A moratorium in insolvency refers to the temporary suspension of legal actions against a company, providing breathing space for the company to explore its restructuring or rescue options.
How a moratorium protects the company
It prevents creditors from taking further legal action, allowing the company to focus on addressing its financial issues without the pressure of immediate legal proceedings. However, during this period, interest may continue to accrue, meaning the debt could increase once the moratorium ends.
Types of Moratoriums in Insolvency Proceedings:
Moratorium in a Company Voluntary Arrangement (CVA):
- The moratorium in a CVA lasts for 28 days, providing the company’s directors time to negotiate a CVA with creditors. During this period, creditors cannot take legal action against the company. While a CVA doesn’t automatically trigger a moratorium, an automatic one applies if the company enters administration.
- Moratorium in Administration: – In administration, the moratorium protects the company from legal actions by creditors, including the filing of a winding-up petition, unless the administrator consents. This allows the company to reorganize and restructure without legal interference.
Standalone Moratorium:
- The standalone moratorium is a 20-day period (extendable) that is director-led. It is used when a company is not yet insolvent but is at risk of becoming so. During this time, directors, with the assistance of an Insolvency Practitioner, can assess the company’s financial position and develop a recovery plan.
