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What is a moratorium in a company administration process?

What is the effect of a moratorium and why is it so important?

A moratorium is a temporary delay or suspension of an activity. In the case of a company administration, a moratorium is imposed which causes all legal action and insolvency proceedings against a struggling company to cease. That gives the company the breathing space it needs to put a rescue or restructuring plan in place.   

Here we look at the effect of a moratorium in a company administration and discuss how long it’s in place and why it’s so important.

What is the purpose of a moratorium in company administration? 

Without a moratorium, administration would not be an effective company rescue procedure. The company creditors would be able to continue their legal action and potentially issue a Winding Up Petition against the business, which would bring any chance of recovery to an end.  

The moratorium has the effect of preventing creditors from recovering their debts in the normal way. Instead, the moratorium prioritises the recovery of the business and puts the interests of the creditors as a whole ahead of the interests of those individual creditors that are taking legal action.

By freezing the usual creditor legal process, the moratorium gives the company and the administrator the time to put a plan in place. That could be by restructuring the business, seeking a buyer while continuing to trade or liquidating the company and selling the assets for the benefit of its creditors.

What effect does a moratorium have?

During a moratorium, the creditors’ rights to take action and claim the money they are owed are frozen temporarily. During this time, they cannot:

  • Begin or continue any legal proceedings against the company or its property
  • Repossess company assets under a hire-purchase agreement
  • Enforce security over company property
  • Exercise the right of forfeiture to end a commercial lease
  • Commence or continue an insolvency procedure against the company

Importantly, the moratorium does not prevent third parties from exercising their contractual rights. For example, a creditor could still terminate a contract with the company after it has entered administration.

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How long does a moratorium last?

The moratorium lasts for as long as it takes for the statutory aims of the administration to be achieved. Initially, an interim moratorium is put in place when the company files a formal notice of its intention to appoint an administrator with the court. The company then has 10 business days to appoint an administrator. Once the notice of appointment has been filed, a permanent moratorium begins that lasts until the company administration ends. 

Company administration automatically ends after 12 months, although this can be extended if the administrator needs more time to achieve the best result for the company and its creditors. Importantly though, a company will not be allowed to use administration to hide from its creditors and delay the inevitable. There must be a clear purpose and end goal in sight. 

How does the moratorium end?

The moratorium ends when the company exits administration. That can happen in several ways. It could be that the moratorium has given the company the chance to reach an agreement with its creditors, overcome its challenges and continue trading. 

Alternatively, a formal insolvency process may be required to help resolve the company’s financial issues. If the company is viable in the long term but is struggling to pay its debts, a Company Voluntary Arrangement (CVA) could be negotiated to give the business more time to pay. The administrator will draw up the CVA proposal and present it to the creditors. if it’s accepted by the creditors, control of the business will be handed back to the company directors and the moratorium will end.  

If the company’s financial problems cannot be resolved, it might be in the best interests of the creditors to close the company down. In this case, the administrator will place the company into a Creditors’ Voluntary Liquidation (CVL) and its assets will be sold for the benefit of its creditors.

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