Is a Moratorium right for my company?

While a Moratorium gives a company a chance to breathe, it is the plans put in place during the period of the Moratorium that will provide a long-term solution to the financial difficulties it faces. A Moratorium is not a solution in and of itself but enables the breathing space for one to be decided and put into practice.

What is a moratorium?

A moratorium, provides businesses with a breathing space. It is triggered as soon as a company and a monitor (a licensed insolvency practitioner) file appropriate documents in court.

The Corporate Insolvency and Governance Act (the Act) makes both temporary and permanent changes to the UK insolvency laws which came in effect when it received Royal Assent on 25 June 2020. One of the long-term measure introduced was the Moratorium.

This article will examine what happens to a company during a moratorium, and how it can be beneficial.

Breathing space

Essentially, a Moratorium provides a company with breathing space for an initial period of 20 days (however this can be extended) without the threat of creditor action. In a Moratorium the day to day running of the business remains in the directors’ control, under the supervision of a licensed insolvency practitioner (the monitor).

This breathing space allows the company time to assess its position and pursue a plan to rescue the company as a going concern. The company will be granted a payment holiday from certain debts incurred prior to the Moratorium for the period of the Moratorium.

While a Mortarium freezes ongoing legal proceedings (except certain employment claims) and disallows the commencement of new proceedings being brought forth, it is not a permanent solution against these threats. It should be noted the upon application of creditors the court can give consent to creditors taking certain action in respect of their debts. The protections provided are however quite significant, and include:

Landlords not being able to implement any action such as forfeiture or Commercial Rent Arrears Recovery (“CRAR”),
No petitions of a winding up order can be made,
No petition for administration can be proposed and no administrative receiver can be presented or appointed,
No High Court and bailiff enforcement for pre-Moratorium debts can be commenced or continued.
There can be no action to secure or repossess Hire-Purchase goods in the company’s procession, including those with a retention of title agreement,
No other legal action can be taken against the company.

Other Benefits of a Moratorium

Unlike the moratorium in an Administration or a company moratorium preceding a Company Voluntary Arrangement the Moratorium is a stand-alone process and not a pre-cursor to a formal insolvency procedure.

Subject to certain obligations and restrictions the directors remain in control of the running of the business while being supervised by the Moratorium monitor.

Unlike other procedures involving a moratorium there is no requirement to provide notice or obtain secured creditor consent to the Company entering the Moratorium.

Company Eligibility

Our experts can assess whether your company would be eligible to enter a Moratorium. Most UK companies are eligible if the company is, or is likely to become, unable to pay its debts as they fall due and it is likely that the Moratorium will save the company.

Our licensed Insolvency Practitioners can act as a monitor of the Moratorium and assist the Company in establishing whether it is likely that the Moratorium will result in rescue of the company as a going concern.

Once the company eligibility has been established the company and the monitor file documents in court and the Moratorium commences. For those companies that are already subject to winding up proceedings the company will be required to make an application to court to commence the Moratorium.

Obligations during the Moratorium

During the Moratorium, a company is required to adhere to certain obligations and restrictions.

The company is obliged to pay certain creditors including, debts incurred during the Moratorium including rent for the Moratorium period, employee liabilities (not limited to those falling due during the Moratorium).

The company and directors are required to comply with requests for information from the Moratorium monitor, display the name of the monitor and that a Moratorium is in force on its website and the business premises and any business documentation (e.g. invoices and business letters).

The company must not, obtain more than £500 credit without informing the creditor that a moratorium is in force, grant security over its property and assets (without the monitor’s consent), pay certain pre-moratorium debts without the monitor’s consent or dispose of any other property, unless the disposal is in the ordinary course of business or the monitor or court consents.

The Moratorium Monitor

A company must appoint a licensed insolvency practitioner (IP) to act as the Moratorium monitor. The monitor is not involved in the day to day running of the business but is required to determine whether a Moratorium is likely to result in the rescue of the company as a going concern and during the Moratorium continue to monitor the company’s affairs to ensure that this is still the case.

The monitor can provide consent to some actions which are restricted without their approval and in some circumstances is required to terminate the moratorium. Our IP’s at Chamberlain and Co can act as a Moratorium monitor and will work with you to rescue the company.

What happens when a Moratorium comes to an end?

There are a number of solutions that can be used to successfully emerge from a Moratorium and rescue a company as a going concern. These could include:

Finance being raised to pay creditors.
Additional investment obtained from shareholders to assist with cashflow.
Obtaining approval for a Company Voluntary Arrangement
Agreeing an informal time to pay agreement with creditors and/or HMRC.

If it is decided that the company cannot be rescued as a going concern then other options such as Administration, Company voluntary Arrangement or Liquidation can be considered.

What is a moratorium?

The best course of action is to contact a licensed insolvency practitioner. This way, you will have all the options laid out in front of you and can be walked through by a professional who deals with hundreds of these situations.

Seeking advice early often increases the options available and the chances of a successful outcome. Please do not delay and call one of our licensed insolvency practitioners today to discuss your situation.

Alternative routes

While a moratorium offers a lot of benefits to companies facing difficulties, there are alternative, potentially more appropriate routes which may be pursued. Our expert advisors will talk you through the alternative routes available. Some alternative options are explained in brief below.

Company Administration

If your company is experiencing pressure from creditors and the Company needs a breathing space to formulate and implement a rescue plan, then a Company Administration may be the best route for you.

This process involves a licensed insolvency practitioner being appointed as Administrator to take control of the company, review it financial position and formulate a plan to achieve the purpose of the Administration which is defined in statue as one of three purposes:

Rescuing the company as a going concern
Achieving better results for the company’s creditors as a whole, than would be possible if the company were wound up without first being in administration.
Realising property and assets to make a distribution to one or more secured or preferential creditors.

A Pre-Pack Administration can be a powerful tool to rescue a business allowing the sale of a Company’s business to be done quickly, preserving value as the risk of losing employees and contracts are reduced and therefore enhancing the return to creditors.

Company Voluntary Agreement (CVA)

If a company has significant debts but it is believed that is can continue to trade and repay at least a significant portion of those debts, it may be beneficial – for both creditors and for the company itself – to enter into a Company Voluntary Agreement (CVA).

A CVA is a process by which the company and its creditors agree to a payment plan of part, or all, of the debts owed, over a specific time frame. This will often provide a better return for creditors than liquidation and give the company a chance to continue trading and potentially recover.

Once formalised, a CVA will then become a binding contract for both parties and will usually facilitate a company restructure in order to increase the profitability, to enable payments to creditors.

Creditors’ Voluntary Liquidation (CVL)

For some companies, financial issues may have reached a severity out of which there are no viable options to continue or trade out of its difficulties and continue the business.

In these cases, the most appropriate way forward may be a Creditors’ Voluntary Liquidation, or CVL. A CVL is a formal insolvency process, initiated by the directors to close an insolvency company. Once a company enters CVL a licensed Insolvency Practitioner is appointed to sell any assets, deal with creditors and handle the affairs of the company.

For further information and impartial advice, feel free to give us a call on 0113 242 0808 or e-mail advice@chamberlain-co.co.uk