Beer & Young - Informal Moratorium

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Informal Moratorium


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A moratorium is a freezing of debts. It is an informal arrangement between a company and its creditors, designed to give the company breathing space to put its affairs in order.

Its main purpose should be to see that ultimately the creditors get paid in full.

The main features are as follow:

A meeting of creditors should be held, at which a Statement of Affairs is presented, the reasons for the company's difficulties explained, and the proposals outlined
Provision should be made for preferential creditors to be paid in full
A Committee of Creditors should be formed to supervise the company's affairs during the moratorium, if creditors wish to appoint one
A phased programme for the repayment of the debts should be set out
Each creditor should sign a document agreeing to defer action for the recovery of their debt
If the bank account is overdrawn, a new account at a new bank should be opened

An informal agreement can take many forms. The tem refers to any scheme under which creditors accept less than 100p in the £ in full and final settlement.

Such a scheme will normally only work when the number of creditors is few and they can be satisfied that the scheme will provide them with a better return than Winding-Up.

Although such schemes are described as 'informal', the agreement is fully documented and binding to all parties.

The fundamental weakness is that such a moratorium requires 100% agreement amongst the creditors in order to be successful. Any creditor which does not agree to defer recover action may commence formal proceedings at its leisure.

Abolition of Crown Preference
Section 251 of the Enterprise Act 2003 abolishes Crown preference.

The Receiver, Liquidator or Administrator of an insolvency procedure that commence on or after 15 September 2003 is now required where there is a floating charge which was created after 15 September 2003, to set aside a Prescribed Part of the company's net property for distribution to the unsecured creditors.

If the Prescribed Part is below a prescribed minimum and the costs of distributing would be disproportionate to the benefits, the Office Holder is not required to make a distribution to the unsecured creditors.

Prescribed Part
Under the new regime the Office Holder must make a Prescribed Part of the company's net property available for the satisfaction of unsecured debts and not distribute it to the Floating Charge holder provided that:

The company has gone into liquidation, provisional liquidation, receivership or administration
The company has created a floating charge over its assets, and
The floating charge was created on or after 15 September 2003

The Prescribed Part is calculated as follows:

50% of the first £10,000 of net property
20% of net property thereafter
Up to a maximum of £600,000

The Floating Charge realisations are applied:

Firstly against costs and expenses of realisations
Secondly against preferential creditors claims (employees)
Thirdly, in respect of Floating Charges created after 15 September 2003, against the claims of unsecured creditors by virtue of the Prescribed Part (restricted to the upper limit of £600,000)

NOTE

In respect of Floating Charges created before 15 September 2003, Floating Charge holders will now obtain a 'windfall' resulting from the abolition of Crown preference. This is because setting aside a Prescribed Part of the company's net property only applies to Floating Charges created on or after 15 September 2003, whereas the abolition of Crown preference applies to all insolvencies commenced on or after 15 September 2003.

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