When and why is a Moratorium Required in an Administration?
What is a Moratorium?
One of the main reasons companies choose to enter into administration is to benefit from the moratorium, which is triggered automatically as soon as an application to the court for an administration order is made. The moratorium has the effect of pausing all insolvency proceedings and legal processes that are being taken against the company in question. It also means no other legal processes can be commenced without the consent of the administrator or permission of the court.
In most circumstances, this will lead to winding up petitions against the company being dismissed. This gives the company the breathing space it needs and allows the insolvency practitioner to plan a rescue or restructure without having to deal with constant creditor pressure.
Interim and Permanent
The initial application to the court for an administration triggers what is known as an interim moratorium. This has the effect of freezing the rights of creditors to bring insolvency proceedings and other legal processes against the company. However, the rights of the creditor remain, they are just temporarily stayed.
The Interim Moratorium will Remain in Place until:
- The application for the appointment of an administrator is granted or dismissed; or
- The administrator is appointed after the notice to appoint has been served; or
- Five business days pass after the filing of a notice of intention without an administration being appointed.
Once an administrator has been appointed, a permanent moratorium then applies which runs until the administration has been completed.
What is the Effect?
It is important to note that while the moratorium does freeze legal process from commencing or continuing, it does not prevent the enforcement of contractual rights. This includes the right of a third party to terminate a contract as the company has entered administration. However, unless the court of an administrator agrees that such actions can be taken, it does prevent:
- The enforcement of security over the company’s property;
- The repossession of company assets under a hire-purchase agreement;
- A landlord’s right to forfeit a lease by peaceable re-entry;
- The appointment of an administrative procedure;
- Any legal proceedings against the company or its property.
Why is it so Important?
Its purpose is crucial to the aims of the administration being achieved. It gives the company and the insolvency practitioner the opportunity to put a restructuring plan in place, continue trading whilst seeking a buyer or realise the assets of the company for the benefit of its creditors. Importantly, the moratorium prevents any one creditor from gaining priority over the others. It also prevents unnecessary and potentially expensive legal action being taken for issues that will be dealt during the course of the administration.
Filing a formal notice of intention to appoint an administrator (Form 2.8B) at court will bring into effect an interim moratorium. Company directors are required to provide a minimum of five business days’ written notice of their intention to appoint administrators to any qualifying floating charge holder (QFCH), and also file a copy of the document at court.
The notice of appointment (Form 2.9B) should then be filed with the court. This must have the written consent of the holders of any qualifying floating charges and the proposed administrator. Once the notice of appointment has been filed the interim moratorium ceases to have an effect and a permanent moratorium lasting for the duration of the administration will be in place.
If you are considering putting your business into administration, you should always seek professional advice in advance. We’re always happy to help, simply give us a call on 08000 746 757 for a no-obligation, free consultation. or chat using the Live Chat box on the bottom right of the screen.