Welcome guidance provided by English Court's second reported decision on the new moratorium procedure

The English High Court has clarified the test it will apply on an application for a moratorium. A company can get the benefit of a moratorium without applying to court but a court application is necessary if a winding up petition has already been presented or the company is an overseas company.

Background

Grove Independent School Limited faced financial difficulties due to increased costs and a decrease in fee income caused by the COVID-19 pandemic. The UK tax authority, HMRC presented a winding up petition against the company and the directors sought a moratorium to continue trading and facilitate a refinancing.

Better result test

The court may make an order for a moratorium if it is satisfied that this would achieve a "better result" for the company's creditors as a whole than would be likely if the company were wound up (the Better Result Test).

Decision

The Better Result Test requires the court to compare:

the likely or probable outcome in the event of a moratorium being ordered, with
the likely or probable outcome in the event of a liquidation without a prior moratorium.

The court found the test had been satisfied as the moratorium was more likely to achieve a rescue which was a better outcome for creditors than a liquidation which would have led to the closure of the school (with chaos to parents and children) and additional claims, expenses and delay which would arise as a result.

Once satisfied that the Better Result Test has been met the court has a discretion to order a moratorium. The judge held that the proposed "light touch" moratorium providing a short breathing space to organise necessary refunding was better suited to the running of a school than a relatively heavy handed and expensive administration.

Key takeaways

The standard of proof required for a moratorium is the "balance of probabilities" and not the "real prospect" test used when considering administration applications.
Unusually, the judge considered the interests of the children (who were unlikely to be creditors) in determining which was the better outcome for creditors.
In exercising his discretion, the judge took into account the social function of a school with a large number of pupils.