Phase out of temporary restrictions on the use of winding up petitions
On 9 September 2021, the UK Government announced that the current restrictions on the use of statutory demands and the presentation of winding up petitions (as introduced by Schedule 10 of Corporate Insolvency and Governance Act 2020 (“CIGA”) and set to expire on 30 September 2021) will be amended by the Corporate Insolvency and Governance Act 2020 (Coronavirus) (Amendment of Schedule 10 Regulations 2021) (the “Regulations”) and replaced with more limited restrictions (discussed below) until 31 March 2022.
Current restrictions due to expire on 30 September 2021
My colleague, Francesca Charlton, has previously posted about the temporary suspension of the use of statutory demands and winding-up petitions noting various extensions to the same. Since this date, these restrictions were extended further - due to expire on 30 September 2021.
To summarise, Schedule 10 to CIGA prohibited the winding up of a company where it would otherwise have been deemed unable to pay its debts as a result of an unpaid statutory demand and restricted the winding up of a company by a creditor where the company’s inability to pay its debts was due to the financial effect of coronavirus.
The purpose of these restrictions was to support viable businesses through the pandemic and provide protection for companies from creditor enforcement action during this period.
As the economy is said to be returning to pre-COVID trading conditions, the restrictions on creditor actions (discussed above) will be lifted and will be replaced with new measures aimed at assisting smaller companies and commercial tenants. The Insolvency Service says that “This will particularly benefit high streets, and the hospitality and leisure sectors, which were hit hardest during the pandemic”.
Paragraph 2 of the Regulations substitutes Schedule 10 CIGA and states that from 1 October 2021 to 31 March 2022 (the “Relevant Period”), the prohibition on issuing winding-up petitions based on an unpaid statutory demand will no longer apply. Further, a creditor will be able to present a winding-up petition in the Relevant Period provided only that the following conditions are met:
- the debt is for a liquidated sum is due and payable and does not relate to unpaid rent or other sums due under a commercial lease, unless the creditor can prove that the non-payment of the debt is not related to the pandemic;
- the creditor has given the prescribed formal notice to the debtor of its intention to present a winding-up petition unless satisfactory payment proposals are received from the debtor within 21 days, beginning on the date on which notice is received;
- at the end of the 21 day period (referred to above), the debtor has not made a proposal for payment of the debt that is to the creditor’s satisfaction;
- the creditor is owed £10,000 or more (from the original threshold of £750) based on the debtor’s inability to pay debts.
Any petition presented must contain a statement that the requirements detailed above have been met and either that no proposals have been made or a summary of the reasons as to why the proposals are not to the creditor’s satisfaction.
It should also be noted that the court has the power to waive the requirement for creditors to serve a formal request seeking proposals for payment of the debt or to shorten the period within which such proposals are to be submitted.
As stated above, there are continued restrictions on winding-up petitions for commercial rents, supporting the announcement in June 2021 that commercial tenants will continue to be protected from eviction until 31 March 2022, whilst the government implements a rent arbitration scheme to deal with ring-fenced commercial rent debts arrears accrued during the pandemic. For further details on the restrictions relating to recovery of commercial rent arrears - see my colleague, Emma Humphrey's post here in this regard.
Whilst it is encouraging to note that the debt threshold for petitions has increased substantially, it remains to be seen as to whether this change will have the desired effect in affording protection for small businesses. It may well be that there are a number of creditors of small businesses (other than commercial landlords) who have accrued debts during the period of the pandemic amounting to more than £10,000 that will require the urgent attention of debtor companies.
If an agreement cannot be reached, debtor companies may find that they need to concentrate on repaying accrued debts that fall into the above category first. The difficulty faced by commercial landlords now is that they may be put to the back of the pile and cash flow reserves of debtor companies may have depleted by the time they are allowed to enforce.
It is also interesting to note that the Regulations state that the proposal for payment of the debt must be to the creditor’s satisfaction, however, the Regulations do not elaborate on whether the court will look behind the creditor’s reasons for rejecting any proposals put forward by the debtors or whether these reasons will be taken on face value. It remains to be seen how the court will deal with cases such as this.