What is a Moratorium and how long does it last?
A Moratorium is a tool available to distressed companies (both solvent and insolvent), to provide them with a short breathing space, free from certain creditor action. The procedure was only introduced in the summer of 2020 and is most appropriate for companies who are under potentially critical pressure from creditors (such as a threat of a winding up petition or a secured creditor intending to appoint an administrator). In this scenario the moratorium protects the company from the hostile creditor action, providing time for it to resolve its financial issues (such as raising additional finance or negotiating a repayment plan with creditors).
A Moratorium must not be accessed by companies that have no chance of avoiding failure and/or are simply using the procedure to postpone entry into a formal insolvency procedure. To ensure the moratorium is used appropriately, there are safeguards attached to the use of the procedure in the form of eligibility criteria which must be met in order to qualify for entry.
A Moratorium gives a period of 20 business days “breathing space” and can be extended for a further 20 business days without any consent, or for 12 months or longer with consent from pre-moratorium creditors or the court. It can also be terminated before the initial 20 days has expired. The moratorium is broadly similar to the administration moratorium, and includes restrictions (among others) on insolvency proceedings, enforcement of security, and forfeiture.
A Moratorium must be overseen by a Monitor
A ‘monitor’ – required by law to be a licensed insolvency practitioner – oversees the Moratorium in order to ensure that it remains likely that the moratorium will result in the rescue of the company as a going concern. The monitor must be, and remain, of the view that a rescue of the company will be possible. If the monitor is no longer of the view that rescue is possible the moratorium must end.
Prior to the Moratorium the prospective monitor will need to engage with the directors and seek information about the company’s assets, liabilities and business so that they are able to assess the company’s financial position, prospects and eligibility for a Moratorium. This will be a good opportunity for the prospective monitor to obtain a list of the company’s creditors, the amounts owing to them, details of any security held together with their contact details (postal and email addresses), which the monitor will need when appointed. The extent of this pre-appointment work will be for the insolvency practitioner using their professional experience and judgement to decide on and should be proportionate to the size and complexity of the company.
What happens to repayments during a Moratorium.
A company in a moratorium is entitled to a payment holiday in respect of its “pre-moratorium debts”. However, the definition of pre-moratorium debts excludes:
- the monitor’s fees and expenses;
- any goods and services supplied during the moratorium;
- rent payments during the moratorium period;
- wages and salaries;
- redundancy payments; and
- debts or other liabilities arising under a contract or other instrument involving financial services (for example, bank loan).
So a company must continue to pay its banks and other lenders throughout the moratorium, whilst trade creditors and landlords can remain unpaid in respect of any arrears incurred before the moratorium takes effect. Meanwhile, certain restrictions on the company apply, including that the company may not obtain credit of more than £500 without telling the other party that it is subject to a moratorium.
How does a company apply for a Moratorium?
The procedure for applying for a Moratorium is quite straightforward, but it can only be done if a Licensed Insolvency Practitioner (IP) has agreed to act as ‘Monitor’ and provides a statement that the moratorium is likely to result in the rescue of the company as a going concern.
Directors of a company can initiate the moratorium by filing a variety of documents, the most important of which are:
- A statement from the directors that the company is unable to, or will become unable to, pay its debts; and
- A statement from the proposed monitor confirming his view that the moratorium is likely to result in a rescue of the company as a going concern.
- No court hearing is necessary, the filing of the documents in court is sufficient to initiate the Moratorium (unless the company is subject to an outstanding winding up petition in which case a hearing is required). The moratorium initially lasts for 20 business days, though there are a variety of options to extend it.
For more information on applying for a Moratorium, please contact us.