What is a moratorium in company administration?

A moratorium in administration refers to the initial application to the court for an administration triggers what is known as an interim moratorium.

During this period during which a company is granted temporary protection from its creditors while it seeks to restructure or rescue its business.

In the context of an administration, a moratorium can be initiated when a company is placed under the control of an administrator, who can apply to the court for a moratorium to be granted.

It provides the company with breathing space to develop a rescue plan, without the pressure of creditors pursuing enforcement action.

During the period, no legal proceedings can be taken against the company without the court’s permission, and no security can be enforced.

However, the company must still meet its ongoing obligations, such as paying wages and fulfilling contractual obligations. The moratorium typically lasts for 20 business days but can be extended for up to a year with the court’s approval

What is a statutory moratorium in administration?

A statutory moratorium is a legal mechanism available under the UK insolvency law that provides a company with temporary protection from creditor action while it explores restructuring or rescue options. The moratorium can be initiated by filing the necessary documents with the court or by an insolvency practitioner.

The moratorium period usually lasts for an initial period of 20 business days, which can be extended by the court for up to a year in certain circumstances. During the moratorium, no creditor can take enforcement action against the company, and no new security can be granted. The company is also protected from legal action, such as winding-up petitions.

Interim and permanent moratorium

When a company files its initial application for administration in the UK, it triggers an Interim Moratorium that temporarily freezes the rights of its creditors to initiate legal proceedings or other similar actions against the company. The Interim Moratorium is only temporary and does not affect the creditors’ rights in the long run.

• It will remain in place until one of the following occurs:
• The application for the appointment of an administrator is granted or dismissed
• An administrator is appointed after the serving of notice
• Or five business days have passed since the notice of intention was filed without the appointment of an administrator.

Once an administrator is appointed, a Permanent Moratorium will take effect and remain in place until the completion of the administration process. This provides the company with a breathing space to explore restructuring or rescue options, without the pressure of creditor action.

What effect does the Moratorium have?

It’s important to understand that while a moratorium halts the initiation or continuation of any legal proceedings, it does not necessarily restrict the enforcement of contractual rights. Third parties, for instance, may still retain their right to terminate a contract when the company enters administration.

However, such actions cannot be taken without the approval of the court or the administrator, as it may otherwise undermine the purpose of the moratorium. Therefore, it is crucial to seek guidance from a legal professional to understand the extent to which contractual rights can be enforced during the moratorium period.

It prevents: Unless the court of an administrator grants permission for such activities to be conducted.

• imposed security over a company’s assets;
• repossessed property covered by a hire purchase arrangement;
• the ability of a landlord to terminate a lease through uncontested re-entry;
• the selection of a formal administrative process;
• Legal action taken against the business or its assets.

Why is a moratorium so crucial?

A moratorium in administration is crucial for several reasons.

• it provides the company and its insolvency practitioner with a breathing space to formulate a plan for restructuring the business and maximising the value of its assets for the benefit of all creditors.
• it prevents any individual creditor from taking priority over others, safeguarding the cardinal principle of insolvency proceedings that insolvency is a class remedy.
• it helps to avoid costly legal actions that could arise during the administration process. Overall, a moratorium is essential for ensuring that the administration process runs smoothly, efficiently and in the best interests of all parties involved.

Documents that are required to rise a moratorium

To initiate an interim moratorium, directors must submit Form 2.8B, a formal notice of their intention to appoint an administrator. This process requires directors to provide at least 5 business days’ written notice to any qualifying floating charge holder (QFCH) of their plans to appoint an administrator. The notice should also be filed at the court.

Subsequently, the court requires Form 2.9B, a notice of appointment, to be filed. This form necessitates the written consent of the holders and the proposed administrator of any qualifying floating charges. Once this form is submitted, the interim moratorium will expire, and a permanent moratorium will come into effect for the entire duration of the administration. This process ensures that the administration process runs smoothly, and all parties involved are fully informed of the proceedings.

Frequently asked questions

How long does a moratorium in administration last?

A moratorium in administration can last up to 40 business days. However, an extension can be granted by the court in exceptional circumstances.

What are the benefits of a moratorium in administration?

The primary benefit of a moratorium in administration is that it allows a struggling business to review its options and restructure the business without fear of legal action or individual creditors taking priority over others. The moratorium also helps to prevent potentially costly legal actions that could arise during the administration process, ensuring that the process runs efficiently and in the best interests of all parties involved.

Conclusion

A moratorium in administration provides a struggling business with a vital breathing space to assess its insolvency options. During this period, the company can continue trading under the supervision of an insolvency practitioner, who will review the company’s financial situation and determine the best course of action.

This might involve attempting to restructure the business, seek new investors, or even find a buyer. Crucially, the moratorium prevents individual creditors from taking priority over others, ensuring that any decisions made are in the best interests of all creditors. Additionally, the moratorium helps to prevent costly legal actions that could arise during the administration process.

Overall, a moratorium in administration is a crucial tool that enables a struggling business to review its options, take necessary steps, and emerge from the administration process with a viable future.