Cash flow pressures drives over 100% rise in insolvencies
Insolvency figures released today for April 2022* by the Government’s Insolvency Service showed corporate insolvencies more than doubled compared to […]
Read moreAbout Statutory Moratorium
A Statutory Moratorium is a legal procedure which provides a period of breathing space for a company, during which creditors (including secured creditors) cannot take enforcement action.
What is a Statutory Moratorium?
A Statutory Moratorium is a legal procedure which provides a period of breathing space for a company, during which creditors (including secured creditors) cannot take enforcement action.
Although it is for use by companies who are suffering financial difficulties it can only be used where a company is reasonably likely to be able to continue as a going concern (rather than requiring a formal insolvency process at some future point).
The procedure was only introduced in the summer of 2020 but it is likely to be most appropriate for companies who are under potentially critical pressure from creditors (such as a threat of a winding up petition or a secured creditor intending to appoint an administrator). In this scenario the moratorium protects the company from the hostile creditor action, providing time for it to resolve its financial issues (such as raising additional finance or negotiating a repayment plan with creditors).
A moratorium may only be used where it is likely that the company can be rescued and will meet liabilities which fall due during the moratorium. The directors stay in control but an Insolvency Practitioner (“IP”) acts as ‘monitor’.
Oliver specialises in advising lenders and equity providers in distressed scenarios.
What is the process to obtain a Moratorium?
The procedure for initiating a Moratorium is quite straightforward, but it can only be done if a Licensed Insolvency Practitioner (IP) has agreed to act as ‘Monitor’ and provides a statement that the moratorium is likely to result in the rescue of the company as a going concern.
The directors initiate the moratorium by filing a variety of documents, the most important of which are:
- A statement from the directors that the company is unable to, or will become unable to, pay its debts; and
- A statement from the proposed monitor confirming his view that the moratorium is likely to result in a rescue of the company as a going concern.
No court hearing is necessary, the filing of the documents in court is sufficient to initiate the Moratorium (unless the company is subject to an outstanding winding up petition in which case a hearing is required). The moratorium initially lasts for 20 business days, though there are a variety of options to extend it.
What happens when a Moratorium is in place?
The directors remain in full control of the business.
The monitor’s role is to make an ongoing assessment of whether the company still meets the moratorium criteria – that it can pay debts falling due during the moratorium and that it is likely to be rescued as a going concern. This will involve the monitor receiving regular updates on trading (such as management accounts), the company’s forecast cash position and what financial commitments the company is making.
If at any stage the monitor considers that one of both of these criteria are not met then the moratorium will be brought to an immediate end. The purpose of the moratorium is to give the company time to formulate a restructuring plan which will enable it to exit the moratorium and return to normal trading. The restructuring plan might take the form of operational changes (such as reducing costs or disposing of loss making parts of the business), agreeing a reduction or deferment of some of its liabilities (either through separate agreements with certain creditors or through a CVA process) or raising additional finance to enable it to deal with short term cash flow issues.
The initial period of the moratorium (20 business days) can be extended by a further 20 business days simply be a further filing of forms. After that there are two options for further extending the moratorium:
- Obtaining creditors consent (by vote) to an extension for up to a year from the original start date
- Obtaining an extension from the court to a date to be set by the court. This option requires a court hearing.
If the moratorium is extended beyond its original terms, by whatever method, the company must continue to meet the criteria at all times otherwise the monitor will be obliged to terminate it.
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