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United Kingdom

Law and regulation of Covid-19 loan moratoriums in the UK

Table of contents
  1.  Description of the legislation
    1.  Is there a moratorium on loans legislation implemented in your jurisdiction?
    2. If no: Are there any ongoing discussions regarding a potential introduction of such measures?
    3. What is the name of the relevant legislation (the “Relevant Act”)?
    4. What is the duration of the measures (period of moratorium)?
    5. Does the legislation provide for an extension of the period of moratorium?
    6. Is the moratorium mandatory, or can each borrower opt out should they wish to simply continue payments, or opt in if they want to be protected by the moratorium?
  2. Parties and agreements affected by the Relevant Act
    1. Is the moratorium available for both corporate and consumer loans?
    2. Who are the affected Lenders?
    3.  Does it make a difference whether loans are granted by a foreign entity and governed by foreign law?
  3. Impact on the loan agreements
    1.  Is there a cut-off date with respect to loan agreements to which the Relevant Act will apply (e.g. not applicable to loan agreements entered into after the cut-off date)?
    2.  Does the moratorium apply to principal only, or also to interest and/or fees?
    3. Will the maturity of the loan automatically be extended by the moratorium period?
    4. Are repayments and interest which have become due and payable under the contract before the Relevant Act has come into force covered by the moratorium?
    5. Will lenders be able to terminate a loan due to an event of default other than non-payment (e.g. breach of financial covenants)?
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1. Description of the legislation

1.1 Is there a moratorium on loans legislation implemented in your jurisdiction?

No.

1.2 If no: Are there any ongoing discussions regarding a potential introduction of such measures?

The UK Government announced on 28 March 2020 that it would be amending the current insolvency laws in response to the COVID-19 crisis. Little detail has been provided to date except that the Government has said the changes will include the implementation of certain reforms that were announced in August 2018.  Legislation is to be put before Parliament when MPs return after the Easter recess on 21 April 2020.

Among the proposed reforms is the ability for companies to seek a moratorium to provide them with breathing space to undergo a rescue or restructure process to avoid an unnecessary insolvency. If the reforms mirror the August 2018 proposals, then companies would need to be solvent to seek a moratorium.  Furthermore a rescue would have to be more likely than not, and the company would need to be able to pay its debts as they fall due during the moratorium period.

If as per the August 2018 reforms, the period of moratorium will initially be 28 days. The August 2018 reforms contemplated an extension of a further 28 days if the qualifying conditions continued to be met. Beyond 56 days an extension would require the agreement of a majority of both secured and unsecured creditors.

In addition to a moratorium, other proposed reforms include a prohibition on the enforcement of termination rights due to the insolvency or financial condition of the other party to enable companies to buy supplies like energy, raw materials and broadband. There is also a proposal to introduce a new restructuring procedure (which could be used in conjunction with the moratorium).  

In addition to reforms based on the August 2018 proposals, as part of these changes to Insolvency law, the UK Government has said it will temporarily ‘suspend’ the offence of wrongful trading retrospectively from 1 March 2020. Again, detail is awaited to understand more fully the extent of this change.

1.3 What is the name of the relevant legislation (the “Relevant Act”)?

N/A

See point 1.1 above.

1.4 What is the duration of the measures (period of moratorium)?

N/A

See point 1.1 above.

1.5 Does the legislation provide for an extension of the period of moratorium?

N/A

See point 1.1 above.

1.6 Is the moratorium mandatory, or can each borrower opt out should they wish to simply continue payments, or opt in if they want to be protected by the moratorium?

N/A

See point 1.1 above.

2. Parties and agreements affected by the Relevant Act

2.1 Is the moratorium available for both corporate and consumer loans?

The proposed changes apply to corporates only.

2.2 Who are the affected Lenders?

Any lender – although no details at present, the August 2018 consultation suggested that secured creditors would not be able to take action against a company during this period while it was making plans to restructure.

2.3 Does it make a difference whether loans are granted by a foreign entity and governed by foreign law?

No.

3. Impact on the loan agreements

3.1 Is there a cut-off date with respect to loan agreements to which the Relevant Act will apply (e.g. not applicable to loan agreements entered into after the cut-off date)?

No.

3.2 Does the moratorium apply to principal only, or also to interest and/or fees?

The proposed moratorium will prevent creditors from enforcing their rights generally rather than being specific to the type of amount owed.

3.3 Will the maturity of the loan automatically be extended by the moratorium period?

No.

3.4 Are repayments and interest which have become due and payable under the contract before the Relevant Act has come into force covered by the moratorium?

To be determined, but based on the August 2018 proposals, no as if not paid, the company is not solvent so cannot seek the moratorium.

3.5 Will lenders be able to terminate a loan due to an event of default other than non-payment (e.g. breach of financial covenants)?

Again, to be determined, but based on the August 2018 proposals, loans can be terminated but rights not enforced.

Authors

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Portrait ofMartin Brown
Martin Brown
Partner
London
Portrait ofJulian Turner
Julian Turner
Consultant
London