MORATORIUM MEASURE IN PROCEEDING OF THE REHABILITATION REGIME

Abstract

The debtor, who is willing to implement the rehabilitation regime, needs proper support in order to maintain and protect insolvency, increase the liquidity of the entity, etc. The moratorium measure ensures all of the aforementioned in insolvency law, in particular in the rehabilitation regime. The use of the moratorium measure in the rehabilitation regime should not be understood solely in favour of the debtor. It is a means of protecting the interests of creditors along with the interests of the debtor. The law distinguishes between mandatory and additional moratorium measures. As soon as the court issues a ruling on opening the rehabilitation regime, certain measures of the moratorium are automatically put into effect, and in certain cases, based on the court’s decision, it is possible to apply additional measures of the moratorium. Consequently, the moratorium measure requires the court’s involvement and caution. When applying the moratorium, the court must act in accordance with the principles of justice and proportionality. The use of the moratorium measure in the rehabilitation regime can be considered an important means of implementation of one of the important principles of the law, “ – Maintaining and increasing the insolvency and business value as much as possible”.

Keywords: Insolvency; Rehabilitation; Moratorium.

Introduction

As we know, in 2020, the Parliament of Georgia adopted a new Law, “On Rehabilitation and Collective Satisfaction of Creditors”. The legislator set the implementation of the rehabilitation regime as the primary goal of the law, which is the best way to protect the interest of both the debtor and the creditor.

The basis of the debtor’s insolvency/expected insolvency is a financial crisis from which no business entity is immune. Therefore, to overcome the crisis, the debtor needs some legal support. In insolvency, in particular, in the rehabilitation regime, a moratorium measure appears as such, which ensures the suspension of obligations to be fulfilled by the debtor for a certain period of time. The moratorium measure cannot be understood only as a means of realising the interests of the debtor. It is also a means of protecting creditors’ interests for the implementation of the rehabilitation regime.                                                

This article is interesting and innovative in the sense that the moratorium measure within the framework of the new law is discussed in it.

In order for the work to be of a proper standard, such types of research as historical research, comparative, narrative, descriptive methods, etc., are used in it.

The purpose of the research topic is to study and discuss the moratorium measure in the field of insolvency, in particular, in the rehabilitation regime.

The subject of the study is the study of the current law of the Georgian legislation on insolvency, in which the institution of the moratorium falls.

The object of the research is to study the institution of a moratorium in the example of Georgia and Britain.

The Law of 2007  on Insolvency Proceedings was considered to be rigid with regard to moratorium measures and did not allow for the application of moratorium measures that were balanced and tailored to a particular debtor. It was also noted that the previous law was characterised by a lack of legal regulation.^[1] Accordingly, it became necessary to organise it in a new way, which was implemented within the framework of the new law.

Moratorium Measured as a Free Breathing Space for the Debtor

The moratorium measure, in its turn, gives the financially distressed but still viable debtor the opportunity to prepare for rehabilitation, seek new investments or implement other rescue measures. During the moratorium, creditors cannot take any legal action against the company without approval (i.e. permission) of the court.^[2] A moratorium protects a financially distressed company from taking legal action until a rehabilitation plan is approved or the company’s affairs are settled.^[3] By using the moratorium cover, the debtor is given an opportunity to improve liquidity, including by postponing the fulfilment of due obligations, which, in turn, increases its ability to rehabilitate and is one of the determining factors for successful rehabilitation.^[4]

The most important feature of the rehabilitation regime in Great Britain is the moratorium, which is called a kind of “freeze”.^[5] Here, in order to take advantage of the moratorium measure, it is necessary to submit an application to the court and produce documents.^[6] The moratorium comes into effect from the date when an application is made to the court for the appointment of a practitioner or when a notice of appointment of a practitioner is served during an out-of-court proceeding. In Great Britain, a moratorium halts all legal proceedings and enforcement of judgments already made and provides security without court permission or practitioner consent.^[7]   According to the applicable law of our country, the moratorium measures are automatically put into effect as soon as the court issues a ruling on the opening of the rehabilitation regime, and in certain cases, it is possible to use additional moratorium measures based on the court’s decision. The law determines everything imperatively. Let’s discuss each of them individually.

