Free standing moratorium

Free standing moratorium

Application for free standing moratorium

The free standing moratorium is intended to give companies breathing space to explore options for survival.

The directors of an eligible company can get a moratorium by filing relevant documents at court. A company with an outstanding winding-up petition would need a court order to apply for a moratorium.

There must be a statement from an insolvency practitioner (the monitor) that, in their view, it is likely that the moratorium would result in the rescue of the company as a going concern.

The initial moratorium lasts for 20 business days. The directors can extend the moratorium for a further 20 business days, provided they can – among other things – confirm that all moratorium debts have or will be met. Further extensions (up to a maximum of 1 year) require the consent of creditors. The court may also extend the moratorium. There does not appear to be a maximum extension period if the extension is granted by court order.

During the moratorium

  • Creditors can't take enforcement action for pre-moratorium debts, i.e. debts that have fallen due before or fall due during the moratorium. However, there are some exceptions, including amounts payable for goods/services supplied during the moratorium, rent for the period of the moratorium, salaries, and debts or other liabilities involving financial services.
  • No insolvency proceedings can be started against the company during the moratorium period, though the directors can still start them via the monitor.
  • No creditor can enforce security or repossess goods in the company's possession, unless they get the court's permission. No proceedings or legal process can be started or continued, and a landlord can't exercise a right of forfeiture by peaceable re-entry. The moratorium prevents a floating charge from becoming a fixed charge (i.e. crystallising) and stops restrictions being imposed on the disposal of assets.
  • The monitor must ensure that it's appropriate for the moratorium to stay in place, and sanction certain acts by the company. The monitor must end the moratorium in certain situations, e.g. if the company's rescue is no longer likely, or if the company can't pay its moratorium debts.

Creditor protections

There are protections for creditors (or members) of the company to apply to court for relief on the grounds that the management of the company's affairs, business and property unfairly harms their interests.

Eligibility

Companies are generally eligible, unless they:

  • are a financial service company;
  • are already subject to a formal insolvency proceeding;
  • have already been subject to a moratorium during the 12 months prior to the filing date (unless the court orders otherwise); or
  • have already been subject to a Company Voluntary Arrangement or administration during the 12 months prior to the filing date.

New restructuring plan

A restructuring plan can be proposed between a company and its creditors (and/or members) for the purpose of dealing with financial difficulties.

This will apply to any company liable to be wound up under the Insolvency Act 1986 that has encountered (or is likely to encounter) financial difficulties that affect its ability to carry on business as a going concern.

Any creditor or member whose rights are affected by the plan must be allowed to participate in the process and be given enough information to vote on the plan. However, those with no genuine economic interest in the company can be excluded.

The voting majority for each class is 75% in value. If passed, the plan has to be approved by the court, who will assess whether it's just and equitable. However, it's also possible for the court to sanction the plan where a class has voted against it. It can do that if:

  • the members of the dissenting class would be no worse off under the plan than they would be in the event of the relevant alternative; and
  • at least one class who would receive a payment (or would have a genuine economic interest in the company in the event of the relevant alternative) voted in favour.

'Relevant alternative' is whatever the court considers would be most likely to happen if the plan were not sanctioned.

Where a plan is proposed within 12 weeks of the end of the new moratorium period, it can't affect the rights of creditors in respect of either moratorium debts or pre-moratorium debts that weren't subject to the moratorium restrictions.

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