Managing an insolvent company is not a trivial task. Finding additional sources of revenue while stymying the loss of capital is difficult enough, but this is often made worse when creditors start applying pressure. Not only will this increase the stress directors have to bear, but it could constitute additional outgoings for the company, or even mark the beginning of legal action to recover a debt. In such scenarios, having a moment to catch your breath would surely be invaluable.
As a result of the Corporate Insolvency and Governance Act 2020, directors have the option to apply for such breathing room. This comes in the form of a standalone moratorium, one aspect of the act that affords directors of struggling companies time to regroup, assess their options, and settle on a path forward for their company.
According to GOV.UK’s ‘Commentary – Monthly Insolvency Statistics April 2023’, between 26 June 2020 and 30 April 2023, in England & Wales, only 43 moratoriums were obtained, and 21 companies had a restructuring plan registered at Companies House.
So, although it is not an option that is often used, we thought it would be useful to give an overview of the standalone moratorium process, what it does, and how it can help your company.
What is the standalone moratorium process?
The standalone moratorium process was included in the Corporate Insolvency and Governance Act 2020. The act sought to give directors of financially struggling companies a grace period to decide how to move forward without the usual pressures that go with managing an insolvent company. Directors can start the process of their own accord, applying for a standalone moratorium if their company cannot, or will soon be unable to, repay its debts. Directors must state the financial status of their company, and attach relevant documents, such as company accounts, to their application.
If approved, a standalone moratorium will afford directors 20 days to identify a potential solution, without having to face creditor pressure or the looming threat of legal action. If directors cannot settle on a course of action within this timeframe, it is possible to apply for an extension of a further 20 days, though this may not always be granted. Longer extensions can also be sought, though this is a rare occurrence, as few standalone moratoriums last longer than 40 days.
Advantages for directors
The standalone moratorium process offers directors several advantages. Most notably, it acts as a grace period for legal action, ensuring creditors cannot resort to the courts for debt recovery. This allows directors to carefully consider their options, without the imminent threat of legal action, such as a winding-up petition. Additionally, a monitor will be appointed to the company, with the aim of identifying potential solutions to the financial problems it faces. The monitor will attempt to find a workable solution before the end of the standalone moratorium, so it can be implemented immediately once the moratorium elapses. This solution will be implemented as a rescue plan, with a view to making the company a going concern. However, using a standalone moratorium doesn’t mean you must use a business rescue plan; placing your company into an insolvency procedure is a perfectly viable solution, if you deem it the more effective option.
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What happens at the end of a standalone moratorium?
Once your standalone moratorium has come to a close, any plans that have been drafted to rescue your company should be put in place, if they haven’t already. Generally, it is much better to implement any potential solutions before the end of your standalone moratorium, as this will help get your company back on track and stave off creditor pressure. Once all potential solutions have been implemented, or your monitor deems the process no longer likely to assist your company, the moratorium will be ended prematurely. Your monitor can also end the standalone moratorium if you have not provided the necessary information, or have failed to keep up with any required payments.
What payments must be made during a standalone moratorium?
Although a standalone moratorium will take much of the financial strain off a company, essentially acting as a payment holiday for its duration, there remain some debts that must be paid. This is generally restricted to operational costs, but also includes some other payments that may crop up during the standalone moratorium. For example, you may be required to pay the cost of goods, staff wages, rent for premises, and utilities. Naturally, exactly what you have to pay will depend on your situation.
What are my options after a standalone moratorium?
Whilst in the standalone moratorium process, it is vital that you identify any options to recover your company, and contingencies for if you can’t. Searching for a viable business rescue plan will be your first priority during the initial window of time your standalone moratorium affords you. The monitor assigned to your case can be of some help with this endeavour, though turning to a licensed insolvency practitioner for professional advice is a good idea. Many insolvency practitioners offer business rescue plans as a service, and they can use their experience to help you find a method of keeping your company’s doors open. However, it may be time to consider other options if you can’t find a workable solution.
One of the best options available to insolvent companies that cannot recover is a Creditors’ Voluntary Liquidation (CVL). This formal insolvency procedure is a strong solution for closing a company burdened by debts. It can be taken voluntarily, requiring a company’s directors to submit an application and appoint an insolvency practitioner of their choosing. This insolvency practitioner will identify and value the company’s assets, dispose of them efficiently, and distribute the proceeds amongst outstanding creditors.
Also Read: What Is Receivership & How Can It Affect Your Company?
Creditors’ Voluntary Liquidation Process
The CVL process offers company directors considerable benefits, as well as being an efficient means of liquidating a company.
- The company will be protected from creditors looking to take legal action against it, blocking any attempts at serving a winding-up petition and compulsory liquidation that so often follows. This protection will last for the duration of the CVL.
- Any debts that remain after the company will be written off, allowing directors to pursue other ventures without being saddled with their previous company’s debt. However, exceptions to this rule do exist. For example, debts secured by a personal guarantee will transfer responsibility for the debt onto the signatory, who must pay from their personal finances.
If you would like to learn more about Creditors’ Voluntary Liquidations, read our complete guide to the process.
Clarke Bell can help
If your company is facing financial troubles, don’t struggle alone; let Clarke Bell be there to help.
We have more than 28 years of experience in helping companies find solutions to their debt problems, whether it be a thorough business rescue plan, or voluntary liquidation.
Don’t hesitate to contact us today for a free, no-obligation consultation and find out exactly what we can do for you.
