In a week when the high profile failures of two of the UK’s best known retail brands – BHS and Austin Reed – have dominated the business news, the insolvency trade body R3 has called for new rules to give struggling companies more breathing space.

In a bid to help save more companies that are facing financial collapse, R3 believes a ‘business rescue moratorium’ should be introduced. This could help to safeguard more jobs and improve creditors’ returns.

The moratorium would give failing companies a period of up to six weeks free from creditor pressure. This could give insolvent companies the additional respite they need to plan a recovery or rescue. Under R3’s proposals, creditors would not be able to pursue debts owed by companies in a moratorium for an initial 21 days. This period could be extended for a further 21 days with approval from the court.

What type of company can enter the moratorium?

The R3 proposals would allow any company to enter a moratorium, including insolvent companies that would otherwise enter a formal insolvency procedure immediately. During the moratorium, the companies will be overseen by a ‘moratorium supervisor’, who is charged with ensuring the moratorium is used as intended.

The moratorium could be used to negotiate alternative payment terms with creditors; put plans in place to restructure the company; negotiate a company voluntary arrangement (CVA); or prepare for an administration or liquidation.

The struggling companies will be responsible for any liabilities they create while they are in the moratorium. If they are unable to do this, they will have no choice but to enter a company insolvency procedure immediately.

Why would a moratorium work?

R3 believes the business rescue regime would benefit from the introduction of a moratorium as it will give company directors the time they need to properly consider their options. It is hoped this extra breathing space will improve decision making and allow creditors to become more involved in the business rescue process.

By allowing companies to benefit from these protections, directors may be encouraged to take action about debt problems sooner. Acting early has always been one of the key factors in achieving a positive outcome and rescuing a business.

The principle of a moratorium will already be familiar to insolvency professionals. Companies considering a company voluntary arrangement (CVA) can already apply for a Schedule A1 moratorium. However, the rules for using a Schedule A1 moratorium are very demanding. As a result, this option is rarely used.

How would a moratorium work?

The business rescue moratorium proposals are still very much in the early stages, but R3 has already outlined how the process could work.

• Company directors will firstly have to make a statutory declaration confirming that the company is insolvent or is likely to become insolvent. This declaration will also set out the objectives of the proposed moratorium and identify the moratorium supervisor.

• Companies applying for a moratorium will have to file a notice in court. There will be no requirement to notify creditors that the filing is being made unless there is an outstanding winding-up petition. In that case, the petitioner must be given 3 days’ notice of the filing.

• Once the filing has been made, creditors should then be informed by email or post wherever possible, or by a notice in The Gazette.

• If an extension to the moratorium is required, company directors must make an application to the court explaining why the extension is necessary. Applications for the extension must also be supported by a statement from the moratorium supervisor.

Commenting on the proposed introduction of a moratorium, Neil Harris, R3 North East chair, said: “A short moratorium gives struggling companies a chance to be open with their creditors and negotiate a way out of their problems in a transparent fashion.

“Directors would remain in control of their company under the supervision of a qualified insolvency practitioner. Business rescue usually means more money back for creditors than would be possible following liquidation too.”