New Insolvency Moratorium Procedure

The Corporate Insolvency and Governance Act 2020 introduced provisions to the Insolvency Act 1986, which came into force on 26 June 2020. The changes allow businesses in financial distress a breathing space in which to explore rescue and restructuring options, free from creditor action. By being placed upstream of formal insolvency, the Insolvency Service and Government hope that it will encourage companies to act earlier to restructure debt and improve a company’s chances of success.

The main aim of the new Moratorium is to try to save the life of a company as a going concern by effectively allowing a company a payment holiday from its pre-moratorium debts, while it looks to restructure.

What are the Effects of the Moratorium?

The effects of the Moratorium during the relevant period will be that: 

1. No insolvency process, unless in very specific circumstances, can be commenced.
2. Except with the leave of the Court no secured creditor can enforce their security.
3. Except with the leave of the Court, a landlord is not able to forfeit a lease.
4. Except with the leave of the Court no legal action can commence or continue against a company.

Procedure

The procedure to start the moratorium is quick and easy and involves the directors sending a notice to the Court, in a very similar way to Administrations.  Part of that notice requires the directors to make a declaration that the Company is, or is likely to be, unable to pay its debts.

The notice must be accompanied by a statement from the Monitor that he consents to act, and that the process is likely to achieve its goal, which is that the life of the Company can be saved as a going concern.

Once filed in Court the notice needs to be circulated to the creditors, employees, pension companies and the FCA, if it is a regulated Company.

The monitor must also ensure that a copy of that notice is filed at Companies House.

Who is eligible?

Only companies who are not in, or have not been in an insolvency process within the last twelve months, are eligible.  Also, you cannot have two moratoriums in the any one twelve-month period.

Banks, insurance companies and other financial institutions are also not eligible.

Accordingly, most companies will be eligible to apply for a moratorium, if they can satisfy the purpose, which is that the moratorium is likely to result in saving the Company.

How long does it last?

The Moratorium lasts 20 business days unless it is extended.

The Monitor has the power to extend the period once for a further 20 business days if they deem it appropriate.

The Moratorium can be extended further if either the Court or the creditors agree, of if a CVA has been put forward and is currently pending.  However, the Moratorium cannot last longer than one year.

The Moratorium can also be brought to an end by the Monitor if:

1. The company has been rescued and the moratorium is no longer needed.
2. It has been determined that it is no longer appropriate because it is no longer possible to save the life of the Company as a going concern.
3. If the directors do not cooperate with the Monitor, and do not provide any reasonably requested information.

 

The Monitor

The Monitor must be licensed insolvency practitioner, and their role in the process is to ensure that the purpose of the Moratorium is being achieved, and to act as an Officer of the Court.

The directors will still be in charge of the company and responsible for the day to day running of the business. However the Monitor is to have oversight of the Company and its finances.

The Monitor will have a say over what payments can be made, and to review whether sufficient income is being received to cover the costs of the Moratorium process.

The Monitor will also need to be actively involved in any restructuring of the business, and will want to satisfy themselves that appropriate progress is being made and the purpose of the Moratorium is still achievable.

Conclusion

It will be interesting to see how often these Moratoriums are used in practice, and by what companies. 

In respect of larger organisations I can see how this new process will be very useful in some respects.  On the other hand, larger business are often more proactive in taking early advice and look to resolve financial issues sooner rather than later.  Therefore I am not sure how often they will be needed.

My view is that this new procedure may allow smaller and medium sized business more time and opportunity to look to restructure their business.  However, the pressure will then be on Insolvency Practitioners to justify their use.  It is often easier to restructure larger businesses as they have a greater ability to obtain finance and have more interest from third parties who may wish to become involved.

Having said that if financiers, agents, solicitors and insolvency practitioners are engaged early enough, there should be sufficient time to generate the necessary interest and finance to restructure business.  Accordingly, I hope that we will see more small and medium sized businesses being restructure in the future.