A pause for thought - the new Insolvency moratorium explained

We’d love you to read the whole blog but if you’re in a hurry you can click on the question you want answered most to jump straight there:

 

What is the Insolvency moratorium?

How to apply for a moratorium?

What happens during the moratorium?

How can the moratorium conclude successfully?


Pause for thought – we explain the new Insolvency moratorium

Moratorium

 

 

 

 

 

 

 

As of June 25th 2020, the Corporate Insolvency & Governance Act 2020 received Royal Assent and became law – coming into effect immediately. 

Whilst many of the measures are temporary such as the suspension of winding up petitions and wrongful trading provisions, one of the long term measures introduced by the act is the Insolvency Moratorium.

 



What is the Insolvency Moratorium?

The moratorium grants a business ‘breathing space’ from its creditors to allow a plan to be formed to restructure the company’s debts. 

Initially a break of 20 business days is granted, however this can be extended by a further 20 business days by filing an extension with the court. Further extensions can be granted, but would require the consent of creditors.

In order to officially enter into a moratorium period, the board must appoint a licenced insolvency practitioner to act as the monitor of the company. 

If you need to appoint a monitor, please contact us to discuss your situation directly with one of our insolvency practitioners.

During the moratorium, your company will be granted a payment holiday from all debts prior to the commencement of the process. This means you won’t be able to make payments against these debts without permission from the monitor. The moratorium also puts all legal proceedings and recovery actions on hold, including, but not limited to:-

  • Winding up petitions
  • Appointment of administrators
  • High court enforcement officers and bailiffs 
  • Landlord actions such as the forfeiture of a lease or commercial rent arrears recovery (CRAR)

The court can however grant permission for these to proceed in certain circumstances so it’s important to act quickly when a moratorium is granted. Employment tribunals will also usually continue in moratorium.

 



How to apply for a moratorium?

There are two potential routes to entering a moratorium, depending on the circumstances of the company. 

Generally it will be a case of having the relevant forms sealed by the court (being an extremely quick process). Alternatively, if there is an outstanding winding up petition, the appointment can only be made by way of a court order. 

This is similar to the administration process, which also carries a moratorium, however the main difference is the board retains control of the company, instead of handing control over to the administrator.

To be eligible for a moratorium the business must be a limited company or LLP registered in the United Kingdom. The moratorium cannot be applied for by financial institutions such as banks, building societies and insurers. 

Aside from this, the following criteria applies:-

  • The company is insolvent, or likely to become insolvent and cannot pay its debts
  • A licenced insolvency practitioner has agreed to act as monitor
  • The monitor believes the company can be rescued as a going concern

Before accepting the appointment, the monitor will need to carry out a viability assessment on the company to determine the route by which the company will return to being a going concern.

Upon the appointment being made, the monitor will notify the company’s creditors and other relevant authorities of the moratorium taking effect. A notice confirming the company is subject to a moratorium should also be displayed prominently on the company website and physically on any shopfronts.

 



What happens during the moratorium?

Once the moratorium is officially in place, no legal action can be taken against the company and creditors cannot chase payment for pre-moratorium debts. 

However there are a number of restrictions on what the company can do, without permission of the monitor, including:-

  • Paying creditors
  • Disposing of property belonging to the company
  • Granting security over company assets
  • Obtaining credit

The company must also continue to pay the following during the moratorium period:

  • The monitor’s fees and expenses (agreed between the monitor and the company)
  • For any goods or services provided during the period
  • All employment entitlements
  • Rent in respect of the moratorium period
  • Any liabilities arising under financial service contracts

The monitor will work with the board of directors to ensure the plan to rescue the company as a going concern remains viable and to ensure that all of the above restrictions are being complied with. 

If it’s no longer possible to rescue the company or the company cannot pay its moratorium debts, the monitor must immediately bring the moratorium to an end.

 


 


How can the moratorium conclude successfully?

 

There are a number of restructuring routes which can be used to bring the moratorium to a successful conclusion. These include:-

  • Creditors approve a Company Voluntary Arrangement
  • The directors raise funds from personal assets to pay creditors
  • Additional investment is obtained from shareholders
  • A business loan is obtained to consolidate the company debts into manageable payments
  • Informal payment plan agreed with creditors
  • Time to Pay arrangement agreed with HMRC

Alternatively, if the company is unable to be rescued as a going concern, the moratorium will come to an end and the company will likely have to enter into liquidation or administration

The moratorium cannot be used to plan for a pre-pack administration, so the company will again be exposed to creditor actions whilst preparing to commence either of these processes.

The moratorium will no doubt be an extremely useful tool moving forward to assist with business rescue and restructuring, particularly when the company needs breathing space to put forward a company voluntary arrangement, informal arrangement, or Time to Pay. 

If your business is under significant pressure, get in touch with us to find out how you could benefit from the latest insolvency tool.

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