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Leveraging the insolvency moratorium

Posted: 03 Jun, 2021

Our experts discuss the subject of our upcoming webinar

Ahead of our upcoming Review. Adapt. Evolve. webinar: ‘Moratorium: a process for recovery,’ taking place on 8 June, we sat down with a panel from our Restructuring Advisory and FRP Transition teams to discuss the standalone moratorium process which is becoming an increasingly important option for businesses to consider as a route to recovery.

The process, which came into effect via the Corporate Insolvency and Governance Act last year, has had limited use to date but could provide a vital resource for businesses. Our panel, Restructuring Advisory Partners Anthony Collier and David Hudson and FRP Transition Director Susan Moor, explore the process, with additional key insights provided by Corporate Restructuring Officer, Thomas Lane at Bayley Barclay & Mills.

The moratorium was brought in last year but, to date, there have been very few examples of it being used. Why is that?

David Hudson: It’s right to say that the moratorium process has been underutilised so far – but that’s likely to change in the coming months as the threat of insolvency increases for businesses.

A number of commercial pressures are likely to come to a head this summer that have largely been delayed by extensions to the government’s emergency COVID support schemes, which explains the limited use of the moratorium process. Firms are now being asked to repay their emergency loans at a time when they are getting back on their feet and understandably have little by way of a buffer in terms of working capital. Creditors and landlords will also be in a position to start pursuing winding up petitions and evictions again as of the end of June – creating something of a perfect storm.

The moratorium will provide firms – particularly those whose balance sheets have only been substantially impacted by COVID – with some room (20 days minimum) to find a solution with the support of a restructuring specialist.

What is different about the moratorium and what are the key benefits?

Thomas Lane: The moratorium process enables businesses with liabilities which are creating insolvency concerns to have time to seek an arrangement with creditors in order to return to solvent trading.

The moratorium process is one of the few formal options where management maintains control and the company does not need a change of structure or ownership. An Insolvency Practitioner will be required to act as the Monitor, and it is recommended that the senior management team has restructuring experience to deliver the turnaround. As an example, a business that is unable to repay debts built up during lockdown but is otherwise profitable may enter a moratorium process where it has time to seek a resolution with creditors.

If the wave of insolvencies begins to materialise as forecast, which types of businesses should be looking at a moratorium process?

Susan Moor: The moratorium process is just one of a number of options businesses can pursue – although the options available to them become more limited the longer they choose not to deal with their issues head on.

In theory, the moratorium could prove beneficial to firms in any sector. However, we’d anticipate it proving most valuable for retail, leisure and hospitality businesses given they are starting to trade well again but have been disproportionately affected by periods of lockdown.

While the process shouldn’t be viewed as a luxury, it will naturally bring the associated cost of appointing an adviser or Corporate Restructuring Officer (CRO) to monitor activity and devise a recovery strategy while the directors continue to run the business. As such, it is an option which will likely favour firms that are mid-sized or larger.

After such a long period of delayed and deferred payments, is the process currently being welcomed by creditors?

Anthony Collier: The moratorium process is about providing businesses time to get back on the right track or the breathing room that the process provides is designed for action to be taken – whether that’s securing new finance with the support of a debt adviser or the development of a company voluntary arrangement (CVA). Overall, the 20-day period allowed – which can be extended if all parties agree – will benefit creditors. Given that most businesses entering this process will be cash-generative, it’s something most creditors will or should see as a positive way forward.

The ICAEW will also be closely monitoring cases to ensure the process is only being recommended by restructuring professionals where appropriate. Once we begin to see some positive ‘first mover’ cases – something we are actively working on as a firm – confidence in the process among creditors is only likely to grow.

Given it’s a relatively new concept for businesses, what signs should management teams be looking out for to suggest they might benefit from the moratorium process?

David Hudson: The economy is now fully in recovery mode and growth is likely to be accelerated

as social restrictions are due to lift at the end of June. Post-COVID even strategically sound businesses have been starved of income and the working capital needed to meet the expected uptick in demand.

We advise firms to keep a 13-week rolling forecast and scenario plan to understand how their cashflow will evolve in the future. The moratorium process is designed to capture businesses towards the top of the decline curve, before things begin to escalate and recovery becomes more difficult. The earlier potential difficulties are flagged, the better the outcome usually. As such, it’s important that management teams consider their options at the earliest sign of distress, even from overtrading.

To book your place on our upcoming webinar, or to learn more about the moratorium process and how it can aid business recovery, visit our events page Moratorium: a process for recovery.

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