'INFORMAL' GENERAL MORATORIUM

Given a choice, any director of an insolvent company would almost certainly choose the least formal of all insolvency rescue procedures – an ‘informal' general moratorium.

Framework

•  creditors agree not to pursue outstanding claims which will be paid or compromised in accordance with the agreed terms of the    moratorium.

•  company allowed to continue to trade, usually under the supervision of the auditor, independent accountant or licensed insolvency    practitioner.

•  future suppliers paid on a cash basis or against strictly imposed credit terms.

Difficulty in achieving consent

•  agreement of 100% of creditors required

•  nothing to stop any individual creditor from taking immediate action for recovery including petitioning for compulsory winding up

Potential benefit to creditors

•  may represent most cost effective way forward in certain specific instances.

•  potential for enjoyment of continuing profitable trade with company coupled with supervised scheme designed to achieve maximum    recovery of outstanding claims.

Issues to be addressed  

•  creditors with preferential status will require their claims to be recognised in preference to the general body of unsecured creditors    (now easier to achieve following the abolition of the Crown's preferential status on 15 September 2003 )

•  creditors will need to be convinced they are not giving up valuable rights that could be pursued by a liquidator. The obvious examples    are the right to bring action against the directors for;

   IA 1986

- fraudulent trading s 213
- wrongful trading s 214
- transactions at an undervalue s 238
- preferences s 239
- transactions defrauding creditors s 423

• where a bank or other lender holds a fixed charge over specific assets, for example a freehold property, the charge-holder could insist upon appointing its own receiver under the Law of Property Act 1925 to dispose of the property or could sell as mortgagee in possession. Alternatively, the lender may be prepared to sit back and do nothing as long as the loan repayments continued to be made. In any event the lender’s interest would be restricted to the property over which it held its charge, leaving the directors free to pursue the moratorium with the remainder of the (unsecured) creditors

• where a lender holds a debenture which also grants a ‘qualifying’ floating charge, the situation would be quite different. If the debenture is dated prior to 15 September 2003, the bank may appoint either an administrative receiver or an administrator; for qualifying floating charges granted on or after 15 September 2003, the lender may appoint an administrator (but not an administrative receiver). Any holder of a qualifying floating charge will need to be convinced that both its rights and prospects of recovery would in no way be jeopardised by allowing an informal arrangement to proceed.

Preparing for meeting with the company’s creditors

If, having surmounted all other obstacles, you are successful in reaching the stage where you are able to meet with the creditors to put to them your proposals, you will need to be armed with answers to the following questions:

• How did the insolvency arise?
• Are the directors in any way to blame and have they any proposals to contribute personally to the available fund?
• Where the directors are also creditors: are the directors prepared to waive their claims or defer them in favour of other creditors?
• Who is to be the supervisor of the proposed scheme?
• What is the proposed level of the supervisor’s fees?
• Where there are bank borrowings: has the bank agreed to participate in the proposed scheme and if so, under what terms?
• What proposals are there to maintain the status of the ‘preferential’ creditors?
• Have investigations been made to ensure there have been no breaches of;

- s213 fraudulent trading
- s214 wrongful trading
- s238 transactions at an undervalue
- s239 preferences
- s244 extortionate credit transactions

• Has a cash flow been prepared detailing anticipated income and expenditure?
• How long is the scheme proposed to last?
• What level of dividend is anticipated for unsecured creditors and when will the dividend(s) be paid?

Agreement to the scheme

Each creditor should sign a formal agreement setting out the terms of the moratorium; only when this has been done by every creditor may the scheme go forward. In reality each creditor enters into a new contract incorporating terms not to pursue the existing debt. Once every creditor has so contracted, then provided the moratorium thereafter proceeds in accordance with its agreed terms, the company is safe from the threat of a winding up petition.

Flow Chart
The following flow chart summarises the various stages in attempting to effect a successful moratorium: