A moratorium (or a ‘suspension of payments’) means that a debtor company is allow to defer the payment of its debts, thus giving it a bit of breathing space. If the debtor knows that it is not going to be able to continue repaying its debts, it can apply to the court for a moratorium. The court then appoints an administrator for the period during which the moratorium is in force. The administrator is required to submit regular progress reports and also to give permission for any transactions (formally known as ‘acts of management’ or ‘acts of disposition’) that the debtor wishes to undertake.
Doing business with insolvent (or potentially insolvent) companies
A moratorium may nonetheless prove valuable as it has the effect of deferring the repayment of short-term debts. Its aim is to protect the continuity of the company in question, and it can be used to gain time for solutions other than liquidation or bankruptcy. In practice, this means that meetings are held with creditors in order to try and agree on a composition. Even though a moratorium is often regarded as the first stage of bankruptcy proceedings, the intention in principle is to prevent the company in question from going into liquidation.
A moratorium also creates an opportunity to arrange a ‘compulsory composition’, which is binding on any creditors who are unwilling to compose with the debtor.
We regularly act as administrators in moratoria and can advise you on how to apply for a moratorium and help decide whether the situation is appropriate.