The Corbin & King Group (the Group) operates nine restaurants, including the Wolseley and the Delauney. The shareholders of the Group include the majority shareholder, MI Squared Limited (MI Squared), and minority shareholders Christopher Corbin and Jeremy King, after whom the Group is named. The parent company of the Group is Corbin & King Limited (TopCo), under which are various intermediate holding companies and operating subsidiaries which hold the restaurant businesses (together with the intermediate holding companies, the OpCos).
MI Squared is owned by Minor International plc (Minor International). Another subsidiary of Minor International, Minor Hotel Group MEA DMCC (MHG), provided TopCo's working capital through:
(together, the Loan).
The Loan was secured by a TopCo debenture over its assets, and guaranteed and secured by debentures from each OpCo. TopCo failed to repay the £14.25m loan at maturity in May 2020, resulting in an event of default under the £20m loan. Thereafter, a period of 19 months elapsed before MHG demanded repayment of the Loan, leading to the following events:
19 January 2022: MHG serves notice of demand on TopCo. On the same day, Minor International received an offer from third party investors (the Investors) to purchase the debt and equity held indirectly by Minor International in TopCo for the total amount of the Loan (effectively, ascribing nil value to the equity) (the First Investor Offer). This was rejected by Minor International.
20 January 2022: Directors of the OpCos furnish prospective monitors (from Teneo Financial Advisory Ltd) with the OpCos' financial information and information on the First Investor Offer. The financial information shows the OpCos are meeting their trading debts as they fall due. The prospective monitors form the view that the OpCos can be rescued as going concerns (a threshold requirement to the availability of the moratorium) and are appointed as joint monitors of the OpCos (the Monitors), instituting a moratorium in respect of each OpCo under Part A1 of the Insolvency Act of (the 1986 Act).
21 January 2022: MHG demands against each OpCo under their guarantees (the OpCo Guarantee Demands).
25 January 2022: MHG appoints administrators of TopCo (from FRP Advisory Ltd) (the Administrators).
26 January 2022: The Investors make a second offer, this time to the Administrators, to purchase TopCo's direct and indirect interests in the OpCos for a price equal to at least the outstanding Group debt, which was understood to be c. £37.9m (the Second Investor Offer). The Investors offered assurances that they would work rapidly to close the Second Investor Offer, but the Administrators, as is standard, considered it necessary to first run a market-testing process, which could take "weeks if not months".
28 January 2022: MHG applies to terminate the moratoria on the grounds that the failure of the joint monitors to terminate the moratoria following the demand under the guarantees has unfairly harmed their interests. In later evidence, MHG emphasised it had lost confidence in the directors and wished to appoint administrators to the OpCos. It did not suggest that the Loan would be repaid earlier if the OpCos entered administration, nor did it suggest that the continuation of the moratoria jeopardised the Loan in any way.
1 February 2022: In contesting the MHG application, one of the Monitors provides a witness statement which explains that as part of their rationale for not terminating the moratoria upon receipt of the OpCo Guarantee Demands, the Monitors believed "it is likely that the [Loan] will be repaid in full “in the reasonably near future" [emphasis added], citing the credibility and deliverability of the Second Investor Offer.
3 February 2022: The Investors make a third offer, this time of an interim funding arrangement under which the Investors would refinance the existing debt (including the MHG debt) on a short-term basis but with a lower interest rate (the Third Investor Offer). The intention was to allow sufficient stability for the Administrators to pursue a sales process. This offer was also made in conjunction with a separate offer to purchase the assets for £45m.
4 February 2022: Date of hearing before High Court on whether the moratoria should be terminated.
The key questions in the case were whether:
as a result of the OpCo Guarantee Demands, the Monitors ought to have terminated the moratoria; and
if they should have terminated the moratoria, but had not, should the Court exercise its discretion to terminate the moratoria.
The relevant statutory provision is section A38 of the 1986 Act:
(1) The monitor must bring a moratorium to an end by filing a notice with the court if …(d) the monitor thinks that the company is unable to pay any of the following that have fallen due … (ii) pre-moratorium debts for which the company does not have a payment holiday during the moratorium ….
Points of agreement
A number of points were common ground between the parties:
the Loans and the guarantees had been entered into prior to the commencement of the moratoria. Therefore the debts arising under them were clearly "pre-moratorium debts";
once a company has entered a moratorium, its pre-moratorium debts are split into two categories: those for which the company has a payment holiday and those for which there is no payment holiday. Importantly, one of the categories where there is no payment holiday is a pre-moratorium debt arising under a contract or other instrument involving financial services. The parties agreed, and the court confirmed, that the guarantees were contracts involving financial services, meaning that the debt that arose following the OpCo Guarantee Demands did not benefit from a payment holiday and fell due for payment notwithstanding the moratoria. The monitor has to bring the moratorium to an end if it “thinks” that the company is unable to pay debts which do not benefit from a payment holiday and which have fallen due during the moratorium;
section A38 of the 1986 Act's use of the words "the monitor thinks" meant that the Court would not substitute its judgment for the professional judgment of the monitors, except in the case of bad faith (which was not alleged) or irrationality; i.e. the decision not to terminate would have to be one no reasonable monitor could have reached. If the monitors applied the wrong test in arriving at their decision that the company "is" able to pay its debts, then that would be a strong indicator of irrationality, but would not be definitive.
Issues to be decided
The first issue for the Court to decide was how the Monitors should approach the decision on whether the OpCos were "able to pay" the Loans. While the OpCos were trading successfully, they were not from their own resources able to meet the OpCo Guarantee Demands and repay the Loans. MHG contended that this alone meant they were "unable to pay". The Court disagreed, preferring a "flexible and commercially realistic approach", which took into account the surrounding circumstances. These surrounding circumstances included the possibility of the Administrators accepting the Second Investor Offer, which would result in TopCo repaying the Loans and discharging the OpCo guarantee liabilities.
