Wind the clock back a couple of years to (dare I mention it…) the Covid-19 pandemic, and insolvency practitioners were getting mildly giddy about a new development in the form of a standalone moratorium. Slotting in at the forefront of the Insolvency Act 1986 courtesy of the Corporate Insolvency and Governance Act 2020 (CIGA), the moratorium was designed to give companies a breathing space to find a solution to their troubles when insolvency was knocking on their door.

Fast forward to the latest company insolvency statistics, and the moratorium numbers can hardly be described as earth-shattering. According to the Insolvency Service, between 26 June 2020 and 31 January 2023, in England and Wales, just forty-two (that’s 42 – you read correctly) moratoriums were obtained. If I had been the draftsman behind the free-standing moratorium, I think I’d have been hoping for slightly more than that. 

So, why isn’t the moratorium proving very popular? In principle, it’s difficult to see what’s not to like. Read the legislation and it talks about enabling an eligible company, in certain circumstances, to obtain a moratorium, giving it various protections from creditors. That’s without entering formal administration. And from what I’m told (hand on heart I’m yet to be behind one of these myself), the process does not involve a time-consuming and expensive legal process either.

Of course, if one were to be critical one could flag various limitations within the statutory rules. So, the moratorium only lasts a short period (20 business days initially unless extended). It doesn’t give protection from all creditors – meaning the payment holiday a company enjoys during the moratorium period does not extend to certain creditors – most importantly those providing financial services (i.e. banks). The real anoraks have been up in arms about how, if a moratorium is followed by a formal insolvency procedure, the priority of debts in the subsequent insolvency is altered. This means that certain pre-moratorium debts (namely those for which the company did not have a payment holiday and which were not paid) take priority over all other claims including liquidation/administration expenses and preferential claims in the subsequent insolvency. Understandably, insolvency practitioners will be reluctant to promote a standalone moratorium if there is any risk that the company might end up in insolvency and they might not be paid their fees.

However, my own experience in practice is that the real issue is that clients just don’t tend to go for the moratorium. And it’s not for want of trying on the part of the lawyers – I can think of several calls with distressed businesses over the last year or so when we’ve explored potential restructuring options, and the topic of the CIGA moratorium comes up and you can see the eyes of clients starting to glaze over.  

For the client, maybe it’s the adverse publicity that comes with obtaining a moratorium. Maybe they don’t like the idea of being monitored. The monitor will typically be an insolvency practitioner who acts as an officer of the court, and whilst they don’t take control of the day-to-day management of the company their consent would, for example, be necessary for a company subject to a moratorium to make payment of certain pre-moratorium debts during the moratorium. The analogy with being on parole does rather come to mind…

The short-term nature and limited effect of the moratorium does perhaps mean that it can appear like a lawyer’s dream – a sticking plaster at best but with some more billable hours on the clock for the lawyers in the meantime. And if a business is already facing a winding-up action, then the directors of the company must apply to court to obtain a moratorium.

The truth is that the moratorium was only ever designed to give companies more time where they have a potential rescue in mind. On its own it’s often not worth the time or effort. But combined with a restructuring of sorts, it can give the breathing space that can be the difference between survival and liquidation. But moratorium users do need to have a plan.

Take for example a company that’s on the receiving end of a winding-up petition from HMRC with a winding-up hearing scheduled for say 14 days’ time. The company asks HMRC for more time to pay but HMRC says "no". In this situation, one might think that a moratorium is an immediate way out of a sticky situation, at least in the short-term until a longer-term solution can be found. But that seems unlikely. On its own the moratorium would do nothing more than simply delay the inevitable.

Which brings us full circle to what the draftsman had in mind when the CIGA moratorium was first introduced. The legislation makes clear that when applying for a moratorium, the proposed monitor must give a statement that the moratorium is likely to result in the rescue of a company as a going concern. There’s no way it seems to me that one can arrive at that conclusion without having a restructuring solution of some kind – perhaps a company voluntary arrangement, a scheme of arrangement, or a restructuring plan – in the pipeline. In short, when seeking a moratorium, it should be seen as a period of breathing space to get that long-term solution over the finishing line, not just some time out in the hope that divine inspiration might follow later.