The Coronavirus outbreak is worrying for businesses for a number of reasons, one of which is likely to be the impact it may have on its finances.

Many small and medium-sized businesses will already be feeling the effects of COVID-19 and will want to reduce the disruption where possible. It will therefore be key to the survival of many small businesses that its clients or customers make payments on time and keep debtors to a minimum. Businesses may be wondering what its legal rights are, if it finds itself in a position whereby one of its debtors enters into administration.

Entering into administration

When a company enters into administration, the Insolvency Act 1986 provides that a company has the benefit of a moratorium, which is effectively a suspension of each creditor’s ability to issue or continue proceedings against the company or its assets for the duration of the administration process.

Between the commencement of the administration process and the point at which the company formally enters administration, the company has the benefit of an ‘interim moratorium’.

Whilst most enter into administration to increase the prospects of successfully rescuing the insolvent company or its business, there are instances where a company enters administration so that a moratorium is put in place to avoid a judgment from being obtained in favour of the creditor.

It is possible under certain circumstances for creditors to continue or commence proceedings against a company with the consent of the administrator or by applying to the Court to ‘lift the moratorium’.

If it is clear that a court would grant an order to lift the moratorium (i.e. there is clear evidence that the company entered administration to avoid liability) then the administrator should consent to creditors pursuing a claim without the need to apply to Court.

Alternatively, a company in administration might be in possession of goods which have not been paid for and which the supplier may have a legal claim over pursuant to a legal charge. Alternatively, machinery or equipment belonging to a supplier may be in situ at a company’s premises. In both these scenarios, it may be possible to lift the moratorium to obtain delivery up of those goods and equipment.

If the administrator does not consent, an application must be made to Court. Permission will usually be given if the creditor has a right to some of the company’s property and the steps they take to repossess the goods or property claimed does not impede the purpose of the administration.

The Court must balance the rights and interests of the applicant against those of the other creditors. If the applicant would suffer significant loss was the application refused, that would normally of itself be a good ground to lift the moratorium.

Further information

If you require any advice on how to overcome the challenges posed by litigating against a company in administration, please do not hesitate to get in touch with Myerson’s experienced Dispute Resolution and Commercial Litigation team. It is important that businesses seek advice as soon as possible to ensure steps can be taken to protect their position, you can contact a member of our Commercial Litigation team on 01619414000 or at lawyers@myerson.co.uk

We also recommend paying close attention to any new government guidance at www.gov.uk and following our COVID-19 blog series.