Rescuing Businesses in Crisis – The Strategic Use of Moratoriums (successful case study)

Use of Moratoriums in Insolvency

Problem: In the UK, many companies face severe financial difficulties, often struggling with cash flow issues and creditor pressure. These challenges can escalate, pushing businesses towards the risk of insolvency, disrupting operations, and threatening their survival.

Outcome: A moratorium can be a lifeline for these struggling companies. It can give businesses the time and the opportunity to sort out their finances without the pressure of immediate debts or being shut down. This break from enforcement measures can help businesses get back on their feet, save jobs, and keep contributing to the economy.

Moratorium for Financially Distressed Companies – Breathing Space

A moratorium for financially distressed companies in the UK is a legal provision that provides temporary protection from creditor claims and disputes i.e. it puts a pause on any adverse actions against the business. During this period, creditors cannot take legal action against the company for debts including any insolvency winding-up petitions or measures.

The moratorium can give the company time to reorganise its finances, develop a recovery plan, or negotiate new terms with creditors without the immediate threat of legal proceedings. The main goal of a moratorium is to give companies breathing space to find a way to survive financial troubles without the immediate threat of insolvency or liquidation.

However, the moratorium procedure has not been used as originally expected with statistics indicating that the moratorium process has only been used on 47 occasions between June 2020 and October 2023.

The key features of a moratorium include:

1. Protection from Creditors: The most significant feature of a moratorium is that it temporarily stops creditors from pursuing debts, legal actions, or winding-up petitions against the company.
2. Duration: A moratorium typically lasts for an initial period of 20 business days, which can be extended under certain conditions and by way of negotiation with creditors.
3. Company Management Retains Control: Unlike some insolvency procedures, the company’s management retains control of the business during the moratorium.
4. Appointment of a Monitor: A licensed insolvency practitioner is appointed as a monitor to oversee the company during the moratorium and ensure the interests of creditors are protected.

What are the Benefits of a Moratorium?

There are several benefits of applying for a moratorium to allow the business to resolve its financial issues including:

1. Time to Restructure: Companies get valuable time to restructure their business, negotiate with creditors, or seek new investment.
2. Reduces the Risk of Insolvency: By halting creditor actions, a moratorium can prevent a company from being pushed into insolvency.
3. Business Continuity: It allows the company to continue trading, which can be crucial for preserving its value and saving jobs.
4. Opportunity to Negotiate: Companies can use this period to negotiate better terms with creditors or arrange for debt refinancing.
5. Prevents Asset Stripping: It protects the company’s assets from being seized by creditors, which is vital for maintaining operational capability.

A moratorium can provide a shield for financially distressed companies, offering them a chance to recover and potentially return to profitability, without the disruption of creditor actions.

Understanding the Legal Framework of Moratorium

The legal framework for a moratorium in the UK is primarily outlined in the Corporate Insolvency and Governance Act 2020. This legislation introduced significant changes to insolvency law, aiming to provide greater support to businesses facing financial difficulties. The key aspects of the legislation includes:

1. Objective: The Act aims to give companies facing insolvency a chance to explore rescue and restructuring options.
2. Scope: It applies to companies that are, or are likely to become, unable to pay their debts but can potentially be rescued.
3. Legal Protection: The moratorium provides legal protection from creditor actions for a specified period, allowing companies to focus on recovery plans.
4. Role of the Monitor: A licensed insolvency practitioner must act as a monitor to oversee the company during the moratorium. The monitor’s role is to ensure that the moratorium is likely to result in the rescue of the company as a going concern.
5. Filing Requirements: To initiate a moratorium, a company must file relevant documents with the court, including a statement from the directors and the monitor.
6. Creditors’ Rights: While a moratorium prevents legal action by creditors, it does not absolve the company of its debt obligations. Creditors retain their rights and can challenge the moratorium if they believe it unfairly prejudices their interests.

This framework reflects a shift towards a more rescue-oriented approach in UK insolvency law, providing companies with a valuable opportunity to stabilize their operations and seek sustainable financial solutions. Understanding this legal context is crucial for businesses considering a moratorium as a strategic option to overcome financial distress.

Eligibility Criteria for a Moratorium

The Part A1 moratorium, introduced under the Corporate Insolvency and Governance Act 2020, amends the Insolvency Act 1986 and represents a significant development in UK insolvency law. It allows for companies to apply under the moratorium procedure to give companies in financial distress a breathing space to explore rescue and restructuring options, free from creditor action.

For a company to qualify for a moratorium under UK law, it must meet specific eligibility criteria set out in the Corporate Insolvency and Governance Act 2020. These criteria ensure that the moratorium is used appropriately and is likely to aid in the company’s recovery. The key eligibility criteria includes:

1. UK Company: The company must be registered in the UK, including foreign companies with a sufficient connection to the UK.
2. Insolvency Status: The company should be insolvent or likely to become insolvent. This means it is unable to pay its debts as they fall due or its liabilities exceed its assets.
3. Rescue Viability: There must be a reasonable likelihood that the moratorium will result in the rescue of the company as a going concern. This is a critical criterion, as the purpose of the moratorium is to provide a pathway to recovery.
4. No Existing Insolvency Procedures: The company must not be undergoing an insolvency procedure at the time of the application, such as liquidation or an existing moratorium.
5. Monitor’s Statement: A licensed insolvency practitioner must consent to act as the monitor during the moratorium and must provide a statement confirming that, in their opinion, the moratorium would likely result in the rescue of the company as a going concern.
6. No Recent Moratorium or CVA: The company must not have been in a moratorium or a Company Voluntary Arrangement (CVA) in the recent past, typically within the last 12 months.
7. Financial Obligations: The company must continue to pay certain debts that arise during the moratorium, such as salaries, new loans, and goods and services supplied during the moratorium.

