Who would want to be a monitor – The case of Corbin & King Holdings Ltd

Corbin & King Group (Re Corbin & King Holdings Ltd [2022] EWHC 340 (Ch)) marks the first judicial consideration of the moratorium regime introduced in 2020.  Perhaps its not surprising that it has taken almost two years to come before the courts given the limited usage of the regime during these COVID times.

The case centred around the Corbin & King Group (Group) of nine restaurants, including the renowned The Wolseley.  Key to the case was the structure of the Group which had a parent company (Topco) separated by two intermediate group companies from eight operating, asset owning companies (Opcos).

The Group was funded by lending from Minor Hotel Group MEA DMCC (MHG), through separate facilities of £14.25m and £20m granted to Topco and secured by guarantees granted by the Opcos.  MHG was an associate company of the Group's majority shareholder known as MI².

The £14.25m loan was due to be repaid in 2020; the failure to do so then cross-defaulted the £20m loan albeit that MHG only formally made demand for repayment on 19 January 2022.  This set in motion a chain of significant events which, given the delay, is perhaps no coincidence.

• On 19 January 2022, a party known as Knighthead issued an offer to the parent of MI² (Parent) to buy its interests in Topco and the Opcos for the amount of the outstanding loans.

• On 20 January 2020, the Opcos commenced moratoriums under Part A1 of the Insolvency Act 1986, with joint monitors giving the necessary confirmations that moratoriums for the Opcos would result in their rescue as going concerns.

• On 21 January 2022, MHG made demand on the Opcos under the guarantees.

• On 25 January 2022, MHG appointed administrators over Topco.

• On 26 January 2022, Knighthead made a revised offer to the joint administrators of Topco to purchase the Opcos for a consideration at least equal to the outstanding group debt of circa £38m (Purchase Offer).   The Parent, MI² and MHG put the administrators of Topco on notice that if they accepted this offer, they would face personal claims.

The result of these conflicting actions was an application by MHG on 28 January 2022 pursuant to sections A38 and A42 of the Insolvency Act 1986, for orders terminating the moratorium on the grounds that the monitors' failure to do so already, had prejudiced their rights to appoint administrators over the Opcos.

The limits of the moratorium regime

The case highlights one of the key limitations from the debtor company's perspective of the moratorium regime, that the guaranteed debt, because it arose under a financial contract, was not subject to any payment holiday under the moratorium and therefore could be accelerated by MHG and needed to be paid by the Opcos.

In turn, the result of the demand for the monitors was that they were faced with the need to assess whether they needed to bring the moratorium to an end because they thought that the company was unable to pay a pre-moratorium debt for which there was no payment holiday.  An obligation imposed by section A38 IA. 

The court noted that this was a different question to the one monitors continually have to be assessing of whether it is likely that the moratorium will result in the rescue of the company as a going concern.

What does 'think' mean in the insolvency legislation?

The court confirmed case law from administrations that the use of the word think is intended to bring a degree of latitude for the officeholder such that they are not lightly to be second-guessed by a court acting with hindsight; therefore to challenge what an officeholder thinks, you would need to show bad faith or, more likely, a decision so irrational no monitor could reasonably have reached it.

When is a company to be considered unable to pay a pre-moratorium debt for which there is no payment holiday for the purposes of section A38 IA?

The judge opined that a company was able to pay a presently due pre-moratorium finance obligation if (being unable to pay out of current cash resources) only where it had the immediate prospect of receiving third party funds or owned assets capable of immediate realisation for the relevant amount. What is immediate was a matter of commercial judgment which the monitor, because of the use of think, had considerable latitude in respect of. 

What did the monitors think in this case and was that a decision no monitor could have reached?

On their evidence, the monitors submitted that they did think the Opcos would be in a position to meet the debt because of the Purchase Offer made from Knighthead and the fact that this set a low bar threshold for any further offers that might be made, demonstrating that the Group would repay the debt.  The judge did not agree, however, and thought this decision sat the wrong side of the line of what a reasonable monitor could have thought; this was because the offer was only one to purchase assets (not directly to repay the MHG debt) and any sale process was going to take the administrators a period of time to complete extending the time for any repayment of the MHG debt.

However, a further offer made by Knighthead after the application had been made by MHG, changed this landscape by the time of the hearing.  This next offer involved a time-limited cash offer of £45m for the Topco interests but, crucially, an interim funding arrangement under which Knighthead would refinance the existing MHG debt on a short-term basis at a significantly lower interest rate, in order to allow sufficient stability for an orderly sale process.  On the basis of this funding offer, the judge considered the monitors could properly think that the debt was to be repaid. 

As a result, he used his discretion to dismiss MHG's application on the basis that the harm suffered by MHG as a creditor was less significant than the harm that would have been suffered by the Opcos if MHG was enabled to commence insolvency proceedings against them.

Commentary

Aside from the novel nature of the case and the high profile brands involved, the case provides useful direction on the interpretation of IA provisions which are triggered by what an officeholder thinks.  It also provides helpful guidance for monitors faced with a moratorium which is highly likely to succeed but is under pressure from a creditor not subject to the payment holiday.