What are the benefits of a moratorium in administration?
When a company goes into administration, it gets the advantage of a moratorium, a strong legal protection that stops legal actions against the company. This stops creditors of a financially troubled company from starting more recovery actions, like asking the court to close down the company.
What is the purpose of a moratorium?
It’s crucial to understand that a moratorium is a short-term solution. It doesn’t mean the company is off the hook completely; rather, it provides the company an opportunity to address its problems without facing immediate legal consequences. Creditors still keep their rights and the right to claim the money owed to them, but these actions are put on hold during the moratorium.
Administration should have a clear goal; a company can’t linger in it endlessly, just postponing the unavoidable. The company needs to make use of this chance and the safeguard offered by the moratorium to create plans with its creditors. The aim is to achieve the statutory objective of the administration and make decisions about the future of the business. Throughout this period, the interests of creditors should take precedence over those of the company’s directors and shareholders.
How long does a moratorium last?
A provisional moratorium is given when the company submits a notice of intention to appoint an administrator. The appointment of an administrator must happen within 10 business days of filing the notice in court. Once appointed, a second moratorium is granted immediately. This protection remains in place until the company completes the administration process.
How does a company exit administration?
A company can leave administration through various routes, and the best one depends on the company’s financial status and its ability to continue operating successfully.
In certain situations, the time-out offered by the moratorium might be sufficient for the company to tackle its difficulties and reach a consensus with creditors. In such instances, the company would conclude administration, the administrator would return control to the directors, and the company would carry on with its operations.
However, in many scenarios, an additional insolvency process is frequently needed to address the challenges confronting the company.
Other exit routes
1. Company Voluntary Arrangement (CVA)
If the company stands a realistic chance of future success but needs restructuring, a recovery method like a Company Voluntary Arrangement (CVA) might be suggested.
A CVA includes discussions with creditors to establish a mutually acceptable payment plan. Some debt may be forgiven, and the remaining amount is repaid over the CVA’s duration, usually spanning two to five years.
The administrator will create a CVA proposal to submit to creditors, and upon acceptance, control of the company is returned to the directors. All parties are then obligated to adhere to the CVA terms. Contracts, including leases, can be renegotiated, and unprofitable sections of the company can be shut down to enhance the company’s recovery prospects.
2. Creditors’ Voluntary Liquidation (CVL)
In certain situations, it might be determined that the company’s issues have escalated to a point where a successful trading future is not feasible. In such instances, creditors would benefit more from the company’s closure.
If this is the judgment, the company undergoes a voluntary liquidation process known as a Creditors’ Voluntary Liquidation (CVL).
Alternatively, if the administrator has sold the business and assets during the administration process and only needs to transition to CVL for distributing funds to creditors, it can happen.
A CVL may also serve different purposes, like allowing the liquidator to disclaim burdensome assets or conduct thorough investigations into potential misconduct or claims against third parties.
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Seek qualified advice and support
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I am an insolvency professional with a distinguished career specialising in commercial insolvency, adeptly navigating Creditors Voluntary Liquidation, Company Voluntary Arrangements, and Company Administrations. With a comprehensive understanding of insolvency laws and an unwavering commitment to ethical practices.