Waiver or Insolvency Moratorium - What’s the best solution?

There was a maelstrom of new legislation and rule changes in 2020 that were implemented in the UK as part of the overall response to Covid-19 and to support the subsequent stabilization and recovery efforts of North East businesses.

Some of these such as the Coronavirus Job Retention Scheme (CJRS) have had an immediate and verifiably positive effect in supporting businesses from Newcastle to Teesside and preventing depression-level numbers of redundancies in a region which is no stranger to economic hardship. 


Other measures such as the Bounce Back Loan scheme, grants for small businesses and self-employed support schemes have met more mixed results across our area. 


Some businesses have been able to fully access enough funding to remain solvent over the months of lockdown even if they haven’t been able to resume trading depending on their sector. 


There have been some examples of genuine and otherwise viable businesses slipping through the cracks and failing through no real fault of their own. Hidebound by bureaucracy and other hurdles that have proven insurmountable. 


There have also been large numbers of fraudulent claims being paid out which has led to doubt and suspicion, souring opinion on what would otherwise be a generally successful effort to stop a huge number of insolvencies overwhelming the courts and systems.


The North East is famous for its fairness and the idea that somebody is cheating is a particularly poisonous impression to shift once it begins to take hold. 


The Corporate Insolvency and Governance Act 2020 is the main piece of legislation that brought in a lot of changes that many companies may be unfamiliar with when exploring their future options. 


Some of which might be the difference between being able to restructure successfully and give the business a real shot at surviving and being able to take advantage when lockdown conditions lift and they’re to function like a real business again. 


One of which is the introduction of the Insolvency Moratorium as a specific piece of legislation. 


It enshrines into law the concept of “breathing space” for a distressed business, automatically staying creditors’ demands for a minimum of 20 working days. 


Previously there has been an agreed practice known as a “standstill agreement”, where creditors agree not to enforce any demands for repayment for a period with the aim of enabling a restructure but the moratorium formalises this arrangement. 


This time is to be used by a licensed insolvency practitioner, like ourselves, to work with the owners and directors to produce a viable restructure and rescue plan which would ultimately be accepted by creditors and allow the business to emerge from the moratorium successfully. 


There are other ways to exit including raising additional funding or agreeing another way forward such as a Company Voluntary Arrangement (CVA) but ideally, working out an agreeable solution would be the main priority. 


But is this the best way to proceed for a company if it’s financial problems aren’t at a critical stage?


For instance, if a business is seeing a squeeze to its cash flow and would find it difficult to make a regular debt repayment then it could contact the lender or creditor, and depending on their relationship with them look to agree a waiver with them. 


Taken from contract law, a waiver officially denotes the granting of a concession by one party not insisting on another’s precise performance of its obligations under the contract.  


By granting a waiver, one party gives up its rights to take action or enforce its rights under the terms of the contract. 


They have been most commonly used when a company has been about to breach a lending covenant which would usually have serious consequences for them either legally and/or financially. 


If the creditor is satisfied that the repayment issue is a one-off or temporary situation then they might be inclined to issue the waiver rather than go through the necessary procedure once a covenant is breached. 


Alternatively, this might be a way of ending any agreement with the debtor and taking possession of any securities named in the original agreement so they might be inclined to deny any waiver request – although this could then see the company apply for an insolvency moratorium which would put a halt to any additional recovery action until this legal process had run its course. 


The need to seek a waiver could well be a symptom of wider and more serious issues within a company. Looking to activate an insolvency moratorium in these circumstances might be the most sensible course of action. 


An insolvency practitioner could carefully examine the situation and advise the directors or owners what the likelihood of recovery and restructure is.


It might be the case that the creditor would ultimately be repaid if not in full then a significant amount of the owed sum or take possession of any named securities in the agreement after the moratorium procedure had run its legal course. 


Sometimes the waiver is enough to allow the company to get through an isolated patch of harsh trading conditions to return to health.


Directors and even some creditors will prefer the less drastic remedy of a waiver over a formal insolvency moratorium, fearing that it would merely be a precursor to a CVA or administration. 


Although if a company frequently finds itself having to choose which bills it can pay and its waiver requests become more frequent then a moratorium would be the most sensible and logical choice available. 


If your business is at the point where it’s having these internal conversations or is actively considering asking for a waiver or a moratorium then you should get in touch with us first.


Our expert advisors have worked with hundreds of businesses from Newcastle, Sunderland, Middlesbrough, Durham City and from other locations all over the North East. 


We can help you plot the best way forward and recommend the best course of action to give your company the best chance of becoming viable and profitable once again.