Re Grove Independent School Article Overview

Thursday 14th December, 2023

Second only landmark decision shows the direction of travel by the Insolvency courts when hearing applications for a Part A1 moratorium

In the recent case of Re Grove Independent School Ltd [2023] (“Re Grove”), the High Court exercised its discretion to approve an application by the directors of an independent school to obtain the benefit of a moratorium under section A4 of the Insolvency Act 1986 (the “IA 1986”).

The judgment is the first since Re Corbin & King Holdings Ltd [2022] EWHC 340 (Ch) and only the second overall to consider issues under the recently introduced moratorium procedure in Part A1 IA 1986. As such, the decision is very helpful as it provides some clear direction as to how the court will exercise its discretion when considering moratorium applications by financially distressed companies.

Background to the A1 Moratorium Process

By way of background, the moratorium under Part A1 of the IA 1986 was one of three new permanent measures introduced under the Corporate Insolvency and Governance Act 2020 shortly after the outbreak of the COVID-19 pandemic.

The moratorium procedure aims to provide temporary breathing space for a company in financial difficulties by protecting it from certain types of creditor claims during the protected period. This breathing space then allows the company to pursue a rescue process or a financial restructuring without the threat of it being undone by creditors pursuing their claims against it. The Part A1 process is the first free-standing moratorium provided under UK insolvency law.

The moratorium can either be commenced by an out-of-court filing or by a court order. Where there is an outstanding winding-up petition, as there was in Re Grove, it will be necessary to seek a court order for the sanction of the moratorium.

If granted, the moratorium will be overseen by a monitor and will last for an initial period of 20 business days. It can then be extended for a further 20 business days without creditor consent and, thereafter, for a further year with creditor consent.

When using the court route, the application will need to be accompanied by certain documents, one of which is a statement from the proposed monitor that the moratorium would achieve a better result for the company’s creditors as a whole than if the company were wound up without it. The Court will only grant the application if it is satisfied as to this latter element and this was the focus of Re Grove.

The Facts

Grove Independent School (“Grove”) had been facing financial difficulties, partly due to the after-effects of the pandemic and other challenges facing the independent school sector, both of which saw a reduction in fee income.

These difficulties resulted in Grove being in arrears with HMRC which subsequently presented a winding-up petition. Grove urgently applied to the High Court to seek a moratorium to allow it to continue trading and seek refinancing.

The decision

The High Court approved the application and ordered that Grove be granted the protection of a moratorium.

In approving the application, the High Court provided useful guidance on how it would exercise its discretion in a process which had, until the case, been untested.

The following are some of the key points to note from the judgment:

  • The wording of Section A4(4) of Part A1 of the IA 1986 makes it clear that the Court has a discretion as to whether to make an order. However, this discretion is narrowed by virtue of Section A4(5) by providing that a moratorium can only be ordered if the Court is satisfied that the company would achieve a better result for its creditors as a whole than would be likely if the company were wound up without first being the subject of a moratorium.
  • The test under Section A4(5) requires the Court to engage in a comparison between two alternative, uncertain futures. The first is the likely or probable outcome for the company’s creditors as a whole in the event of a moratorium being ordered. The second is the likely or probable outcome in the event of a liquidation without a prior moratorium. It is only if the Court considers that the first outcome is better than the second that it has jurisdiction to consider whether to exercise its discretion.
  • Regarding the above comparison, the language of Section A4(5) suggests that the Court must be satisfied on the balance of probabilities that the first outcome is better than the second, not merely that there is a real prospect or possibility that it will be better.

Following this guidance, the High Court ruled that, based on the evidence presented, creditors of Grove as a whole would be better off with the granting of a moratorium rather than a liquidation scenario without a prior moratorium.

The Court noted that, based on the evidence provided by the proposed monitors and the sole director, the limited breathing space provided by the moratorium was exactly what was needed in order to help facilitate Grove’s rescue. The Court further stated that the alternative use of an administration would, in the circumstances, be unduly heavy handed and expensive. It was noted that Grove’s only secured lender supported the moratorium application and HMRC had not objected to it.

The Court also indicated that particular factors arising from Grove being a school played a material role in it choosing to exercise its discretion. These included the facts that the school had a large number of pupils (approximately 200) and 50 staff, all of whom would be adversely impacted by the refusal to grant a moratorium.

Key Takeaways

The Re Grove case has provided us with important guidance on how the Court will exercise its discretion when considering whether to grant a Part A1 moratorium. It is therefore helpful in providing useful clarity as to how the Court will approach a moratorium application and will be welcome news for insolvency practitioners and lawyers.

The judgment is also interesting in clarifying that the standard of proof required in order to satisfy the test under Section A4(5) is “on the balance of probabilities”. This is to be contrasted with the lower standard required when hearing an application for an administration order which only requires that it be “reasonably likely” that the administration would achieve the statutory purpose.

Finally, it is notable that cases may prove to be very fact sensitive. In this case, weight was given to the school’s important societal function and the clear downside impact that liquidation would have on pupils, their parents and staff alike. In addition, Grove’s secured lender was supportive of the application and had indicated that it would continue to offer its facilities during the course of the moratorium. Less deserving candidates may not fare so well and fail to persuade the Court to extend its discretion.

In the Matter of the Grove Independent School Limited [2023] EWHC 2546 (Ch)

Brett Israel is a partner in our Business Restructuring team.

Articles by Brett Israel