Insolvency moratorium: a welcome break?

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The new Corporate Insolvency and Governance Act has been described as the most significant reform to the UK’s insolvency framework in decades. That’s why we are breaking down the details into a series of articles, explaining the key changes.

This time we’re looking at another measure that gives distressed companies more room for manoeuvre.

A new moratorium

A new stand-alone moratorium has been introduced by the Corporate Insolvency and Governance Act 2020. A reprieve for distressed businesses, the moratorium gives those eligible some breathing space to rescue their company as a going concern by, for example, putting in place a restructuring plan, refinancing, investment, sale or other rescue option.

More time to rescue and recover

The moratorium is a stand-alone process for which most companies suffering financial distress will be eligible.

It is a “debtor in possession” process which leaves the affairs of the company in the control of the directors. The company continues to trade as normal, under the watchful eye of a licensed insolvency practitioner, acting as a monitor.

The moratorium lasts for 20 business days beginning with the business day after the day on which the moratorium comes into force and is only available where the monitor is satisfied that the moratorium would result in the rescue of the company as a going concern.

Who’s eligible?

All UK companies that are, or are likely to become, unable to pay their debts as they fall due are eligible, unless you:

  • are a bank, insurance company or other regulated entity; or
  • have been subject to a moratorium or insolvency procedure in the last 12 months

 

How it works

Companies get a payment holiday for certain debts (e.g. trade creditors, tax liabilities, rent) due before or during the moratorium (if it relates to an obligation incurred pre-moratorium). Other insolvency proceedings, enforcement and legal proceedings are also suspended. The moratorium can be put in place without the need to gain consent from creditors.

However the monitor’s costs, employee wages and redundancy payments must still be paid. Any goods/services received and rent fees incurred during the moratorium, must also be paid. Liabilities in respect of bank loans, factoring and other finance agreements must also be discharged as normal.

What to do

Directors of eligible companies may simply file certain documents in court confirming that it is, or is likely to be, unable to pay its debts and that it is likely that the moratorium will result in the rescue of the company as a going concern.

Overseas companies and those subject to winding up proceedings, can still apply to court to obtain the benefit of the moratorium. If the company is subject to a winding up petition, it must be able to demonstrate that it would achieve a better result for their creditors than winding up.

Timescales

The moratorium comes into effect once you’ve filed the relevant documents in court or once the court makes an order. It will be effective for an initial period of 20 business days, starting from the business day after the moratorium comes into force.

Directors can extend it for a further 20 business days by filing the relevant papers in court without creditor consent, or for up to 12 months with creditor and/or court approval.

If the company proposes a CVA or a “new” restructuring plan/arrangement, the moratorium is automatically extended until the proposal is disposed of or the plan/arrangement is approved.

Company requirements during the moratorium

  1. Pay all the debts required under the moratorium (outlined above).
  2. Provide any information your monitor asks for and notify them when the moratorium is extended or ends and when steps to enter into an insolvency process.
  3. Display the name of the monitor and the fact that a moratorium is in force on the company website, business documents (e.g. invoices, correspondence), and premises.
  4. Not incur credit over £500 unless the creditor is informed that a moratorium is in force.
  5. Do not grant security over its assets without the monitor’s consent.
  6. Pay pre-moratorium debts exceeding £5,000 or 1% of the value of all unsecured debts as at the start of the moratorium, without the monitor’s consent.
  7. Dispose of any property subject to security or hire purchase, unless retaining the property is part of the terms of the agreement or expressly permitted by the court.
  8. Dispose of any other property unless it is in the ordinary course of business or the monitor or the court consents.

What it means for creditors

During the period of the moratorium creditors can’t commence insolvency proceedings against the company. Unless they have the consent of the court, creditors also cannot:

  • enforce security or re-possess hire purchase goods;
  • commence or continue with legal action; or
  • take steps to forfeit a lease.

 

A secured lender cannot enforce its security (without the court’s permission) by, for example, appointing an administrator, or crystallise a floating charge.

Can it be challenged?

Anyone can challenge the moratorium by applying to court on the grounds that the conduct of the monitor has unfairly harmed them. A creditor or member may also challenge the conduct of the directors on the grounds that company’s affairs have been managed in a way that has unfairly harmed them.

Insolvency expert view

Kelly Jordan, partner and head of restructuring & insolvency, says: “No doubt that the new moratorium will have an impact on all creditors and materially shifts the balance between debtors and creditors in favour of debtors.

“In particular, floating charge holders’ rights will be affected through the inability to appoint administrators and crystallise their floating charge. This raises the question as to whether this will in turn have an impact upon the finance arrangements available to companies.

“There are still a number of uncertainties as to how the moratorium will be utilised in practice, insolvency practitioners will need to adapt to this new role and it will be interesting to see whether any tensions emerge from the retained control of the company’s affairs by its directors.”

Next read

Our next installment covers the new restructuring plan and how that impacts businesses – or click here to view all five updates.

For more help and specialist insolvency and restructuring advice meanwhile, contact Kelly Jordan on 0191 211 7899 or email [email protected] for a free consultation.