The company in this case was a school and fell into significant arrears with HMRC as a result of the covid pandemic. When HMRC presented a winding up petition, the company made an application for a moratorium under s.A4 of the Insolvency Act 1986. The application was made as the company needed the protection of a moratorium to enable it to continue to trade whilst at the same time allowing for it to refinance, which was what it said it wished and hoped to do.

What are the practical implications of this case?

This case may come in very useful for companies faced with a winding up petition in circumstances when they have a real prospect of (as in this case) raising finance that would allow it to continue to trade therefore achieving a much better outcome for its creditors than would be the case if it were simply wound up by the Court. Providing the company can show that a moratorium would achieve a better result for its creditors as a whole than would be likely if the company were wound up without first being subject to a moratorium (together with fitting the eligibility criteria) this could prove a valuable protection for companies. In reality, it should help petitioning creditors as, in this case, the refinance sought would result in them receiving significantly more than (you would have though) a Liquidation would provide.

This is caveated by the fact that s.A4 is a relatively new provision (introduced by the Corporate Insolvency and Governance Act 2020). It has also never been tested before the Court until this case. Further, the company in this case was a school and several references are made to the fact that the company was “an independent school with over 200 pupils” and “as such, it fulfills an important social function”. The Judge clearly took this factor into consideration. It therefore remains to be seen if a manufacturing company (for example) would be treated in the same way.

What was the background?

During the covid pandemic, the company racked up debt with HMRC totaling £655,971.90. As a result, HMRC petitioned for the company to be wound up. In response, the company made an urgent application to the Court under s.A4 of the Insolvency Act 1986 for a moratorium (effectively “breathing space”) to allow it to continue to trade and arrange finance to enable it to repay the arrears.

The Court had to be satisfied that a moratorium for the company would achieve a better result for the company's creditors as a whole than would be likely if the company were wound up (without first being subject to a moratorium).

What did the court decide?

The Court had to consider the impact on creditors and whether a moratorium would be better than straight liquidation. In this case the company showed in evidence that it had been in contact with various commercial brokers to arrange short term bridging finance, ultimately to be replaced, it was hoped, by a new longer term facility.

Having considered the evidence, the Court agreed with the company’s position that the company remaining under the control of and management of its directions (subject to oversight by a monitor) would be much less detrimental long term than the appointment of an administrator or liquidator, which the Court considered would have been unduly “heavy handed and expensive”.

Case details

• Court: Chancery Division, England & Wales Insolvency & Companies List - Companies
• Judge: Insolvency And Companies Court Judge Greenwood
• Date of judgment: 24/2/2023

Chris Adams, is a Partner at Gosschalks LLP. If you have any questions regarding this issue, or any insolvency or restructuring matters, please feel free to contact Chris directly on cha@gosschalks.co.uk