Suspension of payment in addition to tax debt

All business owners with a tax debt due to the corona deferral have received a letter in recent weeks: the existing tax debt must be paid off in 60 installments. The first installment was due Oct. 31. The insolvency law service team provides various solutions to liquidity problems in 5 blogs and a webinar.

The Internal Revenue Service gives options for relaxing the repayment of tax debts (by corona), such as: paying quarterly, staggering the repayments from 5 years to 7 years and a temporary pause button, but the tax debt must be repaid in full.

Already a good number of clients have come forward because of tax debts ranging from several tons to several tens of millions of euros that need to be repaid. It is a huge drain on liquidity and liquidity forecasts show that it will not be feasible to meet these repayment obligations. With exponential increases in energy prices, inflation on the rise, interest rates steadily increasing, and the NOW scheme possibly needing partial repayment, it may be necessary to restructure a company to overcome financial challenges.

In our campaign series on financial restructuring this week, focus on: suspension of payments

Since Jan. 1, 2021, many accountants and lawyers have been mouthing off about the WHOA (Homologation Private Agreement Act), the new law that allows creditors to force creditors to agree to a settlement. The WHOA was the subject of the previous blog in this series. In the blog before that, I discussed the possibilities of offering an out-of-court settlement. But, what options does the moratorium offer your company?

A legal pause button

A debtor who anticipates that he cannot pay his debts in full and wishes to avoid bankruptcy may, in addition to an out-of-court settlement or a WHOA, consider applying for a moratorium (hereinafter also referred to as a "moratorium" for short) with the court.

The moratorium is effectively a legal pause button. Very briefly: Creditors may not sue their debtor who has been granted a moratorium for payment of their claims. They may not demand payment, seize, file for bankruptcy etc etc.

During the moratorium, the court places an administrator next to the debtor's director. Together, they must prepare an agreement to the creditors. The administrator must guard the interests of the creditors in that process.

Money tied up

The moratorium can be a useful tool to overcome a temporary liquidity problem. Often money is tied up in:

• An ongoing (construction) project;
• as work in progress in a large contract,
• A large claim against a defaulter; or
• in excess (and unsaleable) inventory.

Examples of suspension of payments from our practice

I have seen a moratorium of a shipbuilder who built a ship himself from bare hull all the way down and who put hundreds of thousands of euros in materials and hours into it, but could not find a buyer for the ship (which by now was almost finished). And I know of a moratorium that was applied for because the debtor herself had a claim on one of her debtors of €800,000 that was not paid.

Then a pause button is useful: in the relative calm on the creditor side, try to sell the ship or collect the claim, respectively, and distribute the proceeds to the creditors (against final discharge of the excess or with some other kind of agreement).

Suspension of payment exceptions

By the way, the moratorium has all sorts of rules and exceptions, but it is beyond the scope of this blog to go into them. The point here is to explain the rationale and usefulness of the moratorium compared to other options for overcoming liquidity problems.

The "beauty" of a moratorium is that the agreement that the debtor wants to offer -under certain conditions, of course- can be forced by the court on creditors who disagree, while the debtor's board and shareholders can "stay put."

Front porch of bankruptcy (?)

As described above, the moratorium is a very useful tool for a debtor to cope with temporary liquidity problems. Yet the moratorium has a bad reputation. Often, a moratorium converts to bankruptcy within just one week. There are a number of reasons for this:

• Often the moratorium is filed too late, not prepared well enough, and there is no cash on hand to meet the ongoing costs of the business and the costs of the moratorium.
• Sometimes the moratorium is filed simply to get around an obstructive shareholder. After all, applying for one's own bankruptcy requires an AGM resolution, whereas applying for a moratorium (often) only requires a board resolution.
• Trade relations (suppliers and creditors) often have little confidence in a company in receivership. They start asking for payment in advance or cash in hand. The supplier credit that used to be given melts away. That creates - additional - liquidity challenges. Also, the suspension of one party often constitutes grounds for the other contracting party to terminate a commercial agreement.
• The moratorium does not work against preferential creditors, the most important of which are the tax authorities, the UWV, the pension fund and the employees. The debts to these parties must be paid as usual.

The moratorium can come out of mothballs

In particular, the latter reason why a moratorium often quickly becomes a bankruptcy need no longer be an obstacle precisely because of the 60-month payment schedule granted by the tax authorities. If 1/60th of the tax debt can be paid each month and the moratorium can be used to put other creditors on hold for a while, time can be gained to overcome liquidity problems.

Then those 3 to 6 months can be used to liquidate that hull-ship-in-construction, that construction project, that excess inventory or that large claim against that defaulter and offer the creditors a settlement. Or during that period, refinancing can be achieved or a new shareholder with fresh money can be sought. You can read how that works in this blog.

A prerequisite for a successful moratorium, however, is that the company is viable per se. Current income must be able to support current expenses. The moratorium does not provide an opportunity to cut costs, such as excess rent, lease and personnel costs. Other legal options must be used for that.

Conclusion

In addition to out-of-court injunctive relief and the WHOA, with the tax authorities' current repayment scheme, suspension of payments may also be a good solution for some companies with liquidity problems.

Often this will be the case with companies where the costs and benefits are balanced in themselves, with few preferential creditors outside the tax authorities and no redundant staff, where the liquidity problems are mainly caused by one failed project or one or more large unpaid receivables.

The opportunities and risks of a moratorium are different from an out-of-court settlement or WHOA, or bankruptcy. It is therefore important that you seek proper advice, as to which restructuring mechanism will work best for your company.

Want to learn more about this type of restructuring or have other questions? Sign up for the free webinar corporate restructuring or ask your question using the form below.