The new standalone moratorium – what you need to know

A key provision of The Corporate Insolvency and Governance Act which came into force on 26 June 2020, is to introduce a corporate moratorium – an extendable 20-working day period giving businesses protection from creditor action while they seek professional restructuring advice.

What is it?

The directors of a struggling business may file for or apply to court for a moratorium. It gives the company 20 business days to consider rescue options.

Except in certain circumstances, no insolvency proceedings can be instigated against the company during the moratorium period.

It also prevents legal action being taken against a company without permission from the court – with the exception of employment tribunal proceedings, or proceedings between an employer and a worker.

The moratorium is focused on business recovery rather than the realisation of its assets. A key impact on lenders is that the moratorium suspends a floating charge holder’s ability to crystallise their charge or appoint an administrator

How does it work?

The moratorium is a debtor-in-possession regime and allows directors to continue to run a company, under the supervision of a licensed insolvency practitioner (the “Monitor”) and subject to certain restrictions (see Obligations below).

The Monitor must deliver notice of the commencement of a moratorium to Companies House.

The moratorium can be extended for a further 20 business days without creditor consent, or for a longer period with creditor consent, by filing relevant statements with the court. It can also be extended further on application to the court.

The moratorium will expire at the end of the initial 20-business day period and any extension must be made before the current expiry.

During the moratorium period, creditors are prevented from:

  • crystallising their charge or appointing an administrator
  • commencing insolvency proceedings
  • enforcing security (without consent of the Monitor or court) or repossessing goods (without court consent)
  • taking or continuing legal processes (except certain employment claims) without court consent
  • forfeiting leases (landlord) without court consent
  • taking security over the company’s property (without the Monitor’s consent)
  • applying to court to enforce their debt.

Obligations during the moratorium

During the moratorium, the company must continue to pay certain debts, including:

  • new liabilities (including the fees of the Monitor)
  • payment for new goods or services,
  • rent due during the moratorium period,
  • certain payments due to employees
  • debts under financial contracts.

If those debts are not paid, the moratorium will end.

The company and directors are also bound by numerous restrictions and obligations, including:

  • a £500 restriction on credit
  • inability to enter into certain types of contract
  • a threshold on payment of pre-moratorium debt without the Monitor’s consent
  • the directors still need to meet their filing obligations with Companies House.

 

The monitor has a number of statutory roles, including a requirement to bring the moratorium to an end if rescue of the company is no longer likely or the company is not paying the debts that it is required to pay.

Who can apply?

A moratorium can be applied for by companies and LLPs registered in England and Wales, Scotland and Northern Ireland.

Certain exclusions will apply to financial services entities. More details are available at the Government website.

A company may enter moratorium by:

  1. the directors filing relevant documents at court (the out-of-court process).
  2. the directors making an application to court (the in-court process).

Creditors do not need to consent or be given notice of the arrangement prior to filing the documents at court.

What to do now

If you’re concerned about how your business will cope over the next few months, we would be happy to have a conversation (at no charge to you) and to help you understand your options or to guide you through applications.  Contact us.