The Government has launched a consultation process on proposals for a statutory restructuring moratorium with submissions due by 18 October 2010. In light of the wall of restructuring that is thought likely to occur in the foreseeable future and the negative impact that the costs and risks associated with a restructuring can have on an otherwise viable company the proposals are to be welcomed.

Why is a moratorium necessary?
As is now widely known, the credit crunch has left behind a legacy of companies with complex financial structures, put in place during the "golden age" of leveraged buy-outs from 2004-2007. Many of these companies may now be over-leveraged and unable to service their debts as currently structured.

It is estimated that £90 billion of loans made to leveraged buy-outs are expected to mature before 2015. Without the protection and "breathing space" afforded by a moratorium, many viable entities may be forced into a formal insolvency process simply due to the costs and risks associated with attempting to achieve a consensual restructuring.

What are the key features of the proposals?
The moratorium is aimed primarily at larger companies with complex financial structures for whom the costs and risks of restructuring are perceived to be greatest due largely to the difficulties of dealing with often extensive and diverse lender groups and the ever present threat of dissenting creditor action. The proposed moratorium has the following key features: 

• a court sanctioned initial 3 month moratorium period; 
• only companies satisfying (i) eligibility criteria (which excludes, for example, financial institutions), and (ii) qualifying conditions (which include, for example, that it has a viable business, its creditors are prepared to support a restructuring of its debts and it is likely to have sufficient funds to carry on its business during the moratorium) will be able to apply; 
• the company will remain under the control of its directors during the moratorium; and 
• debts incurred during the moratorium would have "super-priority" status in any subsequent insolvency process.

What are the safeguards for creditors?
As the directors will remain in control of the company during the moratorium the Government has recognised that it is essential that the proposals adequately safeguard the interests of the exiting creditors. In light of this, the key safeguards are, therefore, as follows: 

• the moratorium has to be sanctioned in a court hearing where the court will need to be satisfied that each of the eligibility criteria and the qualifying conditions have been met; 
• if the court is not satisfied that the eligibility criteria and/or qualifying conditions have been met it has the power to make an alternative order including for an administration or winding up of the company. This should deter vexatious applications; 
• the directors must give formal notice of its intention to apply for a moratorium. The creditors will receive such notice and will then have the opportunity to raise objections to the moratorium at the court hearing; 
• any extension to the 3 month moratorium will require a further court application which should incentivise directors to complete negotiations within the initial period; 
• on granting the application the court will appoint a "Monitor" with the primary function of ensuring continued adherence to the eligibility criteria and qualifying conditions and whose role is to safeguard the interests of creditors during the moratorium; 
• during the moratorium, the directors' control of the company will be subject to constraints and sanctions in addition to ongoing checks by the monitor.

Conclusion
The Government's proposals are to be broadly welcomed. Trade bodies, such as the European High Yield Association, and practitioners have long advocated the necessity for an effective moratorium to allow the company the "breathing space" from creditor action to pursue and implement a restructuring. The proposals also embrace key features of the US Chapter 11 process, in particular the fact that the directors remain in place during the moratorium (akin to the "debtor in possession" concept) and the super-priority status of any funding during the moratorium. The possibility of allowing super priority funding in an insolvency has been mooted before. 'DIP financing' (debtor in possession financing) is very active in the US and many insolvency experts were dismayed at the absence of a legislative framework for DIP financing in the last major insolvency revamp, the Enterprise Act 2002. The difficulties of obtaining DIP financing which could, for example, fund an operational turnaround in an administration, has been cited as one of the factors why so many quick "pre pack" sales of businesses have occurred in recent years. We expect this prospect will excite considerable comment.

However, as ever, the devil is in the detail and a close analysis of the proposals will be necessary to ensure that adequate protection for creditors is maintained against the backdrop of preserving companies that are capable of being turned around. In particular, the fact that, as currently drafted, the moratorium prevents secured creditors from appointing an administrator, accelerating their debts and enforcing their security but, at the same time, does not prevent the exercise of set-off rights or "ipso facto" clauses for other creditors (which allow a counterparty to exercise contractual termination rights upon the insolvency of the company) will be of key concern to secured lenders.

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