Breathing space to help struggling companies

R3, the insolvency trade body, has released new advice stating that companies in financial difficulty should be given up to six weeks of breathing space from creditor pressure to plan their recovery or rescue. The introduction of a ‘business rescue moratorium’ would help to save more companies, save more jobs and improve the returns to creditors.

There are concerns that rescue deals are arranged too quickly and information is kept from some creditors. Often creditors want to act quickly and dismiss alternative rescue methods for a winding-up petition. The UK insolvency regime has considerable flexibility to be as effective as possible. A simple moratorium procedure could help give a struggling business time to plan their rescue and, possibly, prevent insolvency.

A short moratorium would enable a company to be more open with its creditors about the options and negotiate a solution which was transparent and beneficial to all. When faced with the possibility of losing control of their business, a director might delay seeking help, however the knowledge they would have a period to plan their recovery might reduce the tendency for quick solutions. Breathing space might help a director remain in control of their company with the support of a qualified insolvency practitioner.

The proposals would mean that creditors would not be able to pursue debts owed by a company for 21 days if they entered into a moratorium. This would increase flexibility for the company who might otherwise be entered into a formal insolvency procedure immediately.

During the moratorium, companies would be overseen by a Moratorium Supervisor who would ensure the directors are using the moratorium as intended. They would also have the option to apply for an additional 21 days with the court’s approval.

The moratorium can be used to put in place plans to restructure a company, negotiate alternative payment terms with creditors, negotiate a Company Voluntary Arrangement, or prepare for an administration or liquidation. Companies in a moratorium must meet any liabilities created during the moratorium. If, however, this is not possible, the company will be entered into an insolvency procedure immediately.

R3 has advised that if this moratorium period is introduced, it must be kept short. For example, a period of four months is too long to ask creditors to wait, and there is the danger that in a longer moratorium, the company would not focus on dealing with its financial problems.