Understanding Moratoriums

Understanding moratoriums: how they work and why they benefit company directors
When a company faces financial distress, directors often find themselves under intense pressure. Creditors demand payment, cashflow tightens, and the risk of wrongful trading becomes very real.

A relatively new corporate restructuring tool designed to give companies breathing space, and directors a chance to regain control, is the company moratorium – a powerful mechanism for stabilising a struggling business.

A separate insolvency procedure, moratoriums share similarities with the moratorium provided through Administrations. They can be a powerful mechanism for stabilising a struggling business.

Find out more about how it works and why it can be such a valuable option for company directors facing financial distress.

What is a moratorium?

The Corporate Insolvency and Governance Act 2020 introduced a standalone moratorium designed to help viable companies restructure without the immediate threat of legal enforcement. Once a company is subject to a moratorium, there is a period during which that company enjoys a payment holiday on certain debts and is protected from certain creditor action.

The moratorium acts like a protective bubble that gives the business time to breathe, plan, and recover during times of financial distress. It is a ‘debtor-in-possession’ process, in other words, the directors stay in control of the company along with the responsibility and day to day management. A licensed insolvency practitioner must agree to act as the Company’s monitor and must have the view that rescue of the Company is possible.

How a company moratorium works

A Moratorium is designed to be quick to obtain and simple to operate. While there is an eligibility criteria, the typical process is as follows:

1. Moratorium application

The typical route is for directors to apply for a moratorium by filing the necessary documents at court. These include the following statements:

• A statement by the directors that the company is, or is likely to become, unable to pay its debts. They should also provide a statement that the directors wish to obtain a moratorium.
• A statement from the Monitor must also be provided which states that, in the view of the monitor it is likely that the moratorium will result in the rescue of the company as a going concern.

If there is a winding up petition that has yet to be dealt with, then a court application is required instead.

2. Duration of a moratorium

Once granted, the moratorium lasts for 20 business days. During this time:

• Creditors cannot enforce debts.
• Landlords cannot forfeit leases.
• Banks cannot call in overdrafts or enforce security.
• Suppliers cannot terminate contracts solely due to insolvency triggers.

3. Possible extensions

The moratorium can be extended by directors for another 20 business days without creditor consent or for up to 12 months with creditor consent. A moratorium can also be extended with court approval.

4. The monitor’s role

The monitor is not running the company. Directors stay in control. The monitor’s job is simply to ensure the company remains capable of being rescued. If, in the opinion of the monitor, rescue becomes impossible, the monitor must end the moratorium.

5. End of a moratorium

The moratorium ends when:

• The business rescue plan is implemented
• The company enters another insolvency process
• The monitor concludes rescue is no longer viable
• The directors choose to end it

Benefits of a moratorium for businesses

During the moratorium:

• Creditors cannot take enforcement action
• Landlords are prevented from forfeiting any lease agreement
• Legal proceedings are paused
• The company is shielded from winding‑up petitions
• Secured creditors cannot take action to repossess goods or exercise their security.
• Directors remain in control of day‑to‑day operations.
• Most pre-moratorium debts are subject to a payment holiday. Certain pre-moratorium debts should be paid, for example wages, redundancy payments and payment of goods and services supplied during the moratorium.
• A licensed insolvency practitioner (the “monitor”) oversees the process.

Restrictions of a moratorium for company directors

While the moratorium provides breathing space, it is also critical that directors do not make the creditor position worse. Some of the restrictions on directors are as follows:

• Not to take out any new credit over £500 without informing the lender of the moratorium.
• Not to dispose of the company property without the monitor’s consent unless it is in the ordinary course of business.
• The company cannot grant new forms of security unless the monitor consent to it and it will rescue the company as a going concern.

How Mercer & Hole can help companies recover financially

Moratoriums are an excellent tool to provide directors of a company a way out of financial distress and require the breathing space to strategise and put together a formal plan to rescue the company before it is too late.

It is unlikely that a moratorium alone will rescue a distressed company and instead it will form part of a larger restructuring package such as company administration.

If your business is, or is likely to, suffer from distress in the foreseeable future, then the team at Mercer & Hole can help. Get in touch with us today to find out more.