Part A1 of the Insolvency Act 1986 Moratorium
A relatively new procedure introduced in 2020 is the “Moratorium”. This is available to eligible companies to protect them from action by certain creditors if they are facing difficulties. The procedure creates a moratorium for a maximum of 40 days, though it is possible to extend this period if the right conditions prevail. During the Moratorium the company will benefit from a payment holiday in respect of debts it already owes, save for certain excluded debts.
The procedure is instigated by the directors of the company and the procedure has to have an Insolvency Practitioner involved, who will be the “Monitor”. The directors have to certify that the company is likely to become unable to pay its debts and the monitor has to certify that the Moratorium would likely result in a sale of the business as a going concern. Certifying that “would” be the case is obviously a higher bar than certifying it may be the case, and requires that the Monitor has the necessary confidence to make such certification. This will of course only be possible if the Monitor comprehensively familiarises themselves with the financial health of the company, though the guidance on this suggests that it will be a judgment call for the Monitor and how much work they engage in should be proportionate to the case at hand.
The process can be commenced by the directors simply filing certain documents with the prescribed information at court. If the company is subject to a winding up petition then the process must be commenced by an application to court. If the company is already in a formal insolvency process then it cannot use the Moratorium procedure.
The Moratorium has a similar effect to the moratorium created by Administration, in preventing certain action being taken against the company by creditors. However, the company must continue to pay certain debts as they fall due to enable the Moratorium to continue. If such debts are not paid then the Monitor must terminate the Moratorium. Debts which are covered by a Moratorium gain a greater level of priority in any Liquidation or Administration of the company entered into within 12 weeks of the Moratorium.
The main drawback though is that debts due under contracts for financial services, i.e. most commercial lending, are not covered by the moratorium and need to continue to be paid.
There are certain restrictions in place during a Moratorium as well, such as the company cannot obtain credit of more than £500 without advising the provider that the company is in a Moratorium, breach of this is a criminal offence by the company and any directors that permitted it. No new security can be granted by the company unless it is approved by the Monitor.
This process is not regarded as having met its intended target following a review by the Insolvency Service in December 2022.