Directors’ decisions: call a moratorium for 20 days?

Government announce plans to protect businesses

During the current COVID-19 crisis the government have announced new plans to help directors run their businesses without threats from third party creditors. Some of these are temporary but the government have also announced some permanent new laws, as an addition to current Insolvency Law. This is in order to help directors of companies in getting through financially during business critical periods.

Moratorium concept

The new provisions are designed to create a new pre-Administration step whereby directors are in control of any turn-around plan. They will be able to call what is called a moratorium for 20 business days and be protected from creditors whilst they sort matters out and protect the business as a going concern. The new provisions are taking the UK much closer to the US concept of Chapter 11 bankruptcy filing.

The process for obtaining a moratorium is intended to be simple but it does involve the need for a ‘monitor’ to be appointed who must be an insolvency practitioner. The monitor must consider the company’s affairs and form a view as to whether it remains likely that the moratorium will result in the rescue of the company as a going concern. The moratorium is effective immediately for the period of 20 business days and there will be provision to extend if certain conditions are met. The maximum period for a moratorium will be one year.

Whilst the moratorium is in place, no insolvency proceedings can be commenced against the company such as a winding up. Creditors will be unable to enforce security over the company’s property (such as a debenture) and floating charges will not crystallise during this period.

As part of the new package of laws there will also be legislation prohibiting company contract clauses being invoked during a moratorium which allow any third party supplier to terminate or to materially adversely change the terms of a contract. This could possible apply to a non-payment clause in such a contract triggering default.

Conclusions and advice

The permanent measures, in particular the moratorium concept , may provide some further relief once the temporary provisions cease to apply after the current crisis comes to an end. As for the moratorium generally and the possibility of proposing a restructuring plan, these measures will allow for more company friendly restructuring in the UK allowing directors to remain in control of the company. This may be a way of efficiently buying the company time to re-organise the financial affairs properly and protect the future.

At Moore Barlow our Corporate Law team can advise directors on such choices and ultimately the decisions that need to be made in order to protect the company and its workforce. Various issues arise from any decision such as this and we are here to help. Moore Barlow can also assist directors in making a sensible choice of the monitor either to discuss a proposal or proceed with a moratorium.