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Administration, as an insolvency rescue procedure would be defeated, were it not for the Moratorium. Why are they so useful?

Overview of What Is The Moratorium In An Administration

When an application to Court for an Administration Order is made and if it is successful, a moratorium arises automatically. This is a key reason that Companies choose to enter into Administration instead of other insolvency procedures.

Administration would have not teeth as a company rescue procedure without the moratorium. It is an extraordinary power because it interferes with the rights of creditors to recover their debt in the normal way. It in effect prioritises the opportunity of the company to be rescued as a going concern in the interests of all creditors over the rights of an individual creditor.

However, you cannot go into Administration simply to stop your creditors from taking enforcement action. You need to be able to satisfy the purposes of Administration as set out in legislation because such power has to be exercised responsibly and as a result the legislation controls the potential uses of the Administration procedure.

What Is A Moratorium?

When insolvency and legal proceedings are taken against a company, a moratorium can effectively pause or even conceivably permanently stop those proceedings. This also can stop other legal processes from being commenced unless it has the consent of the Court or the Administrator.

Usually, but not always, Winding Up Petitions against a company will be dismissed as a result of a company having a moratorium. The moratorium provides the company with a breathing space and allows an Insolvency Practitioner to plan his or her course of action without pressure from creditors.

Interim And Permanent Moratorium

An Interim Moratorium is triggered when the initial application to the Court is made. This action freezes the creditors’ rights to bring legal proceedings or other similar processes against the company. This does not affect creditors’ rights, it is just temporary.

The Interim Moratorium will stay in place until:

  • Dismissal or granting of the application for the appointment of an administrator;
  • Appointment Of The Administrator After The Serving Of Notice;
  • The passing of five business days after notice of intention has been filed without the appointment of an administrator.
  • A Permanent Moratorium will apply once an administrator has been appointed. This will run until the completion of the administration.

What Is The Effect Of The Moratorium?

Whilst a moratorium freezes any legal processes from commencing or continuing, it should be noted that the enforcement of all contractual rights is by no means prevented. This includes the right to terminate a contract by a third party as the company enters administration. Unless it is agreed by the court of an administrator that such actions can be taken, it prevents:

  • Security over a company’s property being enforced;
  • Assets under a hire purchase agreement being repossessed;
  • The right of a landlord to forfeit a lease by conflict free re-entry;
  • The appointment of an administrative procedure;
  • Legal proceedings in opposition to the company or its assets.

Why Is A Moratorium So Crucial?

The moratorium is crucial to a successful outcome of the Administration and satisfaction of the Administration objectives – but why? It gives the company and the Insolvency Practitioner time to consider a restructuring plan whilst continuing to trade and finding a way to realise its assets for the creditors’ benefit.

What is more important is that the Moratorium prevents any individual creditor from having priority over the others. It safeguards the cardinal principle in insolvency proceedings ie. insolvency is a class remedy. Unnecessary and potentially costly legal action that could arise during the course of the Administration can also be prevented.

Documents That Gives Rise To A Moratorium

An Interim Moratorium can be brought into effect by filing Form 2.8B (formal notice of intention to appoint an administrator). At least 5 business days’ notice is required by company directors in writing of their intention to appoint an administrator to any qualifying floating charge holder (QFCH). A copy of this document also needs to be filed at court.

Form 2.9B (notice of appointment) is then required to be filed with the court. Written consent of the holders and the proposed administrator of any qualifying floating charges must be received. Once this form has been filed, the Interim Moratorium will cease to have an effect and a Permanent Moratorium will be in place. This will last for the duration of the administration.

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Disclaimer: What Is A Moratorium In Administration?

This page: What Is A Moratorium In Administration? is not legal advice and should not be relied upon as such. This article What Is A Moratorium In Administration? is provided for information purposes only. You can Contact Us on the specific facts of your case to obtain relevant advice via a Free Initial Consultation.