A pre-insolvency moratorium is a new business rescue tool that allows an eligible company to obtain temporary relief from creditors while it works out a business rescue plan. It is not tied or limited to use with any other rescue mechanisms, such as administration or company voluntary arrangement, and it therefore presents a useful statutory-based option for a financially distressed company to injunct creditor action while it works out how to settle with its creditors. The pre-insolvency moratorium replaced and expanded the moratorium that was available with a company voluntary arrangement.
Any company that is financially distressed is eligible to utilise the pre-insolvency moratorium so long as it is not a bank or insurance company or a company that is under liquidation, administration, administrative receivership, a voluntary arrangement, or in respect of which a moratorium has had effect in the previous 12 months. Financial distress is used as a separate and distinct term to insolvency and it seems that the intention is to deal with a company that is in financial difficulties or that is nearly insolvent.
The procedure for applying for this pre-insolvency moratorium is prescribed to include reasons for seeking the moratorium and the company must also appoint an insolvency practitioner as its monitor. The monitor must submit an opinion on whether the proposed moratorium has a reasonable prospect of achieving its aim. The moratorium takes effect when the prescribed documents are filed in court. The moratorium lasts 30 days and can be extended for a further period of at least 30 days if the court considers it desirable to do so.
The moratorium has an effect similar to the moratorium that applies in the administration option. It prevents an application being made for the liquidation of the company or the appointment of an administrator or administrative receiver. Forfeiture and distress by a landlord or action to enforce security is only possible with court approval. The moratorium also restricts repayment of debt or other liability as well as disposal of property.
The directors of the company continue to manage the company during the period of the moratorium and this will be attractive to a company that wishes to keep control while it considers the best options to rescue it. Nonetheless, the convening of a meeting of shareholders must be with the consent of the monitor or with the court’s approval.
The pre-insolvency moratorium presents significant possibilities in the structuring of rescue options for a company that is financially distressed, although the stigma that exists with the use of a statutory procedure under the Insolvency Act, 2015 may limit its shine and use.
Sammy Ndolo is a Managing Partner at CDH Legal in Nairobi.
