Introduction

Independent schools have not been immune from financial stress in recent years.  Prior to the pandemic a combination of increasing staff costs, greater competition and the need for continual investment in technology and premises was already posing challenges for a number of institutions.  This was exacerbated by the unique pressures of COVID, which saw income squeezed as a result of enforced school closures and reduced pupil numbers.

It was against precisely this backdrop that the directors of The Grove Independent School Limited urgently sought a moratorium earlier this year when presented with a winding-up petition from HMRC for various arrears (see Re Grove Independent School Ltd [2023] EWHC 2546 (Ch)).  The company trades as an independent school with 200 pupils aged between three months and 13 years old.  It sought the protection of a moratorium to enable it to continue to trade whilst it pursued a refinancing.

The moratorium process

The free-standing moratorium process was one of three permanent measures introduced by the Corporate Insolvency and Governance Act 2020 (CIGA).  The purpose of the moratorium is to facilitate the rescue of the company using it.  It seeks to achieve this by providing for a limited period during which the relevant company is protected from creditor claims.  With the benefit of this breathing space, the company can seek to implement an appropriate rescue or restructuring option to restore it to financial viability.

Where, as in this case, the company seeking the moratorium is subject to an outstanding winding-up petition, it must make an application to the court (as opposed to simply filing prescribed documents).  In this situation the court may make an order for a moratorium but only if it is satisfied that this would achieve a better result for the company’s creditors as a whole than would be likely if the company were wound up without first being subject to a moratorium (our emphasis added).

The judgement

Use of the moratorium process has been limited since it was introduced which has meant that no case law previously existed to clarify precisely how the court should approach the assessment described above.  Helpfully for practitioners this judgment included the following guidance:

• The better result test requires the court to compare the likely or probable outcome in the event of a moratorium being ordered (taking into account the proposed monitor’s evidence) with the likely or probable outcome in the event of a liquidation without a prior moratorium.  Only if the court is satisfied on the balance of probabilities that the former would be a better alternative is its discretion to approve the moratorium engaged.  
• The standard of proof applied by the court in the context of the better result test is therefore different to the test applied on an application for an administration order.  In that situation the court must be satisfied that the order would be reasonably likely to achieve the purpose of the administration (our emphasis added); this can be taken to mean that there must be a real prospect of its achievement, which is not to say that there must be more than a 50 per cent chance.
• It is unlikely that the legislation intended the better result test to be a profoundly technical exercise.  The court will therefore conduct the comparison on the basis of the evidence before it in a broad fashion, in accordance with commercial realities.

With the better result test clarified the judge had no difficulty in finding that it had been satisfied on the facts of this case.  The evidence supported the conclusion of the proposed monitors that the moratorium was likely to lead to the rescue of the company and it was accepted that the outcome following a liquidation on the HMRC winding-up petition would very likely be worse.  The court noted in this regard that a liquidation would be extremely damaging for the company’s creditors and would very likely lead to the collapse of the business, closure of the school (with chaos to parents and children) and to additional consequential staff and other claims.

The court was similarly happy to exercise its discretion in favour of ordering a moratorium, noting that the company needed precisely the sort of short breathing space that the light touch process offered and that the possible alternative of an administration would be heavy handed, expensive and disruptive to the running of the school.  The court also expressly considered the important social function fulfilled by the large school which the company operates.

Comment

The technical guidance provided in this case makes it a helpful judgment for insolvency practitioners and restructuring advisers.  Those involved in the schools sector will however also be interested to see the regard that the judge had to the social function of the school and the likely disruption that a liquidation would have on parents and children, which has faint echoes of the emphasis given to  disruption to the studies of existing students in an education administration.  It is crucial to note however that the legal form of the school operator will dictate whether it is able to make use of the moratorium and other restructuring tools, and this makes it even more important that specialist advice is sought at the earliest opportunity.

If you would like to discuss any aspect of this decision please contact a member of our specialist Corporate Restructuring and Insolvency team.