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Introduction
In this case, the court granted a Part 1A moratorium, despite the fact a winding up petition had already been presented, on the basis that the imposition of the moratorium would likely result in a better outcome for creditors as a whole and that the company only required a short period of breathing space.
Background
Grove Independent School Ltd (the “Company“) was a company trading as an independent school. The Company had significant assets and its most recent audited accounts showed a balance sheet surplus of roughly £2 million. The Company’s assets included property valued at £4.25 million.
Despite its healthy balance sheet, the Company failed to make payments due to HMRC. HMRC then presented a winding up petition.
The directors of the Company (the “Directors“) believed they could refinance the Company. Accordingly, the Directors applied for a moratorium under Part 1A, section A4 of the Insolvency Act 1986. The Company only had one secured lender, who was supportive of a moratorium and had confirmed that it would keep the Company’s current facilities in place during the moratorium.
Issues
The issue before the court was whether the court could and should order a Part 1A moratorium, in light of the fact that HMRC had presented a winding up petition.
Decision
The court first considered whether it had discretion to order a moratorium. The court considered that section A4(5) did provide the court with the ability to exercise its discretion when considering an application for a moratorium. In exercising this discretion, the court found that it must compare the likely or probable outcomes for the Company’s unsecured creditors as a whole in the following two situations. First, where a moratorium was imposed. Second, where the Company proceeded straight to liquidation without the imposition of a moratorium. The court considered that it would only have discretion to impose a moratorium if the outcome with a moratorium was better than the outcome without a moratorium. This would be assessed on the balance of probabilities.
The opinion of the monitor will be relevant here, for example if they think it is likely that a moratorium would result in the rescue of the company as a going concern, this will point towards a better outcome with a moratorium.
The court noted that this test (balance of probabilities) is a different test to the test for determining whether to grant an administration order (real prospect).
When considering the different possible outcomes, and their effects on the Company’s unsecured creditors, the court had regard to the following.
- The Company was able to self-fund. Therefore, the position of unsecured creditors would not deteriorate if a moratorium was imposed.
- The Company had significant property assets and so would be able to refinance in the short and long term. This would allow the current overdue debts (including those owed to HMRC) to be paid.
- The only secured creditor was supportive and had informed the monitors it would keep the current facilities in place during the moratorium.
- Entering liquidation would be very likely to result in the collapse of the business. This would lead to additional claims against the Company and incur unnecessary expense and delay. All of which would be extremely damaging to the Company’s creditors, and in addition the Company’s staff, and its pupils and their parents.
Accordingly, the court found that it did have discretion to impose a moratorium.
The court then considered how it should exercise its discretion.
The court considered the fact that the Company only needed a short period of relief. The court also considered the consequences of appointing administrators over the Company. In particular, the court considered that it was more appropriate for monitors to supervise the running of the school than for administrators to take over the running of the school; the latter would likely be more disruptive. The court took into account that the Company runs a school with a large number of pupils, and therefore fulfilled an important social function. In light of this, the case was exactly the type of case a moratorium was envisaged for. Accordingly, the court found that it should exercise its discretion to impose a moratorium.
Conclusion
This case illustrates the approach the court will take in determining whether to impose a moratorium where a winding up petition has already been presented. It clarifies that the court has discretion to take into account a wide range of factors when considering whether to grant a moratorium.
Although arguably the facts in this case are unusual (not least because the Court saw fit to consider the interests of the school’s pupils generally, rather than just its creditors), it highlights the potential for winding-up proceedings to be impacted by a moratorium and will be of interest to creditors when deciding whether to present a petition.
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