Introduced as part of the Corporate Insolvency and Governance Act 2020 (CIGA 2020), the standalone moratorium is the latest addition to the range of insolvency options available to financially and operationally distressed companies in the UK.
This article will explain what a standalone moratorium is, the eligibility criteria for a standalone moratorium and what happens when a standalone moratorium is put in place.
This article has been co-produced with Shaun Barton, a Director at Real Business Rescue, to leverage their expertise as insolvency practitioners and their knowledge of the standalone moratorium. This allows us to provide comprehensive insights into how a moratorium overlaps with the roles of insolvency practitioners and solicitors.
What is a standalone moratorium?
The standalone moratorium aims to give struggling, yet viable, companies the breathing space they need to assess their options away from threats of legal action by creditors, and to formulate a plan moving forward under the guidance of a licensed insolvency practitioner.
With the standalone moratorium, the focus is placed upon the recovery of the company as a going concern rather than the realisation of assets for the benefit of creditors. Due to this, the company must have a reasonable chance at effecting a successful turnaround; the moratorium cannot be used simply to delay the inevitable liquidation of a company. The likely viability of the business will need to be confirmed by a licensed insolvency practitioner.
Once approved by the court, the moratorium will run for an initial 20 business days, although this can be extended by a further 20 business days if required. Longer extension can be granted if creditor consent is subsequently obtained.
What is the eligibility criteria for a standalone moratorium?
In order to be eligible for a standalone moratorium the company must be insolvent or be approaching a state of insolvency, yet there must be a genuine belief that the company is ultimately viable and therefore able to be rescued as a going concern perhaps following a process of restructuring. The company must also meet the following criteria:
- Must be a limited company incorporated under the Companies Act 2006
- Currently unable, or likely to become unable, to pay its debts in the near future
- Not already in a formal insolvency procedure
- Not have been under formal insolvency proceedings at any point during the previous 12 months
An application for the moratorium must be filed in court by the company’s directors. The application must state the company is unable, or will soon be unable, to pay its debts and be accompanied by a statement from the insolvency practitioner giving their consent to act and attesting to the fact that rescuing the company as a going concern is a likely outcome.
What happens once the standalone moratorium is in place?
Once the moratorium is granted by the court, the monitor must inform all known creditors of the company and send notification of the implementation of the moratorium to Companies House. Although creditors will be informed of the moratorium, they will be prevented from initiating or continuing legal action against the company while it is in place.
During the moratorium, the company’s directors will retain full control of the business and its operations, although there will be certain restrictions imposed when it comes to matters such as taking out further credit, disposing of assets, and paying creditors.
While there is no debt forgiveness as part of the moratorium, most pre-moratorium debts will be subject to a payment holiday during this time. Certain debts will need to continue to be paid throughout the moratorium including staff wages and salaries, redundancy payments, rent for the period encompassing the moratorium, as well as payment for goods and services supplied during the moratorium.
How is the standalone moratorium brought to an end?
As the name suggests the moratorium functions as a standalone process and not necessarily as a precursor to other formal insolvency proceedings, although in reality it is often used in this way.
This is because, in many cases, the breathing space afforded by the moratorium merely gives a company time to consider its restructuring options, rather than the moratorium being enough in itself to get the company back on track. In their role as monitor, the appointed insolvency practitioner will work to identify the most appropriate way of restructuring the business which may be by way of administration or a Company Voluntary Arrangement (CVA). When used as a gateway into alternative formal insolvency proceedings, the moratorium will end at the point of the company entering into the chosen procedure.
Alternatively, the moratorium will be brought to an end by the monitor in the event of the company no longer being viable. During the moratorium the monitor continue to assess the company’s position and its ultimate viability. If at any point, the monitor reaches the conclusion that the company is beyond the point of rescue, they have an obligation to bring the moratorium to an immediate end. As recovery plans have not been put in place and the company is no longer protected from hostile creditor action, this termination of the moratorium is likely to result in the company subsequently entering into liquidation either voluntarily or after being wound up by creditors.
The standalone moratorium, provides a vital lifeline for financially troubled businesses. It offers them a temporary break from creditor pressures, allowing them to regroup and plan for recovery with the help of an insolvency practitioner. During this period, the company retains control, with some restrictions, and most old debts get a temporary break. The goal is to help businesses find a path forward, whether independently or as a step toward more formal procedures, ensuring they have a chance to recover.