When a business is facing insolvency, one of their best options may be to enter administration. This relieves the company of creditor pressure, giving them the breathing space that they need to facilitate the sale or rescue of the company. There are 3 main purposes of administration, which must be demonstrated in order for the process to go ahead. These are:
- To rescue the company on a going concern basis;
- To provide a better outcome to creditors than would have been the case if the company was placed into liquidation; or
- To provide a return to one or more secured or preferential creditors.
There are many benefits of administration for companies that are struggling financially. Not only does it offer the possibility for the company to return to profitability, it also provides the best deal for creditors whilst removing the pressure that’s weighing down on the company. However one of the main reasons that businesses choose administration as a company rescue tool is because of the moratorium that is included in the process. What is a moratorium in administration and why is it so beneficial for companies that are facing financial difficulty? Let’s find out.
What Is A Moratorium In Administration?
When a company enters administration it is automatically given the benefit of a moratorium. This is a legal ringfence that prevents any further legal action from being taken against the company. As part of the moratorium in administration, creditors cannot initiate further recovery action including the issuing of a winding up petition for the company to be closed down.
How Long Does A Moratorium Last?
It’s important to emphasise that a moratorium in administration is only intended as a temporary measure to give the company the opportunity to work through its issues, without pressure from creditors or the threat of legal action. Once a company files for administration, an interim moratorium is granted which freezes the rights of creditors to bring insolvency proceedings or other legal action against the company. The interim moratorium will remain in place until an administrator is appointed. Once an administrator has been appointed, a permanent moratorium is applied which lasts until the company exits administration. Creditors still retain their rights to the money that they’re owed, however they’re temporarily stayed during the course of the moratorium.
What’s The Importance Of A Moratorium In Administration?
A moratorium is crucial for giving companies the breathing space that they need for achieving the aims of the administration. That might be planning and implementing a restructuring process to recover the business, or seeking a buyer to facilitate the realisation of company assets. It also prevents the need for disruptive and expensive legal action. In short, a moratorium in administration gives businesses the time and freedom that they need to find logical solutions for moving forward.
If your business is facing mounting debts and pressure from creditors, administration could be the best option for moving forward. Please don’t hesitate to get in touch with our experienced team at Ballard Business Recovery to talk through the most suitable options that are available to you.
