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What is a moratorium in company administration?

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What are the benefits of a moratorium in administration?

Once a company enters administration it is given the benefits of a moratorium, a powerful legal ringfence which prevents legal action being taken against the company. This means creditors of an insolvent, or financially distressed, company cannot initiate further recovery action including petitioning the court for the company to be wound up.

What is the purpose of a moratorium?

The important thing to note with a moratorium is that it is a temporary measure. It is not a get out of jail free card; instead it gives the company a chance to sort out its issues, safe from the threat of legal action. Creditors still retain their rights and the claim over the money they are owed; however, they are temporarily stayed while the moratorium remains in place.

The administration must serve a purpose; a company will not be allowed to stay in administration forever simply delaying the inevitable. Instead a company must use this opportunity, and the protection provided by the moratorium, to put plans in place with its creditors to achieve the statutory objective of the administration and for a decision to be reached as to the future direction of the business. During this time the creditors’ interests need to take priority over those of the company’s directors and shareholders.

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How long does a moratorium last?

An interim moratorium is granted once the company files a notice of intention to appoint an administrator. The appointment of an administrator must be made within 10 business days of filing the notice of intention in court and, immediately on appointment, a second moratorium is given. This moratorium lasts until the company exits administration.

How does a company exit administration?

There are several ways a company can exit administration with the most appropriate route being determined by the company’s financial position and viability as a going concern.

In some cases, the breathing space provided by the moratorium may be enough to allow the company to overcome its challenges and come to an agreement with creditors. If this is the case, the company would exit administration, the administrator would hand back control of the company to the directors, and the company would continue to trade.

In many cases, however, a further insolvency process is often required in order to resolve the problems the company is facing.

Other exit routes

  • Company Voluntary Arrangement (CVA)

Should the company have a realistic chance of becoming successful again in the future but requires an element of restructuring in order to do so, a recovery procedure such as a Company Voluntary Arrangement (CVA) may be recommended.

A CVA involves negotiating with creditors in order to come up with a mutually agreeable payment plan; some debt will be written off, with the rest being paid back over the course of the CVA which typically last between two and five years.

The administrator will draw up a CVA proposal to present to creditors and, if this is accepted, the administrator would then hand back control of the company with all parties henceforth being bound by the terms of the CVA. Contracts (including leases) can be renegotiated while unprofitable arms of the company can be closed down in order to maximise the chance of the company recovering.

  • Creditors’ Voluntary Liquidation (CVL)

In some cases, it may be decided that the company’s problems have reached such a level that it has no viable future as a successful trading entity and creditors would gain more by the company being closed. If this is deemed to be the case, the company will be placed into a voluntary liquidation procedure known as a Creditors’ Voluntary Liquidation (CVL).

Alternatively the administrator may have sold the business and assets in the administration process and simply need to move to CVL to facilitate a distribution of funds to creditors. A CVL may otherwise achieve alternative objectives, such as enabling the liquidator to disclaim onerous property or complete more time-consuming investigations into conduct or claims against third parties.

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