The proposed new moratorium to rescue struggling companies

Business Man

The Corporate Governance and Insolvency Bill is expected to come into force by the end of June 2020 and introduces, amongst other things, a new moratorium intended to give directors the necessary time to try and rescue their company as a going concern.

The moratorium has the effect of freezing any ongoing legal action and preventing new actions being commenced, allowing directors to continue to run the business, under the supervision of a licensed insolvency practitioner in the new role of “Monitor”. The crucial provision of the new legislation is the impact on lenders in that the moratorium suspends a floating charge holder’s ability to crystallise their charge or appoint an administrator and there is no requirement to obtain their consent or even notify them of the application meaning that they cannot dictate the choice of Insolvency Practitioner or limit the choice to their preferred ‘panel’.  It is therefore unlikely to be popular with lenders or the Insolvency Practitioners to which they are closest as all the usual enforcement actions available to secured lenders and other stakeholders will be prevented without the consent of the court.

Applying for a directors moratorium

In order to apply for a moratorium the directors must first satisfy the proposed Monitor that the Company is capable of meeting all liabilities incurred during the period and that the process is likely to result in the rescue of the Company as a going concern which could be via restructuring, refinance, CVA etc.  There is no requirement to specify the basis of how the Company will be rescued.

The moratorium commences when the relevant documentation is filed at Court including a statement by the Monitor that it is in their professional opinion likely to result in the rescue of the company as a going concern.  It lasts for an initial 20 business days and can be extended by a further 20 without creditor consent. It can also be extended for up to 12 months with the consent of the creditors and/or a court order.  The Monitor must bring the moratorium to an end if he ceases to be of the opinion that the Company can be rescued as a going concern.

It is clear that the legislation intends to push forward the ‘rescue culture’ that has long been the government’s aim and the timing, having been expedited to soften the impact of the Covid-19 lockdown, may be ideal.

A more dynamic process

It is a more dynamic process than a CVA requiring no creditor involvement or engagement but it is the lack of requirement for creditor engagement which may prove it’s downfall with inevitable comparisons to the ‘PrePack’ Administration where the business is often sold on and creditors left behind before they even know there is a problem.

Used properly the process may afford many good businesses the breathing space they need to get back on their feet, allowing them to focus on the immediate problems in the aftermath of the lockdown and then deal with the main body of creditors when able to do so.

If you wish to discuss how a moratorium may best assist your business and for a free no obligation initial consultation, please get in touch and our skilled and experienced team of Insolvency Practitioners will be happy to help you.

Please call us now on 0330 159 8080 for a FREE initial consultation.

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