The Government has announced the relaxation of the rules which were put in place in order to restrict the use of winding up petitions during the coronavirus pandemic. The changes, which come into effect on 1 October 2021 and will remain in force until 31 March 2022, are likely to prompt a significant increase in the number of petitions being presented to the court given the ever-increasing level of debt that has accumulated as a result of the pandemic.
In this article, insolvency and restructuring specialist Stephen Young examines the new rules which will apply to winding up petitions from 1 October 2021 and provides practical advice to struggling businesses faced with the threat of being wound up.
Restrictions on use of petitions
Shortly after lockdown was announced in March 2020, the Government introduced several restrictions as part of the Corporate Insolvency and Governance Act 2020 (CIGA20) to prevent the use of statutory demands and limit the use of winding up petitions in corporate insolvency. Those rules prevented a creditor from presenting a winding up petition to the court unless it could show that:
- coronavirus had not had a financial effect on the debtor company, or
- the debtor company would still be insolvent even if coronavirus had a financial effect on it.
Whilst these rules provided vital breathing space to businesses which were affected by the coronavirus restrictions, the knock-on effect has been that debt levels have continued to accumulate and rise as a result.
Changes from 1 October
The Government has announced the partial relaxing of the restrictions as well as new requirements for creditors now wishing to pursue a winding up petition in relation to unpaid debts. Therefore, from 1 October 2021, a creditor will now be able to:
- present a winding up petition against a debtor company only in respect of a debt or debts of £10,000 or more. Normally, a creditor can present a petition in respect of a debt in excess of £750; and
- serve a statutory demand on a debtor in order to demonstrate that company’s insolvency due to its inability to pay its debts.
However, a creditor will still not be able to present a winding up petition:
- unless a notice under Schedule 10 of CIGA 20 has first been served on the debtor company, requesting that they make satisfactory proposals for payment of the debt within 21 days (although a creditor can seek an order from the court to avoid having to do this in cases of urgency); or
- if the debt is less than £10,000; or
- if the debt relates to unpaid commercial rent which is due as a result of the financial effect coronavirus has had on that debtor company. This was not unexpected, given that the Government had previously announced that the restrictions on landlords being able to forfeit a commercial lease for non-payment of rent would be extended until March 2022.
What should a company do if faced with a winding up petition?
It is likely that the relaxing of these debt enforcement restrictions will now signal a new wave of corporate insolvencies that many have predicted.
The consequences of a winding up petition being presented is very serious and has a number of consequences:
- If it is advertised, the company’s bank will freeze its account, making it very difficult to trade.
- It will adversely affect the company’s reputation.
- Payments made by the company after the petition has been presented may be set aside by the court at a later date.
- A petition will adversely affect a company’s credit rating and likely amount to a breach of its covenants with the company’s own bankers.
A company faced with the prospect of a petition needs to act quickly should it receive either a threat of a petition or a notice under Schedule 10 and should consider the following:
- Seeking specialist legal advice at an early stage. If the debt claimed is either disputed or the company has a cross-claim against the petitioner, the company may need to obtain an injunction to either restrain the presentation of a petition or prevent it from being advertised.
- If the debt is owed, an attempt can be made to use either the 21-day period provided by the Schedule 10 notice, or an agreed extension of that period to agree a settlement.
- Directors have a duty to act in the best interest of creditors when faced with the insolvency of their company. Failure to do so can lead to potential personal liability for directors, including for potential breach of directors duties, directors’ disqualification and wrongful trading claims.
- Therefore, if the company is unable to pay its debts, its directors should seek prompt advice from an insolvency specialist. It is possible that alternative options to compulsory liquidation, such as a Company Voluntary Arrangement (CVA) or Administration might be a better alternative which might save the business and/or achieve a better outcome for creditors as a whole.
A company is considered to be insolvent if the value of its liabilities exceeds its assets or it cannot pay its debts as they fall due. The fact that one or both of these factors apply to a company does not necessarily mean that it needs to close or cease trading. However, quite often seeking specialist insolvency advice at an early stage can either allow the company to properly manage the situation or allow for a strategy to be implemented that might save the business. The failure to do so is often a key reason why many companies fail.
Should you have any queries arising out of this Keynote, please do not hesitate to contact Stephen Young or any other member of Keystone’s Restructuring and Insolvency team.
This article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Please note that the law may have changed since the date of this article.