What Is A Moratorium In Insolvency & How Can The Breathing Room Help?

Designed to allow a little bit of breathing room for financially distressed companies, a moratorium in insolvency provides distressed businesses with a temporary reprieve of 20 business days from actions by creditors. This may not seem like a lot of time to get very much done, but it can be enough to give directors the opportunity to deal with creditor pressure, explore restructuring options, negotiate with stakeholders, and potentially stabilise their financial affairs. 

Understanding the intricacies and implications of a moratorium is essential for both businesses and insolvency practitioners involved in navigating the challenges of insolvency.  By gaining a more clear understanding of a moratorium, stakeholders will be better equipped to navigate the complex landscape of corporate financial distress while also increasing the chances of successful restructuring and recovery.

How To Get A Moratorium

Moratoriums are used by insolvent businesses experiencing immediate financial difficulty, though some sectors are ineligible including parts of the financial services. To get a moratorium, there must also be a reasonable likelihood that the business will be able to continue going in the future; for example, if it can be rescued by raising additional funds or through a CVA process

To initiate a moratorium, a Licensed Insolvency Practitioner (IP) must agree to act as a monitor. Directors can then enter begin filing for a moratorium, which is usually done by filing the relevant paperwork out-of-court. If the company is based overseas or there is an outstanding winding-up petition, an in-court filing will be necessary. The court may then order that the company enters administration or is wound up if it deems these more suitable processes. 

What conditions must be met?

During both the out-of-court and in-court processes, the same conditions must be met to get a moratorium in insolvency. These are:

  1. A statement from directors that they want to obtain a moratorium and that they believe the company is likely to be unable to pay outstanding debts.
  2. A statement from the monitor that the company is eligible for a moratorium and that this moratorium is likely to mean the company is rescued.

What Happens When A Moratorium Is In Place?

Once both conditions have been met, a moratorium can be initiated and will last for 20 days. Directors stay in control throughout the moratorium, but the IP monitors what is going on and they may decide to end the moratorium during this time should they decide the company is unlikely to be rescued. 

During the time that the moratorium is in place, creditors cannot take any legal and enforcement action against the company. Though the company gets a payment holiday from most pre-moratorium debts, any new liabilities must be paid. These can include things like new suppliers and employee payments.

It is possible to extend a moratorium by an additional 20 business days. Should the company need longer than this, it must obtain consent from creditors and/or the court.

How Does A Moratorium Help An Insolvent Company?

Moratoriums provide necessary respite from creditor action for 20 days. During this time, the company can consider how best to proceed when insolvent and make informed decisions about its future.

There are a number of benefits of a moratorium, including saved costs from legal action involving creditors. The time can also be used to plan possible restructures and find buyers that could satisfy creditor requirements. This means that a moratorium can help creditors as well as directors, as the time given to the company is used to explore ways of returning to profitability and therefore increases the likelihood that creditors will get a fair deal.

In some cases, directors may decide that voluntary liquidation is the most suitable option. The moratorium will end should the company enter into a CVL process, so it’s important to seek professional advice first. By understanding how a moratorium can affect the different options available to insolvent companies, an outcome that satisfies the needs of all involved parties is much more likely.

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