Temporary restrictions on winding-up petitions extended until 30 June 2021
The temporary restrictions on winding-up petitions brought in under the Corporate Insolvency and Governance Act 2020 (“CIGA”) are wider than originally envisaged when first announced by the government in April 2020 and have now been extended until 30 June 2021.
The restrictions initially related to the period 1 March 2020 – 30 September 2020 (referred to as the ‘relevant period’). However, a number of extensions to the expiry of the relevant period have been announced by the government during the pandemic and it is now not due to expire until 30 June 2021 – although further extensions to this deadline have not been ruled out.
The restrictions provide that a creditor may not present a winding up petition during the relevant period unless it has reasonable grounds to believe that coronavirus has not had a financial effect on the debtor or the debtor would have been unable to pay its debts even if coronavirus had not had a financial effect on the debtor.
To protect a debtor company from the effects that even the presentation of a winding up petition has (even if it is subsequently dismissed), a new Insolvency Practice Direction was released which provided for the existence of petition to remain private until such time as a preliminary hearing has taken place to determine the outcome of the Coronavirus Test and the court has decided whether the matter will go forward. This means that a petition will not appear on any public search of the register, reducing the risk of the company’s accounts being frozen by banks etc. You can read more about the privacy provisions here.
The key provisions within the temporary restrictions on winding-up petitions are that:
- No winding-up petitions are to be presented on or after 27 April 2020 which rely on an unpaid statutory demand served during the relevant period;
- No winding-up petitions are to be presented during the relevant period unless the creditor has reasonable grounds for believing that coronavirus has not had a financial effect on the company or that the company would have become unable to pay its debts even if coronavirus had not had a financial effect on the company. As to the meaning of “financial effect”, this is a low threshold. Coronavirus has a “financial effect” on a debtor company if the debtor’s financial position worsens as a result of, or for reasons relating to, coronavirus (referred to as the “Coronavirus Test”).
Even before the CIGA came into force, the courts were acting within the spirit of the government’s proposals and dismissing petitions which failed the Coronavirus Test.
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