Reed Smith Client Alerts

This note sets out the circumstances in which a creditor may successfully lift a statutory moratorium against a company in administration in England and Wales, and in Singapore.

Authors: Kyri Evagora Kohe Hasan Prajakt Samant Richard G. Swinburn Johnny Lim (Resource Law LLC)

English law

Background: A statutory moratorium under Schedule B1 of the Insolvency Act 1986 (IA) will prevent most creditor or third-party actions against a company in administration, from the point at which the administration process is instigated. Policy considerations behind the moratorium hold that the unilateral action by a creditor to protect its own interests can prejudice the prospects of successfully rescuing the insolvent company.

Scope of the moratorium: Unless the administrators consent or a court order permits:

  1. “No step may be taken to enforce security over the company’s property” (paragraph 43(2), Schedule B1, IA). “Security” has a broad definition, and includes “any mortgage, charge, lien or other security” (section 248, IA) but is unlikely to include the exercise of a right of set-off. It is unclear what constitutes taking a “step”, although it may include taking preparatory actions in relation to enforcing security. The moratorium does not apply to certain security interests arising under financial collateral arrangements, certain market charges and certain collateral security charges.
  2. “No step may be taken to repossess goods in the company’s possession under a hire-purchase agreement” (paragraph 43(3), Schedule B1, IA). This includes agreements with a retention of title provision, conditional sale agreements, and leasing agreements.
  3. “No legal process (including legal proceedings, execution, distress and diligence) may be instituted or continued against the company or property of the company” (paragraph 43(6), Schedule B1, IA). The moratorium does not prevent a party from enforcing its contractual rights, such as the right to terminate a contract.1

Consequences for a creditor acting in breach of the moratorium: Technically, the creditor would find itself in contempt of court2 (although it is apparently rare in practice for a creditor to face any sanctions). The breach would give rise to a claim in damages by the company for breach of statutory duty.3 Proceedings issued in breach of a moratorium are likely to be stayed by court order.