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What is a moratorium?
The moratorium procedure introduced by the Corporate Governance and Insolvency Act 2020 (CIGA) allows a company time to pursue a rescue or restructuring plan, during which creditors cannot take action against it without the court’s permission. The directors maintain the day to day running of the company whilst its appointed ‘monitor’, a licensed insolvency practitioner, oversees the moratorium process. As set out in our previous article a moratorium can only be used if it is likely that it would result in the rescue of the company as a going concern.
Relaxation of moratorium procedure during COVID-19 lifted
Schedule 4 of CIGA introduced temporary modifications to the insolvency moratorium procedure, allowing greater protection for companies impacted by the Covid-19 pandemic by only excluding a company from obtaining a moratorium by the out of court route if it was currently subject to a moratorium or insolvency procedure. If the company were subject to a winding up petition, the directors were able to submit a court based application.
Those protections have now come to an end and The Insolvency (England and Wales) (No.2) (Amendment) Rules 2021 came into force on 1 October 2021, which means recent (as well as current) insolvency procedures and moratoriums will also render a company ineligible.
Specifically, a moratorium can no longer be obtained if a company has had the benefit of a moratorium within the past 12 months or a moratorium is currently in force, or if the company is currently subject to an insolvency procedure or has been within the last 12 months. The definition of eligible companies is set out in Schedule ZA1 of the Insolvency Act 1986. However under Section A4, the directors may still apply for a moratorium if the company is subject to an outstanding winding up petition.
The moratorium procedure has not been widely used to date and there were limited numbers of corporate insolvencies during the last 12 months given the protections in place. While moratoriums still provide an option of a breathing space to companies, the requirements to obtain a moratorium now being more restricted will mean a number of businesses will no longer be eligible to seek this protection making them more vulnerable to creditor pressure.
Further, with the rules regarding winding up petitions also having been amended (as discussed in our earlier update), we are likely to see an increase in the number of formal insolvency processes making the company ineligible for a moratorium – unless directors move very quickly to put in a place a moratorium to stave off a petition whilst exploring other options.