Company Moratoriums

The moratorium process, will, broadly, prevent the company from being forced into insolvency proceedings by creditors.  Other aspects of the moratorium largely follow the administration moratorium: landlords cannot forfeit without court permission, security cannot be enforced without court permission and legal processes against the company cannot start or continue without court permission (except certain employment claims). 

Certain creditors (such as those who are owed a pre-moratorium debt that is subject to a payment holiday) are also prevented from even applying to the court for permission to take action despite the moratorium.

During the moratorium the company must still pay its moratorium debts that have fallen due or pre-moratorium debts that are due and not subject to a payment holiday.  Unfortunately, there is no restriction on the ability of financial creditors to take action on debts owing to them and if this happened then this is likely to cause the monitor to terminate the moratorium if the company cannot afford to repay these debts. 

During the moratorium the company must inform potential providers of credit of more than £500 that the moratorium is in force.  If the directors fail to do so, this is an offence.

The monitor’s consent is also needed in respect of the granting of fresh security, which will only be given if the monitor thinks it will support the company’s rescue as a going concern. 

The company may not enter into market contracts, financial collateral arrangements and certain other market arrangements, and to do so will constitute an offence.

The company may not pay pre-moratorium debts that are subject to a payment holiday unless one of the following applies:

• The maximum total amount paid is greater of £5,000 or 1% of the company’s total unsecured debts at the start of the moratorium.
• The monitor consents.
• Payment is pursuant to a court order or court-sanctioned disposal of hire-purchase or charged property.

This would seem to limit the ability of the company to continue to use an overdrawn account into which to pay its income receipts during the moratorium, as this will be discharging its overdraft debt. 

The moratorium must be proposed by the company’s directors and is commenced by an out-of-court filing or the making of a court order following an application to court.

For the out-of-court process, the moratorium can be obtained for eligible, non-overseas companies by filing the prescribed documents with the court, with the endorsement of the monitor.  The contents of the documents are prescribed by the Insolvency Rules 2016.  The out-of-court route is the only process available unless the company is an overseas company and/or subject to a winding-up petition.

If the company is currently subject to a winding-up petition, the directors must apply to court for an order for the moratorium.  In the event the court is satisfied that the moratorium would achieve a better result for creditors as a whole than if the company were wound up without first being subject to a moratorium, it is likely the court will grant the application for a moratorium. 

An overseas company must also always make an application to court. 

If the out-of-court process is used, the moratorium will come into effect at the time that the relevant documents are filed with the court. 

If an  application is made to court, the moratorium will come into effect at the time the court order is made. 

An important qualification on the effect of the moratorium is that it will not prevent enforcement action by financial creditors and these debts must continue to be paid during the moratorium for the moratorium to remain in force. 

The moratorium will initially last 20 business days beginning with the business day after the day on which the moratorium comes into force but it is potentially extendable for much longer periods.  If certain conditions are met, the moratorium can be extended:

• without creditor consent once, for a further 20 business days;
• with creditor consent for up to a year in total, including the initial period; or
• by the court to a date set in its discretion.

The following conditions apply when extending a moratorium:

• A moratorium can only be extended whilst it is still in effect.
• The following debts must have been paid or discharged:
  • moratorium debts (the debts which the company has incurred during the moratorium); and
  • pre-moratorium debts for which the company does not have a payment holiday during the moratorium and to which the company has or may become subject before or during the moratorium. 
• The monitor must provide a statement that in their view it is likely that the moratorium will result in the rescue of the company as a going concern. 

If a company moratorium fails, meaning the company cannot be rescued as a going concern or fulfil the conditions of the moratorium, it will be terminated. 

The monitor has a duty to end the moratorium if it becomes clear the company cannot be rescued or if the company breaches the requirements of the moratorium.  This can lead to the company entering into formal insolvency proceedings such as administration or liquidation.