This article was authored by Elliott Hill.