Restriction on winding-up petitions to be phased out from 1 October

The insolvency restrictions on statutory demands and winding-up petitions introduced to protect businesses from creditor action during the COVID-19 pandemic will be replaced with more limited measures from 1 October 2021.

Current position

Under the current legislation, the Corporate Insolvency and Governance Act 2020, it is not possible to present a winding-up petition based on a statutory demand and a winding-up petition based on a company’s inability to pay its debts is only permitted where the petitioning creditor has reasonable grounds for believing that COVID-19 has not had a financial effect on the company, or the debt issues would have arisen regardless of COVID-19.  These restrictions are due to expire on 30 September 2021.

New position

Under the new legislation, the Corporate Insolvency and Governance Act 2020 (Coronavirus) (Amendment of Schedule 10) Regulations 2021, which applies to winding-up petitions presented between 1 October 2021 and 31 March 2022, there will still be temporary restrictions on winding-up petitions, but these will be more limited, as follows:

• Commercial rent arrears – where a debt relates to unpaid rent or other sums due under a lease of premises used for business purposes it will not be possible to present a winding-up petition unless a landlord can show that the non-payment of the debt is not related to the financial effect of COVID-19.  This provision aligns with ongoing restrictions on the use of Commercial Rent Arrears Recovery (CRAR) and the extended moratorium on the forfeiture of leases of commercial premises which is due to expire on 25 March 2022.
• Debt limit of £10,000 – a creditor may not present a winding-up petition if it is for a debt or debts totalling less than £10,000.  This measure aims to protect companies who owe relatively small debts.
• Written notice – a creditor may not present a winding-up petition unless (i) written notice containing certain prescribed information has been given to the debtor seeking its proposals for repayment and (ii) the debtor has not made a proposal that is to the creditor’s satisfaction within 21 days.

Statutory demands

The new legislation has not amended the regime set out in the Insolvency Act 1986 in relation to statutory demands. Typically, a statutory demand is served prior to a winding-up petition – failure to settle the statutory demand after 3 weeks gives rise to a presumption that a debtor is insolvent for the purposes of a winding-up petition.

The current legislation provides that an unsatisfied statutory demand cannot be used as a basis for the presentation of a winding-up petition.  The new legislation repeals this restriction and adds a new threshold of £10,000 which – although it may not explicitly apply to the statutory demand itself – will apply to any winding-up petition based upon it.

In practical terms, this means that a creditor who is owed £10,000 or more will be able to serve a statutory demand on the debtor at the same time as the written notice described above.  The time periods will run concurrently, and after such time, the debtor will be presumed insolvent, and the creditor can present a winding-up petition.

Comment

It must be remembered that the current and new legislation apply only to insolvency proceedings against businesses and do not affect statutory demands or bankruptcy petitions against individuals.

The new legislation demonstrates the tapering off of government support measures introduced to combat the economic impact of COVID-19.  Unless circumstances change, all temporary restrictions on the use of winding-up petitions will come to an end on 31 March 2022.

How can we help?

If you would like to discuss any issues concerning debt recovery or insolvency, please contact a member of our Business Insolvency Team.