Credit Management July and August 2020

INSOLVENCY EXCLUSIVE
The Moratorium -
How will it work in
practice?
AN SME clothing company, Example Fashion Ltd, suffered
a bad debt of £250,000 after one of its major customers, a
department store, entered administration. According to
its customer’s administrator, there was very little hope of
receiving any of the £250,000 owed through the administration.
The department store had been the company’s largest
customer. However, following negative press, the directors
had worked hard at sourcing new customers so as not to be as
dependant on the department store for business.
Accordingly, at the time the bad debt is suffered, the
company has a healthy order book for the following six
months, but it is not due to receive payment for any of the new
customer orders for at least three months. The company is
receiving payment in invoices from other, smaller customers
but does not have sufficient cashflow to pay all of the debts
that are due now, many of which relate to goods and services
procured to fulfil the department store contract. The company
is now ‘cashflow insolvent’.
While most of its suppliers are supportive, a minority of the
unpaid suppliers are threatening to take legal action against
the company, and one has already served the company with
a statutory demand. One of the directors intends to raise
money for the company by re-mortgaging her own house.
Once these funds are invested in the company, it will be able
to repay its creditors. However, the funds will not be available
for a few weeks and creditors are threatening legal action
now, unconvinced that money will otherwise be forthcoming.
The directors seek advice from an IP and the IP believes
that the company can be saved via this investment. The IP
advises that the company enters a moratorium, a rescue
process that will protect the indebted company from creditor
action while the additional finance is raised.
The directors and the IP complete the necessary paperwork
and file a notice and other documents at court, commencing
a moratorium for an initial period of 20 business days. The
IP is appointed monitor. Using the income from the smaller
invoices, the company is able to pay its ongoing liabilities:
wages, rent, goods and services supplied in the moratorium
etc.
Unfortunately, soon after the moratorium is entered the
director’s re-mortgage is delayed and it becomes apparent
that the funds will not be available for a further six weeks.
The directors tell the Monitor about this. Based on the
information given to the Monitor by the director, the Monitor
continues to believe the investment will be made and that the
moratorium will bring about the rescue of the company as a
going concern. Accordingly, the Monitor does not bring the
moratorium to an end.
After 15 business days the directors file for a 20-business
day extension to the initial period; the Monitor completes
another statement that it is likely the moratorium will bring
about the rescue of the company as a going concern. During
this second 20-day period, the re-mortgage is completed,
and the funds are injected into the company. At this point,
the company ceases to be cashflow insolvent; it is able to pay
all of its older debts in full and the ongoing debts incurred
following entry into the moratorium. Accordingly, the
Monitor files a notice at court terminating the moratorium on
the grounds that rescue of the company has been achieved.
AUTHOR – Paul Bannister
In terms of the
details, the
new Corporate
Insolvency and
Governance
Bill will
introduce a new
moratorium to
give companies
breathing space
from their
creditors while
they seek a
rescue.
Advancing the credit profession / www.cicm.com / July & August 2020 / PAGE 13