Meeting these criteria is essential for a company to take advantage of the moratorium period and work towards restructuring and stabilising its financial situation. Companies should seek legal advice from our expert insolvency lawyers to assess their eligibility and navigate the application process effectively.

The Process of Obtaining a Moratorium

Obtaining a moratorium under UK law involves a structured process, designed to ensure that the company meets the necessary criteria and that the moratorium is properly implemented including:

1. Assessment of Eligibility: The first step is for the company to assess whether it meets the eligibility criteria for a moratorium. Our expert insolvency lawyers will be able to assess whether your application for a moratorium will have any prospects of success to give the company breathing space and time to get its financial affairs in order.
2. Appointment of a Monitor: A licensed insolvency practitioner must be appointed to act as the monitor. The monitor’s role is crucial in overseeing the moratorium and ensuring that the conditions are met.
3. Preparation of Necessary Documents: The company, along with the monitor, prepares the required documents. These typically include a director’s statement that the company is or is likely to become unable to pay its debts, and a monitor’s statement that the moratorium would likely result in the rescue of the company as a going concern.
4. Filing with the Court: The relevant documents are filed with the court. This includes the notice of the intention to obtain a moratorium and the statements from the directors and the monitor.
5. Notification to Creditors: Once the moratorium is in place, the monitor is responsible for notifying creditors. This is important as it informs creditors of the protection in place and their rights during the moratorium.
6. Publicity Requirements: The company must publicise the moratorium to ensure that parties dealing with the company are aware of its status. This typically involves advertising in The Gazette and notifying relevant registries or exchanges.
7. Duration and Extension: The initial moratorium period is 20 business days but can be extended for up to one year with creditor consent or by court order. The company and the monitor must assess the need for an extension based on the company’s circumstances.
8. Compliance and Monitoring: Throughout the moratorium, the company must comply with certain obligations, such as paying new debts. The monitor oversees the company’s activities to ensure compliance.
9. End of Moratorium: The moratorium ends either at the expiry of the period, through a court order, or if the company enters another insolvency procedure. At the end, the monitor must file a notice with the court and inform creditors.

This process ensures that the moratorium is used appropriately to aid the company’s recovery while protecting the interests of creditors. It is a complex procedure and professional guidance from our expert insolvency lawyers is often required to navigate it successfully.

Recent Case Law on Successful Application for a Moratorium

Grove Independent School Ltd faced severe financial pressures, exacerbated by the Covid-19 pandemic. This led to significant arrears of £655,971.90 owed to HMRC in unpaid tax. On 18 January 2023, HMRC presented a winding-up petition against the company. In response, the directors of the school sought a court order for a moratorium under Part A1 moratorium while negotiating refinancing with the assistance of a proposed insolvency practitioner monitor ​​.

In the absence of any prior reported decision on the grant of moratoriums, the court was required to consider the relevant test to be applied. The court considered that it had discretion to grant a moratorium. This discretion was narrowed by Section A4(5) of the Corporate Insolvency and Governance Act 2020, as it amends the Insolvency Act 1986, which requires the court to be satisfied that a moratorium would likely achieve a better result for the creditors than if the company were wound up without first being subject to a moratorium​​.

The court had to be convinced that the outcome for creditors would likely be better with a moratorium than without it. The threshold for a moratorium was deemed higher than for an administration order, requiring the likelihood of a better outcome for creditors to be more than just a real prospect of success​​.

Lloyds Bank, as a secured creditor of the company, supported the application for a moratorium and agreed to maintain its current facilities during the moratorium. This support was crucial, as the absence of lender support could have led to the moratorium’s premature end​​.

In Grove Independent School Ltd, ICC Judge Greenwood emphasised the need for a practical and broad approach when the court assesses potential outcomes under a moratorium application. He pointed out that such analysis should align with real-world business conditions.

Judge Greenwood agreed that the school’s situation was exactly what the new moratorium provisions aimed to address, and thus, granting the application was suitable. He also highlighted the benefits of a moratorium over administration for an entity like the school, noting its less disruptive, cost-effective nature and the school’s significant social role.

This case provides clarity on the utility of a moratorium as a tool for companies needing time to explore refinancing options. It highlights the importance of creditor support and judicial discretion in granting a moratorium, setting a precedent for future cases involving financially distressed companies.

Expert Insolvency Lawyers in London

Moratoriums offer a vital tool for financially distressed companies in the UK, providing breathing space for restructuring and recovery. However, navigating the complexities of obtaining and operating under a moratorium requires careful consideration and expert guidance.

If your business is facing financial challenges and you are considering a moratorium, it is crucial to seek professional legal advice. At Go Legal, our expert lawyers specialise in insolvency law and can provide the expertise and support needed to guide you through this process.

Contact us today on 0207 459 4037 for a Free Consultation to discuss your options and plan the best course of action for your business.