Understanding the new standalone moratorium for insolvent companies

Find out how a standalone moratorium could help your insolvent business

A key part of the Corporate Insolvency and Governance Act 2020 was the introduction of a procedure that gives companies that are in financial distress breathing space from their creditors. The standalone moratorium, as it’s known, gives viable but struggling businesses time and space for its directors to formulate a plan for recovery.

The moratorium lasts for an initial 20 business days, which can be extended if required.  to fully consider their options and consider formulating a turnaround plan without having to worry about legal action from their creditors. 

The moratorium is designed to give company directors some time to consider their options to facilitate the recovery of the company without additional costs being accrued. The process is monitored by an insolvency practitioner throughout, who must ensure that the moratorium is likely to lead to the business’s rescue as a going concern.

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What is the moratorium process?

The standalone moratorium is a director-led process that is designed to help insolvent or financially distressed companies. To start the process, the company directors must file the relevant papers in court that state the company is unable, or will soon be unable, to pay its debts. These documents should be accompanied by statements from an insolvency practitioner, acting as the ‘monitor’, explaining that the company is eligible for the moratorium and that it’s likely it will lead to the business’s rescue as a going concern. 

If the moratorium is granted by the court, the directors will be given an initial 20 business day period to assess their rescue and recovery options. The directors may also apply for a 20 business day extension if required, with a longer extension available in certain circumstances as long as it’s approved by the court or the company’s creditors. In practice, many standalone moratoriums last at least 40 business days. 

Once the moratorium begins, the directors must notify the monitor, who in turn, must send notice to all of the company’s creditors and the Registrar at Companies House. Therefore, it will be public knowledge that the company has entered into the moratorium process.

During the moratorium, the company will continue to operate under the control of the directors, albeit with certain restrictions when it comes to accessing credit and disposing of assets. The appointed monitor will oversee the moratorium to ensure there is a deliverable plan in place to rescue the company as a going concern. Creditors will not be to take legal action against the company but the directors will be able to put the company into an insolvent process, including voluntary liquidation.

What businesses are eligible?

Generally speaking, businesses are eligible to use a standalone moratorium if:

• They are limited companies incorporated under the Companies Act 2006; and
• The directors state that the company is unable, or likely to become unable, to pay its debts; and
• The monitor believes that a moratorium would result in the rescue of the company as a going concern; and
• The company is not already subject to an insolvency procedure and has not been in a moratorium, Company Voluntary Arrangement (CVA) or administration in the previous 12 months.  

The requirement that the moratorium should lead to the rescue of the company as a going concern means the process cannot be used to stabilise the business before its sale. The moratorium is also not suitable for businesses which have no future viability; a moratorium cannot be used to simply delay the liquidation process.

What debts do you have to pay during the moratorium?

The moratorium gives the business a payment holiday from debts accrued before the moratorium, which can provide welcome breathing space. However, there are some business overheads which will still need to be paid during the moratorium, including:

• Goods and services supplied during the moratorium
• Staff wages and salaries
• Redundancy payments
• Rent 
• Loan payments that become due 

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What legal action does a moratorium protect you against?

One of the biggest challenges facing a company that’s struggling to pay its debts is the constant creditor pressure and threats of legal action. The moratorium prevents creditors from taking legal action against the business and gives you the time and space you need to put a plan in place. The moratorium protects you against:

• The repossession of goods by secured creditors
• A landlord exercising their right to forfeit a lease agreement
• The commencement or continuation of any legal proceedings by a creditor 
• The commencement of insolvency proceedings, including the issue of a winding up petition against the company
• The holder of a floating charge on company property giving notice to crystallise the floating charge or restrict the disposal of property 

What restrictions apply to the company during the moratorium?

As well as various protections, there are also several restrictions that a moratorium imposes on your company. For example, you won’t be able to access new credit agreements worth more than £500 unless you inform the creditor the company is in a moratorium. You also won’t be able to provide security without the consent of the monitor or dispose of assets unless the disposal is in the usual course of business.   

How does the moratorium end?

There are several ways a standalone moratorium can be brought to an end. The moratorium will end when plans to recover the company have been implemented. Unless you extend the moratorium, it will also end after the initial 20 business day period, regardless of whether recovery plans are in place. 

The monitor also has the power to end the moratorium if it’s no longer likely to lead to the recovery of the company, if you fail to provide the information the monitor requests or if you fail to make payments that are not included in the payment holiday on time.  

Do you need time to rescue your business?

If your business is struggling and you want time to consider your options, a standalone moratorium could help you get back on track. Arrange a free consultation to discuss your options with one of our team of nationwide insolvency practitioners.