In this article, we look at the Moratorium, what its intended role is, and how it can be used.
A moratorium provides companies in financial distress with Court protection, which means that their creditors are prevented from proceeding or continuing with legal action without the leave of the Court, thus removing the threat of winding up petitions or other enforcement actions. The concept of the moratorium is not new – it already exists for companies that are intending to enter Administration and for smaller companies who are proposing a Company Voluntary Arrangement (“CVA”), although the latter is not widely used. Ordinarily, the moratorium is used to protect the “business” of the company as the distressed company will usually enter Administration.
The difference with the new moratorium is that it has been introduced to afford a distressed company breathing space to facilitate a turnaround strategy to effect a rescue of the company, with the focus being on the company as a whole rather than enhancing asset realisations for its creditors. It is therefore intended that the company can survive and is unlikely a tool to be used to facilitate a sale of the business.
Only the company directors can apply for a moratorium and the initial period is for 20 business days, although it can be terminated earlier. It can also be extended for a further 20 business days without consent, or for a further period (up to 12 months in certain circumstances) with the consent of creditors or longer with Court permission. During the period that the moratorium remains in force, a Monitor is appointed to oversee the process; however, the company subject to the moratorium remains under the control of the directors, albeit the Monitor must approve certain transactions before they can proceed. Only licensed insolvency practitioners are able to act as Monitors. Creditors are unable to instigate enforcement action (including landlords) and lenders are unable to enforce their security.
The key point for creditors will be that although they are unable to take action, a company under a moratorium must continue to meet certain payments as and when they fall due. This includes new supplies, wages and rent for the moratorium period and any obligations in respect of loans or other financial contracts. Should those payments not be met, the Monitor will be forced to bring the moratorium to a close on the basis that it is unlikely that a rescue can be achieved.
In the event that the rescue is not achievable, the company will likely enter a formal insolvency process, with the focus switching to asset realisations rather than the company rescue. Should an insolvency process follow within 12 weeks of the moratorium ending, any debts that were incurred during the moratorium will be treated in priority to other debts and the costs of the subsequent insolvency.
An insolvency practitioner can only agree to be the Monitor if they believe that the company is capable of being rescued. In order to do this, the company will need to be able to demonstrate that it can be viable should the moratorium be obtained. In addition, whilst secured lenders are unable to enforce their security, they are still able to adjust their lending criteria; for example, reducing an overdraft or reducing the percentage that a company is able to draw down from its invoice finance facility. Therefore, whilst the moratorium process does not need the consent of the secured creditor before it can be obtained, seeking their support must be a worthwhile exercise.
A moratorium may also be used alongside a restructuring plan, for further details on restructuring plans click here.