Creditor challenge against seldom-used UK moratorium rejected
In a 17 February decision Sir Alastair Norris, sitting as a judge of the English High Court’s Chancery Division, found that the harm suffered by Thai creditor Minor Hotel Group (MHG) as a result of the moratoria was less significant than the potential harm the restaurant operating companies would suffer if the creditor was permitted to commence insolvency proceedings against them.
The judge also found that each of the 10 operating companies was trading successfully and that there was an “immediate prospect” of MHG’s debt being repaid in light of a new finance and takeover offer from distressed investor Knighthead.
The restaurant owning group at the centre of the case is Corbin & King, the owner of high-end restaurants The Wolseley, The Delauney and Brasserie Zédel.
The group’s top company is majority owned by Thailand-based MI Squared, while its minority shareholders are Christopher Corbin and Jeremy King, from whom the group takes its name.
MHG, which is part of the same group as MI Squared under parent Minor International (MINT), had provided two loans to Corbin & King’s top company, a £14.25m (US$19.4m) facility due for repayment in May 2020 and a £20m (US$27.3m) loan due in 2024 that had acceleration provisions.
The loans were secured by a debenture over the Corbin & King top company’s assets and guaranteed by each of the 10 operating companies.
Corbin & King’s top company failed to pay the £14.25m facility in May 2020, which caused an event of default and accelerated the £20m loan too.
After 19 months without repayment, MHG served a notice of demand on the top company on 19 January.
As soon as the notice of demand was served, Knighthead and hospitality and tourism investor Certares offered to acquire all of MINT’s debt and equity in the Corbin & King group for the amount of the loan.
Against that backdrop, the directors of the 10 operating companies contemplated placing them in a Part A1 moratorium process under the UK’s June 2020 Corporate Insolvency and Governance Act (CIGA).
Teneo director Benji Dymant and senior managing director Rob Harding were appointed as joint monitors on 20 January, after they took the view that the operating companies could be rescued as going concerns.
The following day, MHG made demands on each of the operating companies under their guarantees for the full £34m debt (US$46m).
Meanwhile, MINT rejected Knighthead’s offer and on 25 January applied to place Corbin & King’s top company into administration, appointing FRP Advisory partners Geoff Rowley and Ian Corfield as administrators.
In a press release, it said it appointed the administrators because the group’s top company was unable to meet its financial obligations and explained that Corbin & King had been severely affected by covid-19 and required “strong financial support” to survive and succeed.
“MINT has made repeated proposals to recapitalise the company and continuously pushed the board for cash injection to support the sustainability of the business. Unfortunately, Mr King and the other shareholders have declined MINT’s proposals and left it with no other viable option than to appoint administrators to the business,” the majority shareholder said.
“In light of the inability to align with Mr King on a sustainable commercial strategy, MINT has been required to act swiftly, for the benefit of all of the company’s stakeholders, to find a pragmatic way forward. MINT has taken this decision only after thoroughly considering and exhausting all other realistic options, as is required in the best interests of all stakeholders,” it added.
MINT also claimed that there was an attempt to make an unauthorised moratorium filing without board approval, which had to be withdrawn.
GRR understands the “unauthorised” moratorium relates to the group’s parent company, which was subsequently withdrawn by its directors on a consensual basis.
The day after MINT placed the top company in administration, Knighthead made a further offer to the FRP administrators to purchase all its interests and said it was prepared to work fast. But the administrators noted they would need to conduct a marketing process to ensure they had met their obligations to achieve the best price possible: a process that could take a few weeks, if not months.
Sir Alastair Norris noted that when MINT, MI Squared and MHG learned of Knighthead’s renewed offer, they put the FRP partners on notice that if they implemented the offer, they would bring personal claims against them.
On 28 January, MHG applied to terminate the operating companies’ moratoria on the grounds that they had unfairly harmed its interests.
Some days later, on 3 February, Knighthead made a third offer of £45 million (US$61 million) for the top company, plus a separate interim funding arrangement to refinance existing debts on a short-term basis and at a significantly lower interest rate, to allow the joint administrator to pursue the marketing process.
Sir Alastair Norris said it was common ground MHG’s debts counted as liabilities “arising under a contract or other instrument involving financial services” – meaning they were excluded from the payment holiday imposed on other “pre-moratorium” debts under Part A1 of the CIGA.
The judge acknowledged that the exclusion of finance debts from moratoriums under the new Act was “somewhat surprising” and that there was “some ambiguity in the statutory language”. Nevertheless, the result was that the operating companies were bound to pay the sums due to MHG under their guarantees regardless of the moratorium.
