Understanding the Standalone Moratorium for UK Companies

Can the new moratorium process help my insolvent business?

Introduced as part of the Corporate Insolvency and Governance Act 2020 (CIGA 2020), the new moratorium procedure was born out of a desire to give companies who are struggling to pay their debts, legal protection from creditors while they explore their options moving forwards.

As the name suggests this new standalone moratorium exists outside of any formal insolvency procedure and is designed to provide insolvent, or soon-to-be insolvent, companies a short period of breathing space free from threats of upcoming or ongoing litigation by its creditors. The theory behind the standalone moratorium is that it will allow distressed companies and their directors, time to assess the variety of options – including the full range of formal company rescue procedures – in a less pressurised environment. While the moratorium is a standalone procedure, it may be a gateway to a formal insolvency process to rescue the company.

It should be noted here that the moratorium is not to be used as a tactic to simply delay the inevitable liquidation of a company. Instead, a company should only apply for a moratorium if it is believed that the granting of such would increase the chances of the company being saved.

How does the moratorium work?

A standalone moratorium is initiated by the company’s directors who submit the relevant documentation with the court stating that the company is unable, or will soon be unable, to pay its debts as and when they fall due. A licensed insolvency practitioner – in their role as ‘monitor’ – will also need to give their consent to act and confirm that they believe the company in question could be rescued as a going concern following the moratorium period.

If granted, the moratorium will run for an initial 20 business days, which can be extended by a further 20 business days by the directors. A longer extension can also be given in certain instances, however, this will need to be approved by either the court or by the company’s creditors.

The appointed insolvency practitioner will oversee the moratorium in their role as monitor, however, the company will continue to operate under the control of the directors with certain restrictions on borrowing money and disposing of company assets.

What does the moratorium protect against?

The moratorium provides a company with valuable protection against creditors and any legal action they may wish to take against the company in regards to unpaid debts. While under the protection of the moratorium the following applies:

• No insolvency proceedings (including compulsory liquidation via a Winding Up Petition) can be taken against the company
• Secured creditors cannot take any action to repossess goods or otherwise use the power of their security
• No litigation can be brought against the company
• Ongoing litigation action must be stayed
• Landlords can not forfeit an ongoing lease agreement
• Most existing (pre-moratorium) debts will be subject to a payment holiday

What happens during the moratorium?

For the duration of the moratorium, the company will be protected from legal action from creditors. This provides valuable time and breathing space for a rescue plan to be devised and implemented.

Trade will continue while the moratorium is in effect, however, the company will be unable to take out new channels of funding above £500 or dispose of company assets outside the usual course of business without express consent from the monitor. Debts which were accrued before the moratorium will typically not need to be paid during this time, although directors must ensure that employee wages, as well as any goods and services supplied during the moratorium are paid for, along with any rent owed to landlords which relates to the moratorium period.

What happens when the moratorium ends?

The moratorium will be brought to an end if the monitor believes the company is past the point of rescue, if rescue of the company has already been achieved, if the moratorium period comes to an end without being extended, or if the company enters into a formal insolvency process such as a CVA or a restructuring plan.

In many cases, a standalone moratorium will not be the final solution to a company’s debt problems, but rather a stepping stone to a more long-term restructuring option. There are a variety of company rescue, recovery, and turnaround solutions and your appointed licensed insolvency practitioner will be able to talk you through each one and suggest which may be the most appropriate for your company based on its current position and potential long-term outlook.

If your company is currently experiencing financial distress and you would like to discuss whether a moratorium could help you get things back on track, the team at Begbies Traynor are here to help. Call today for immediate help and advice or to arrange a no-obligation consultation with one of our nationwide team of licensed insolvency practitioners.