As a company is considering or entering administration, there may be concerns that creditors will seek to take interim action against the company to satisfy any outstanding debt owed.
During this time, there will be a focus on the rescue and rehabilitation of the company and as such, the moratorium acts as a welcomed breathing space.
What is a statutory moratorium, and how does it help a company considering entering administration?
A statutory moratorium is a legal protection for companies entering into administration. It provides companies with the benefit of preventing majority creditors and third parties from taking action against the company or its assets during the administration process without seeking permission from either the administrator or the court.
Factors that influence the granting of a moratorium
A statutory moratorium is granted by the court through applications made to it in either one of two ways, the court route, or the out-of-court route.
Often, the decision to enter administration stems from the desire to continue trading the company, if viable. Courts tend to favour granting the protection under a statutory moratorium when it is able to identify a genuine effort to develop a realistic and feasible plan to recover the company. Often, the court will be guided by the monitor’s opinion in respect of the impact of the moratorium. If the monitor reasonably believes that a moratorium will assist with the rescue of the business as a going concern, it is more likely that the court will grant it.
As seen in the case of Re Atlantic Computer Systems Plc [1992] Ch 505, the court granted a moratorium to facilitate negotiations between the company and its creditors whilst also developing a rescue plan in the background. There was a clear, viable restructuring plan in place to help repay its debts in the future.
In what circumstances will the court not grant a moratorium?
Where it is clear that a viable restructuring plan is in place, the court will often grant a moratorium. However, there have been and will continue to be moments where the court will not grant a statutory moratorium.
Namely, if granting the moratorium is likely to unfairly prejudice the rights of creditors with a legitimate claim against the company, the court will be reluctant to grant it. The court has an important role to play in balancing the interests of both the company and creditors involved.
Furthermore, the court is unlikely to grant a moratorium if they see the application as an abuse of the process. Often, moratoriums can be seen as a delay tactic, and as such, the court is alert to motivations that may constitute improper use. Examples of improper use of a moratorium include attempts to shield assets from creditors, or failure to comply with obligations during the moratorium period.
It is relatively common for a company in administration to propose and implement a company voluntary arrangement (CVA). In this scenario, a company will often be kept in administration, even though the CVA is largely responsible for reorganising the company’s affairs. By remaining in administration, the company retains the benefit of a moratorium, which it would not otherwise have.
If a company is found to have filed successive notices of intention to appoint administrators without legitimate reasons, the court is unlikely to grant the moratorium on the basis that it constitutes an abuse of process.
What should companies look out for?
While a moratorium can offer welcomed protection to companies, it is worth noting that it will not protect from third parties enforcing any contractual rights. A moratorium also does not prevent a third party from bringing actions against an administrator of a company in their personal capacity.
Furthermore, applications can be made by creditors to lift the moratorium, allowing them to then act against the company.
Conclusion
Whilst the court may not always grant a statutory moratorium, when it is granted, it can assist companies that are going through financial hardship and considering administration.
A moratorium will protect the company from creditors taking actions against them during the administration process and allow breathing space in order to attempt to resolve their financial/trade difficulties.
