For the last few years an individual has been able to apply for a debt moratorium which lasts for six weeks and gives breathing space to decide how one’s financial affairs should be dealt with e.g. sell assets, agree a repayment plan, sign a trust deed, present a sequestration application etc.  The advent of Covid-19 has hastened the introduction of a UK government idea that has been around for a considerable period of time and replicates the moratorium idea for the corporate market. It is known as the Corporate Insolvency and Governance Act 2020 and came into force on 26 June 2020.

The company moratorium process requires the limited liability company (LLPs are not part of this new idea meantime) to present an application to court seeking a 20 day moratorium.  The application requires the directors to create a proposal that rescues the company as a going concern (albeit perhaps in a slightly diluted format than currently exists) whilst allowing the directors to remain in control. The process requires a licensed insolvency practitioner “IP” to be appointed as a monitor and assess the eligibility for a successful moratorium in the application, and review progress regularly. Thus, the company must make it obvious that a monitor is involved e.g. by adding a suitable narrative to invoices, letters, website etc.

Once in place, a third party cannot repossess goods, enforce a security, bring a lease to an end or commence insolvency proceedings.  This breathing space can be extended by a further 20 days by subsequent application to court. If a 40 day period does not look like it will be sufficient but the general plan appears to be working, creditors can be asked to consent to an extension. The period of extension will relate to the specific circumstances that apply, but the longer the extension request, the more unlikely it will be approved unless unusual conditions apply.

If the IP finds that the directors are not following his advice he can apply to court asking for the directors to do so, or he can resign and bring the process to an early conclusion.

It could be argued that an IP may not be keen to incur the reputational damage that might arise if a company spirals out of control because a plan is not working and he cannot influence immediate change. Indeed, if creditors have supported a plan as a result of the IP’s involvement on the basis that such IP was confident that it would succeed, why allow directors to continue to control the levers of power.

Looking at the proposed documentation and issues, the initial costs of a court petition together with the ongoing monitoring process are likely to be fairly substantial. Small companies may find that a moratorium process is simply too expensive to use when they are already financially stretched.

The government’s Insolvency Service have produced detailed notes, flowcharts etc. which seek to regulate the process and also point to a fairly high time/cost commitment for participants.

Many readers will have heard of a company voluntary arrangement “CVA”. These have become fairly popular in the last few years, mainly with tenants of large commercial buildings, and a key difference is that the IP is in charge of the CVA process from the outset.

Leaving the directors in control of a business which has already caused distress amongst stakeholder groups is fraught with danger and whilst one might see a moratorium process occurring before either a CVA or administration process is put in place, a standalone moratorium which could last for many months is perhaps unlikely.  If it is the case that rescuing a business as a going concern is required as  the likely outcome, many companies facing insurmountable financial challenges may decide that liquidation is more straightforward  i.e. stop, sell the assets and move on.

In the unprecedented circumstances that we have all faced since March 2020, and are likely to face in the months ahead, a pragmatic and supportive approach by all stakeholder groups may trump a formal moratorium process.  For example, if one can demonstrate without releasing too much confidential information that there are reasonable prospects of survival and hence, repayment of debt, most creditors will exercise patience. A supplier would far rather have an ongoing customer rather than lose the connection.

The contention is that the current insolvency regime is sufficient to deal with a turnaround process. A company moratorium might not be seen in the light that the government appears to wish i.e. rescuing a business as a going concern. It may simply be an indicator of the final stages of a company’s corporate existence.

Time will tell if this new process captures the corporate imagination.

The views in this article are those of Michael J M Reid, licensed insolvency practitioner and partner of Meston Reid & Co, chartered accountants, Aberdeen.  They do not purport to represent those of the firm in general.