As such, the second question for the Court was the time period within which TopCo might, via a sale in administration, discharge its liabilities under the Loans, and in so doing discharge those of the OpCos under the guarantees. The Monitors had stated in their witness statement that they believed the Loans would be discharged "in the reasonably near future". This, in their view, was a sufficient basis to think that the OpCos were not unable to pay their debts. MHG argued that the appropriate time-frame was much shorter. While accepting that “is” did not mean “is at this instant”, counsel for MHG argued that it meant the company "is presently" able or unable to pay its debts, allowing just some time for the mechanics of payment. Counsel pointed to Rule 1A.24 of the Insolvency (England and Wales) Rules 2016 which provides that when deciding whether to bring a moratorium to an end, the monitor must disregard debts that it reasonably believes will be paid within five business days of the decision. In this case, the Monitors had not believed that the OpCos would be able to discharge their liabilities within five business days of any decision taken by them.
The Court held that the question to be addressed by the monitor was not whether the company was able to pay its debts as they fell due as that phrase is used for the purposes of the cashflow insolvency test under section 123 of the Act; nor was it whether the company was able to pay the debt in the reasonably near future. The question was whether the company “is able” to pay a presently due pre-moratorium debt. The Court held that (emphasis added):
a company “is able” to pay a presently due pre-moratorium finance obligation if (being itself unable to pay out of current cash resources) it has the immediate prospect of receiving third party funds or owns assets capable of immediate realisation. What is an “immediate” receipt or realisation is a matter of commercial judgment for the monitor (as to which the monitor is allowed considerable latitude) bearing in mind that anything over 5 business days requires specific assessment.
This was not the test applied by the Monitors (although the Court showed a degree of sympathy for their failure to apply the correct test, given the newness of the legislation).
The next question was whether, at the time the Monitors decided to oppose MHG's application, a reasonable Monitor, applying the correct test, could have concluded that TopCo had an "immediate prospect" of repaying the Loans. The Court said that "no reasonable monitor applying the test could have reached" that conclusion and the Monitors' decision "fell on the wrong side of the line". The Court noted that, at this point, the only offer on the table had been the Second Investor Offer. This plainly was not an offer that the Administrators would be able to accept without a market-testing process and open sale. The need for a marketing process "made an immediate realisation impossible".
Given that the Monitors had not terminated the moratoria, the final question was whether the Court should exercise its discretion to do so. The parties agreed that the court’s discretion had to be exercised at the date of the hearing in light of the circumstances existing at that time. In the end, the Court decided to allow the moratoria to continue until lapse, at which point the Monitors would have to justify an extension if the Loan had by that point not been repaid.
MHG had argued that if at any stage the Monitors should have terminated the moratoria, then the Court ought to do so on application. Otherwise, the OpCos had the benefit of a "payment holiday" that Parliament had not intended they should have. This was not sufficient to persuade the Court.
First, at the time of the hearing, the Monitors did have a rational basis for believing TopCo had an immediate prospect of receiving funds to discharge the Loans. In the intervening period between the Monitors' decision to oppose the application and the hearing, the Third Investor Offer had been made to the Administrators. Under the Third Investor Offer, the Administrators could accept a refinancing of the Loans, while carrying out their marketing process for the OpCos in tandem. So, at the time of the hearing, the Monitors believed there was an immediate prospect of the Loans being repaid and that the maintenance of the moratoria would lead to the saving of the OpCos as a going concern.
Second, the OpCos were trading successfully and it was common ground that if the moratoria continued the OpCos would likely be rescued as going concerns. Against that, if the moratoria were lifted, MHG could place the OpCos into insolvency proceedings. In the Court's view, the harm that could cause to the OpCos outweighed the harm that MHG was suffering in not being able to appoint administrators. As such, it declined to terminate the moratoria. The Court concluded its judgment by noting that it had since understood that the Loans were in the process of being repaid.
In a further twist, while the moratoria application was being made, MI Squared applied for an injunction which would prevent TopCo from repaying the Loan, taking on new debt or encumbering its assets. However, the application for the injunction was refused1.
The moratorium procedure provides a mechanism for borrowers to obtain protection from creditor action while they seek to restructure their debts. However, there was a clear legislative intention that the moratorium should not prevent a financial creditor from accelerating its debt where the contract allowed it to do so. Parliament's apparent reasoning was it wanted to promote lending to distressed entities, and lenders would be more willing to lend in distress situations if they knew a moratorium would not block acceleration. And while lenders of an accelerated debt of a company within the moratorium cannot enforce security or appoint administrators without the consent of the court, save in limited circumstances, the monitors are required to terminate the moratorium if the company is "unable to pay" that accelerated debt. Following termination of the moratorium, lenders are able to enforce security or appoint administrators. Had the Monitors' arguments been accepted, and the moratoria allowed to continue while the administrators ran their sales processes, the lender would have been blocked from enforcing for "weeks if not months". This quite clearly would have run against the legislative intention and so Sir Alastair Norris’ judgment that this was an unacceptably long period is to be welcomed. That is not to say that monitors do not have scope to manoeuvre. Monitors without funds in hand can delay termination of a moratorium, provided that in their commercial judgment there is an "immediate prospect" of repayment. The Court expressly left open that this period could be longer than five business days. Where exactly the line will be drawn in future remains to be seen.
Case: Minor Hotel Group MEA DMCC v Benjamin Dymant and Robert Harding (Joint Monitors)  EWHC 340 (Ch), decision handed down on 17 February 2022.
1 MI Squared Limited v Corbin & King Limited and others  EWHC 331 (Comm)
Authored by Robert Peel.