Christine Convy, director of Dunedin Advisory, who is a Chartered Accountant and licensed insolvency practitioner with more than 25 years’ experience in restructuring and insolvency, highlighted a little-known section introduced through the Corporate Insolvency and Governance Act 2020.

The Part A1 Moratorium section of the Act provides eligible companies with an initial 20-business-day period of protection from certain creditor enforcement action, giving directors time to assess their position and explore restructuring or rescue options.

The process is overseen by a Monitor, who must be a licensed insolvency practitioner. Convy has successfully used the moratorium as part of restructuring strategies for Scottish SMEs, working with company directors and their legal advisers to prepare applications and navigate the process. 

During a moratorium, qualifying pre-moratorium debts are generally subject to a payment holiday, while ongoing liabilities must continue to be met as they fall due.

The breathing space can be used to explore a range of options, including a sale of some or all of the company’s assets, additional investment, operational improvements, restructuring liabilities or moving towards a formal restructuring process such as a Company Voluntary Arrangement, where appropriate.

She said: “The moratorium can be a very powerful tool when used at the right time. It should not simply be viewed as a way of delaying creditor action. It can provide the breathing space needed to understand the business, assess its viability and put a credible plan in place.

“Directors can very quickly find themselves firefighting, paying whichever creditor is putting them under the most pressure. That can result in working capital being drained from the business while other debts continue to build. The moratorium can allow directors to step back from that daily pressure and consider what the best outcome is for both the business and its creditors.”

Convy added that, in practice, the initial 20-business-day period is unlikely to  be sufficient to gather information, engage stakeholders and develop a comprehensive restructuring plan. Where appropriate, applications to extend the moratorium can form part of the wider restructuring strategy.

She also encouraged accountants, financial advisers and directors to recognise warning signs at an earlier stage. Key considerations include the viability of the underlying business, future orders and contracts, profitability, the commitment of the management team, creditor pressure, secured and unsecured debt levels and the availability of sufficient working capital.