What could it mean for creditors?

The Insolvency Service is currently conducting a consultation for reform of the corporate insolvency framework. As part of the consultation, they have proposed a new restructuring moratorium, which would sit outside of the formal insolvency procedures. It is possible that the proposal could have wide reaching consequences for creditors.

What is a moratorium?

A moratorium is a period of time during which certain actions of creditors and other parties become suspended. Moratoriums usually begin at the point, or shortly before, a company enters Administration and can sometimes be a pre-cursor to a Company Voluntary Arrangement. The period for a moratorium is usually 10 business days. During a moratorium, creditors are unable to commence alternative winding up proceedings, enforce against property they have security over, repossess assets or commence and/or continue with any other legal process.

What are the proposed changes?

The proposal is to introduce a restructuring moratorium; a 90-day grace period in which a company can explore options for rescue and/or come to an arrangement with their creditors. The restructuring moratorium would come into effect as soon as an application is filed with the court by a company in financial difficulty or with imminent likelihood of such.

The proposal could be used as a gateway into formal insolvency, with the time being used to try to agree a CVA or look into options such as placing a company in Administration. The thought behind the proposal is to provide companies with a period in which a rescue plan can be considered and actioned without creditors taking action to recover their debts.

Once the moratorium period begins, action in respect of a company’s debts to date will be frozen, but they will be obliged to meet the continuing business costs going forward.

When could the proposed moratorium be used?

There are a number of qualifying conditions and eligibility tests, which must be met before a company would be able to enter a restructuring moratorium.

Eligibility Test

To be eligible for the moratorium, a company must already be in or imminently be at risk of financial difficulties. Companies providing certain financial transactions such as banks and insurance companies will not be eligible, but all other companies will.

Furthermore, a company will not be eligible for the moratorium if they have been in a CVA, Administration, or another form of moratorium within the last 12 months. Meaning the moratorium cannot be used repeatedly by companies.

Qualifying Conditions

To qualify, a company must be likely to have the funds to carry on business in the future. There must also be a reasonable prospect of a compromise arrangement being made with or agreed by creditors.

Impact of the proposal on creditors

The restructuring moratorium has been proposed to increase success in business recovery by providing a grace period for companies to reach amicable agreements with creditors. There is however, always the risk that it could be used as a delaying tactic to making payments, buying companies 90 days without the risk of creditor recourse.

As imminent risk of financial difficulty would satisfy the eligibility test, there could be circumstances in which moratoriums are entered as a delaying tactic, or worse, dishonest directors could use the time to dissipate assets and creditors could end up with lower levels of recovery as a result. This could simply create a whole new breed of zombie companies in an already uncertain financial environment.

A moratorium is usually bad news for a creditor as many debt recovery tools are immediately suspended. For example, you cannot issue or continue with legal proceedings and serving a Statutory Demand becomes useless, as a company knows you cannot follow through in winding up. In essence, creditors’ cash flow could suffer as a result of the 90-day grace period provided.

What if the proposal is accepted?

It is not all doom and gloom! Creditors will have a period of 28 days to challenge a restructuring moratorium, should they believe that the process unfairly prejudices them.

In addition, although limited in nature, there are still actions that creditors can take against companies during a moratorium. For example, a moratorium does not prevent you from enforcing a contractual right of termination or withholding deliveries or services. It is always good practice to have a contractual clause which allows for termination or suspension in the case of insolvency or on default of payment. This is advantageous as (unless in certain contracts for goods/services essential to the running of a debtor company) you are able to mitigate your losses by cutting ties.

In addition, there is nothing to stop you enforcing against assets of a company outside of England and Wales. However, in the Brexit aftermath, it is unclear how this will be affected in the coming years.

As always, it is best to be proactive and communicate with your customers in the hope of avoiding such action becoming necessary.

You can read the full consultation, including other proposals for change, here.

The consultation will remain open for you to have your say until 08 July 2016.

For more information, please contact us on 01332 226 474 or email: .