Although the operating companies were trading successfully again, the judge found they did not – and could not – pay.
MHG pointed out in its application that the Part A1 legislation states a monitor must bring a moratorium to an end if he or she “thinks that the company is unable to pay”, but Dymant and Harding declined to terminate the moratorium.
MHG also said it wished to appoint administrators over the operating companies because it had lost confidence in their directors and it would be beneficial to have the same FRP Advisory team in control of them and the top company.
It did not suggest the moratoria had jeopardised its loans, which were fully secured, nor that the loans would be paid earlier in administration than if Knighthead’s offer was implemented.
Sir Alastair Norris considered the meaning of the word “thinks” in the legislation and sided with the monitors’ counsel, Stephen Robins of South Square, instructed by Macfarlanes, that a “flexible and commercially realistic approach” should be taken where liability under guarantees was concerned.
The judge said it would be wrong to read provisions intended to introduce greater flexibility to the insolvency regime as requiring a focus solely on the guarantors’ ability to pay without considering whether the primary obligor – Corbin & King’s top company – could meet its obligations via the Knighthead offer.
Tom Smith QC of South Square, instructed by Mishcon de Reya for MHG, argued that the only relevant question for the monitors in deciding whether to terminate the moratoria was whether each moratorium company “is” able to pay its debts within five business days stipulated under a “disregard” clause in section A38(1)(d) of the legislation. He said the evidence showed the joint monitors did not believe the operating companies could do so.
Robins argued for a wider reading of the word “is”, submitting that the monitors’ exercise was not a “mechanical comparison” between liability and available cash at a given date.
Sir Alastair Norris aligned with Smith, saying the question facing the monitors was simply whether a company “is able” to pay a presently due pre-moratorium finance obligation.
The judge said a company “is able” to pay such an obligation if it has the “immediate prospect of receiving third party funds or owns assets capable of immediate realisation”.
What constituted “immediate” was a matter for the commercial judgment of the monitors, over which they are “allowed considerable latitude”, with anything over five business days requiring specific assessment.
The judge said the monitors had not applied that test, which was unsurprising because the moratorium provisions were new and raised novel questions.
Instead, they had considered whether Corbin & King’s top company had the immediate prospect of receiving third-party funds or realising assets to repay MHG’s loans.
The next question for the judge was whether the monitors had taken a “perverse” decision that no reasonable monitor applying the correct test could have reached.
Sir Alastair Norris said it was obvious at the time of Knighthead’s second offer that Corbin & King’s top company did not have immediately realisable assets, since that offer could only be accepted after an open sales process. But that changed following Knighthead’s third offer on 3 February, when separate funds were made available to the top company to immediately discharge the loans and relieve the operating companies of their liabilities.
“The joint administrators (rather to my surprise) gave the proposal a cool reception,” the judge said of Knighthead’s third offer. But he found there was no doubt the offer of secure interim funding pending a sales process “could properly cause” the Teneo monitors to think the loans would be repaid.
Between the moratorium hearing and his decision, Sir Alastair Norris noted that funds had indeed been tendered to MHG in repayment of the loans.
Finally, the court considered whether it should terminate the moratoria because the monitors ought to have terminated them at some point.
The judge said the court’s discretion fell as at the date of the hearing on 4 February and that he decided to dismiss MHG’s application and allow the moratoria to continue until lapse. He said that that would cast the burden on the administrators to justify an extension in the event repayment of the loans had not occurred by the time they expired.
Counsel to the operating companies, partner Paul Keddie at Macfarlanes, confirms that the moratoria came to an end before the judge’s written decision, with the completion of the refinancing.
Keddie tells GRR that this is the first time the new moratorium provisions in the CIGA have been considered by an English court and that his firm is only aware of the procedure being used a handful of times since its introduction in 2020.
“As with any new process, there has been a degree of apprehension regarding the circumstances in which a moratorium can be used (particularly given that there are a number of prescribed conditions to the use of a moratorium), but hopefully Corbin & King’s use of the moratorium demonstrates how helpful the process can be in providing a group with breathing space to achieve a refinancing or other transaction which results in its rescue as a going concern,” he says.
Keddie adds that the entry of the operating companies into administration could have been “very damaging” to Corbin & King’s business and brand and “risked value being lost in the parent’s investment in the subsidiaries”.
GRR reported that UK-incorporated waste oil refiner Hydrodec Group had entered into a Part A1 moratorium last June, which was revealed when the monitors applied for recognition in Australia. In that case, the Australian court said that while it could recognise a moratorium on principle, it could not recognise Hydrodec’s because it did not involve a plan for rescue.
First published on the Global Restructuring Review website, 17 February 2022