Moratorium Measures Automatically Put into Effect

According to the law, the following measures of the moratorium will be automatically put into effect: the ongoing enforcement measures against the debtor’s property shall be suspended, and the initiation of new enforcement measures will not be allowed; Enforcement measures provided for by the Tax Code of Georgia (tax liens, mortgages, etc.) and the accrual/payment of fines and penalties shall be suspended, and the initiation of new enforcement measures shall not be allowed, except for the measures implemented for the purpose of paying off the tax debt incurred after the ruling made on admissibility of the application for insolvency and opening of the rehabilitation or bankruptcy regime by the court in accordance with the procedure established by the Tax Code of Georgia, and many others.^[8] When moratorium measures are directly established by law, they are called statutory moratoriums, the so-called: Oxygen space. For effective negotiation, it is necessary for the company to have free breathing space, which is provided by the moratorium measure.^[9] Considering all of the above, the following can be said: the moratorium is crucial in order to give the debtor the breathing space he/she needs to achieve rehabilitation goals. In rehabilitation, a moratorium gives businesses the time and freedom they need to find logical solutions and ways to move forward. It depends on the debtor what way he/she will find. For example, it can be the sale of assets and the satisfaction of creditors with the money received from the sale, finding a partner who, in exchange for the company’s share, will settle the liabilities with the amount paid by him/her, or finding a buyer through which the company’s products will be purchased, etc. The debtor has absolute freedom as to what measures to take to fulfil obligations. When a debtor is facing a financial crisis, rehabilitation is the best way to avoid pressure from creditors. And the purpose of the moratorium and its legal regulation is crucial to achieving the goals of rehabilitation.

In Great Britain, a moratorium is considered a debtor-in-possession procedure, which means that the company is still controlled by management. However, a licensed insolvency practitioner known as a “monitor” shall be appointed to provide supervision and assurance to creditors. His/her duty is to monitor the company’s current activities and the probability of its survival. If he/she considers that the result is unlikely to be achieved, it is his/her duty to terminate the moratorium measure.^[10] The latter is established by the applicable law of our country, according to which the court is authorised to make a decision on the cancellation of certain measures of the moratorium based on a substantiated statement of the creditor, debtor, manager, or another interested person.^[11] The law also establishes certain cases when the moratorium measure can be revoked.

Additional Measures of the Moratorium

As for the use of additional measures of the moratorium, it requires a substantiated statement of the creditor, debtor, manager, or other interested person on which the court will make a ruling.                         

According to the ruling made on the basis of additional measures, it is possible: 1. To prohibit the debtor from returning the items in his/her possession that were transferred under leasing, conditional title reservation, or another basis; 2. To restrict or prohibit the debtor from disposing of the property, including its alienation or encumbrance, from suspending the operation of the norms of the agreement concluded by the debtor, which obliges the debtor to dispose of the property, etc.^[12]

If the automatically implementable measures of the moratorium are aimed at the interests of the debtor and to give him/her the opportunity, to save him/her, the additional measures of the moratorium ensure the protection of the interests of the creditors so that satisfaction of the creditors’ demands does not become more difficult or worse, impossible. And the third clause, which limits the choices of the debtor’s counterparties, can be considered a means of protecting the interests of both parties.

Moratorium Measure in accordance with the Act on  Insolvency Proceedings

According to the applicable law, a separate chapter is devoted to the moratorium measure. As mentioned, the 2007 law was distinguished by the scarcity of its legal regulation. The moratorium measure is not even mentioned by this name in the  2007 law. Accordingly, its definition does not exist, nor does the standard that the new law proposed by regulating it. The Law on Insolvency Proceedings only indicated that it was prohibited to secure debts taken before the court ruling on acceptance of application on insolvency, payment of debts, and accrual/payment of interest, penalty, and fine (including tax) were suspended.^[13] The mere existence of this norm in the law on such an important institution is an unequivocal basis for stating that the 2007 Law was behind modernity; it was necessary for it to develop appropriate norms and then implement them. The disorder of these and many other issues can be considered as the basis for adopting a new Law, “On Rehabilitation and Collective Satisfaction of Creditors”.

Conclusion                                   

Based on the summary of everything, we can conclude that the applicable Law “On Rehabilitation and Collective Satisfaction of Creditors” gives the debtor an absolute opportunity to secure his/her rights through the rehabilitation regime, achieve the goals and overcome financial difficulties, primarily through the moratorium measure.

