When should a monitor terminate a moratorium?

The group’s secured lender was MHG which had lent to TopCo with guarantees from the OpCos. MHG appointed administrators to TopCo following default on its debt. The OpCos appointed monitors pursuant to the new moratorium procedure. Subsequently, MHG served a demand under the guarantees on each of the OpCos. During this period various offers were made to TopCo relating to the OpCo interests by a third party, Knighthead.

MHG applied for orders terminating the moratoria on the ground that the failure of the monitors to terminate had unfairly harmed MHG's interests. Under section A38 of the Insolvency Act 1986 (IA) a monitor must bring a moratorium to an end if, inter alia, they think “that the company is unable to pay … pre-moratorium debts for which the company does not have a payment holiday”. The liability in this case was such a debt.

The court held:

• The term “unable to pay” was not the same as the cashflow insolvency test under section 123, IA as it did not use the words “as they fall due” and so did not entail the same element of futurity as the cashflow test.
• The question is to be answered in relation to debts other than those reasonably likely to be paid within five business days (which are required to be disregarded pursuant to Insolvency Rule 1A.24). But the "disregard" period provides an indicator of the sort of timescale against which the assessment must be made – something over five business days.
• For this purpose a company "is able" to pay a presently due debt 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 five business days requires specific assessment. This was not the test applied by the joint monitors as, when they reached the decision not to terminate, the Knighthead offer was one which the TopCo administrators could not immediately accept but would be bound instead to conduct a marketing exercise and open sale, which made an immediate realisation impossible.
• However, a later Knighthead offer of immediately available interim funding sufficient to replace the loan did offer the prospect of immediate receipt by TopCo of sufficient funds and so the court decided in the circumstances that it was not appropriate to order the termination of the moratoria.

Minor Hotel Group v Dymant, High Court of Justice Chancery Division, 17 February 2022