90-day Moratorium Proposed to Assist Companies Facing Potential Insolvency
Consultations are currently taking place on a proposed 90-day moratorium period for companies in distress. Intended to allow a ‘breathing space’ in which to consider all options in insolvency without the threat of creditor action, the government’s proposal is part of a wider review of the UK corporate insolvency framework.
High costs and levels of risk have been an issue for large corporate entities attempting a restructure. Some of these risks would be mitigated, and the disruptive effect when creditors threaten legal action as a tactical approach, would be removed if the moratorium period was introduced.
Is the current insolvency framework out-of-date?
Effective insolvency procedures underpin the business and economic success of countries worldwide. The World Bank has developed a set of principles for dealing with insolvent companies, including the balancing of creditor and debtor rights in the process.
As a result of this, and the fact that the UK has experienced an economic recession since the existing framework was developed, the government believes that certain aspects may need to be updated.
One of these is the time currently available to companies to identify their best option in insolvency. It is felt that allowing corporate entities an extra period of time to address their issues without the threat of creditor action, will help to improve their chances of rescue and recovery.
What are the key elements of this proposal?
- The 90-day period could potentially be extended, for example to allow creditors to vote on a plan
- The measure is aimed at all businesses, apart from some financial institutions including insurance companies and banks
- Companies would need to meet the qualifying criteria and pass certain eligibility tests before they could enter the moratorium period
- A supervisor would ensure the company met all requirements, and would oversee the process throughout
- The government hopes to encourage directors to take early action with these measures, if their company is facing insolvency
So what are the issues surrounding this proposal?
One of the problems in implementing this change is achieving the correct balance between debtor and creditor rights. The protection of creditor interests is integral to all insolvency procedures, and the question has been asked as to whether ‘renegade’ companies could use this moratorium period to deny creditors their fundamental rights.
On the other hand, without a period of protection for delinquent companies, creditors can undermine rescue attempts by petitioning for their winding-up. It is often the case that viable companies experience temporary financial difficulties, and simply need extra time to restructure. In these cases, jobs can be saved and the local economy supported by providing this additional time for planning and preparation.
What does the introduction of a moratorium period mean for directors?
Company directors would stay in control during this period and enjoy protection from personal liability, although safeguards would be built in to the system in this respect.
Directors would need to prove that the company could fulfil its ongoing liabilities to creditors during the moratorium, and also that the business was indeed viable at the outset. If circumstances changed during the 90 days, the supervisor would terminate the moratorium and creditors would be able to take action.
How might creditors be affected?
Essentially, the 90-day moratorium period represents a freezing of creditors' enforcement rights. During this time, they would have a ‘general right’ to request information from the appointed supervisor, but be unable to take any legal action against the debtor.
During the first 20 days, creditors could challenge the existence of the moratorium by applying to court, so their rights and interests are balanced with those of the debtor company.
The government also proposes to provide creditors with the right to challenge actions taken by an officer of the company, which if successful, would end the moratorium and open the way for creditor legal action.
How would the moratorium period end?
The period of grace would expire naturally at the end of its time period, and also finish if the company entered a formal insolvency procedure, or if informal negotiations with creditors were successful.
If the criteria for entering the moratorium were no longer met, or creditor interests were not protected as necessary, they could apply to the court for the moratorium to be dissolved.
Begbies Traynor is the leading UK professional services firm, and can offer further advice on the likely effects of these government proposals. Speak to one of our licensed insolvency practitioners to find out how directors and company creditors could be affected.