Based on the law and after analysing everything, it can be said that through the implementation of the rehabilitation regime, the debtor has such interests as a continuation of his legal existence as an entrepreneurial entity - in the registry of Entrepreneurs and Non-entrepreneurial legal entities, maintaining his/her business, where he/she carries out entrepreneurial activities and which is equipped with a number of organisational and structural units. The moratorium, the existence of which is very important because it allows the debtor to breathe by “pausing debts” and helps the debtor to ensure all the mentioned. For the debtor, in addition to personal material interest, it is interesting to maintain the existing relationship with the creditors and to continue it in the future, which is ensured by the rehabilitation regime and the moratorium institution. The rehabilitation regime is also important because it gives the debtor an opportunity to think about the future, enter into new legal relationships, conclude new agreements, acquire new partners, create new trade relations, think about the establishment of a branch office, etc. And for this purpose, it is necessary for him/her to be able to use the moratorium measure.

Bibliography

Used literature:

1. Adam Plainer, Jones Day Gouldens Bucklersbury House, Corinne Ball, Jones Day. Comparison of Chapter 11 of the United States Bankruptcy Code and the System of Administration in the United Kingdom;


2. Ashurst, Corporate Insolvency and Governance Act: The Moratorium. LONDON, 26 JUN 2020;


3. Amisulashvli N., Bashinuridze K., (2019) Guidelines for Regulated Agreements, USA International Development Project “Governance for Development”;           


4. Lorraine Conway. Corporate insolvency framework: proposed major reforms. House of Commons Library;


5. Lorraine Conway. Corporate insolvency framework: proposed major reforms. House of Commons Library;


6. Meskishvili K., Batlidze G., Amisulashvili N., Jorbenadze S., (2021) Basics of conducting insolvency proceedings according to the Law of Georgia “On Rehabilitation and Collective Satisfaction of Creditors”, Publisher: © GIZ, Tbilisi;


7. Vanessa Finch, (2009) Corporate Insolvency Law Perspectives and Principles, Second Edition.

Normative material:

1. Law on Insolvency Proceedings;


2. Law “On Rehabilitation and Collective Satisfaction of Creditors”;


3. Explanatory card on the draft of Georgian Law “On Rehabilitation and Collective Satisfaction of Creditors”, 2020;


4. Corporate Insolvency and Governance Act 2020

Footnotes

[1]  Explanatory card on the draft of Georgian Law “On Rehabilitation and Collective Satisfaction of Creditors”, 2020.

[2] Lorraine Conway. Commons Library analysis of the Corporate Insolvency and Governance Bill [HC2019-21]. House of Commons Library. p. 23.      https://researchbriefings.files.parliament.uk/documents/CBP-8922/CBP-8922.pdf

[3] Lorraine Conway. Corporate insolvency framework: proposed major reforms. House of Commons Library. p. 6. https://researchbriefings.files.parliament.uk/documents/CBP-8291/CBP-8291.pdf

[4]Meskishvili K., Batlidze G., Amisulashvili N., Jorbenadze S., (2021) Basics of conducting insolvency proceedings according to the Law of Georgia “On Rehabilitation and Collective Satisfaction of Creditors”, Publisher: © GIZ, Tbilisi. p. 33. http://lawlibrary.info/ge/books/GIZ_Insolvency-reader_2021.pdf

[5] Vanessa Finch, (2009) Corporate Insolvency Law Perspectives and Principles, Second Edition. p. 22.

[6] Corporate Insolvency and Governance Act 2020, Chapter 2, A3.

[7] Adam Plainer, Jones Day Gouldens Bucklersbury House, Corinne Ball, Jones Day. Comparison of Chapter 11 of the United States Bankruptcy Code and the System of Administration  in the United Kingdom.

[8]  Law “On Rehabilitation and Collective Satisfaction of Creditors”, Article 55 [last viewed on April 11, 2023].

[9] Amisulashvli N., Bashinuridze K., (2019) Guidelines for Regulated Agreements, USA International Development  Project “Governance for Development”, p. 21. https://pdf.usaid.gov/pdf_docs/PA00TZGW.pdf

[10] Ashurst, Corporate Insolvency and Governance Act: The Moratorium. London, June 26, 2020. https://www.ashurst.com/en/news-and-insights/legal-updates/ciga---the-moratorium/

[11]  Law “On Rehabilitation and Collective Satisfaction of Creditors”, Article, 58.1 [last seen on April 11, 2023].

[12]  Law “On Rehabilitation and Collective Satisfaction of Creditors”, Article, 57.1 [last seen on April 11, 2023].

[13]  Law on Insolvency Proceedings, Article 21.3 [last seen on April 11, 2023].