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Commercial Question

Restrictions on winding-up petitions: beginning of the end

updated on 02 November 2021

Question

Winding up petitions: what’s the impact on companies and creditors in financial distress?

Answer

Despite the economic disruption of covid-19 and resulting lockdowns, the number of formal insolvencies has been remarkably low.

The monthly insolvency statistics for July 2021 show that the number of company insolvencies for July 2021 were 24% lower than for July 2019. This is largely due to the government’s support packages and restrictions on creditors’ actions. This includes the temporary restrictions on winding-up petitions found in schedule 10 of the Corporate Insolvency and Governance Act 2020 (CIGA). However, the government has announced that from 1 October 2021 it will be phasing out these temporary restrictions.

Restrictions in place until 30 September

CIGA made it difficult for creditors to successfully petition for the winding up of a debtor company. A winding-up petition cannot be presented:

  • on the basis of a statutory demand; or
  • on the basis of other evidence of a company’s inability to pay its debts unless the petitioning creditor has reasonable grounds to believe:
    • that covid-19 did not have a financial effect on the company; or
    • that the company would have been unable to pay its debts even if covid-19 had had a financial effect on the company.

What changed on 1 October?

It will once again be possible to present a winding-up petition on a basis that a company has failed to satisfy a statutory demand.

The other restrictions on winding-up petitions are being eased significantly, in that it will no longer be necessary to consider the financial effect of covid-19 on the company. Instead, from 1 October 2021 until 31 March 2022, in order to present a petition a creditor will need to satisfy the following four conditions:

  • Condition A: the debt owed; (i) is for a liquidated amount; (ii) has fallen due for payment; and (iii) is not rent or any other payments (eg, service charges) that are due under a relevant business tenancy;
  • Condition B: the petitioning creditor has delivered a written notice to the company containing, among other things, a statement: (i) that the creditor is seeking the company’s proposal for the payment of the debt; and (ii) that if no satisfactory proposal is made within 21 days of the date of delivery of the notice then the creditor intends to petition for the company’s winding-up (a Condition B Notice);
  • Condition C: 21 days have passed since Condition B Notice was delivered and the company has not made a satisfactory proposal for the payment of the debt; and
  • Condition D: the debt owed to the petitioning creditor (or a group of petitioning creditors provided they have all met Conditions A to C) is at least £10,000.

The government has said that it wishes to continue protecting two types of debtor that have been hit particularly hard by covid-19, small businesses and tenants. The restriction on founding a winding-up petition on commercial rent arrears (Condition A) is in keeping with the spirit of the government’s previous announcement that wider tenant protections such as the moratorium on forfeiture and Commercial Rent Arrears Recovery will continue until 25 March 2022. There is a slight misalignment of the dates as Condition A will apply until 31 March 2022.

Small businesses will benefit the most from the introduction of the new £10,000 threshold (Condition D). A threshold of £750 currently applies where a creditor wishes to serve a statutory demand. However, there is currently no minimum debt that needs to be owed where the creditor wishing to present a winding-up petition is able to rely on an unsatisfied judgment debt or can otherwise convince the court that the debtor company is unable to pay its debts as they fall due. On and from 1 October, a minimum of £10,000 will need to be owed in all circumstances before a creditor or group of creditors can present a winding-up petition.

A creditor will be able to apply to court for an order that the other two conditions (Conditions B and C) shall not apply, or that the 21-day time period referred to in Condition C be replaced with a shorter period, but it is unclear at present how ready a court will be to grant any such application.

What does this mean for creditors and companies in financial distress?

Other than for landlords whose options for creditor’s actions against tenants in arrears will remain constrained, winding-up petitions will once again be a viable tool for many creditors. Although the courts have stated that winding-up petitions should not be used as a method of debt collection they are commonly used to focus a debtor’s attention on swiftly repaying an outstanding debt.

The lack of a ‘burning platform’ has meant many debtors have been able to delay restructuring their debts. The renewed threat of winding-up petitions may mean that these companies now need to start engaging with their major creditors to agree a restructuring.

Debtor companies in financial distress will likely once again have to react to receiving statutory demands. Unlike the process for petitioning for the bankruptcy of an individual, a statutory demand is not a compulsory prerequisite to a winding-up petition. However, a statutory demand is useful to creditors as a company is deemed to be unable to pay its debts if a statutory demand is unsatisfied for three weeks. As the petitioning creditor will have to wait the same period for its Condition B Notice to become effective there will be no extra delay caused by a statutory demand. The time periods for a statutory demand and the Condition B Notice can run concurrently.

The requirement to invite a proposal for repayment in the Condition B Notice is designed to encourage engagement between debtor and creditors. It is up to the creditor to decide whether any proposal put forward by the debtor is satisfactory, so this may not be much of a constraint. However, the extent to which a court will scrutinise a creditor’s decision to reject a proposal is still to be seen, so a creditor should be wary of irrationally rejecting a fair and viable proposal.

Creditors who are not themselves intending to present a winding-up petition may nonetheless be concerned to know whether a company has received a winding-up petition, statutory demand or Condition B Notice. For example, lenders may want their information rights to now extend to any Condition B Notice received by their borrower.

Simon Beale is head of the insolvency practice at Macfarlanes LLP.

This article was originally published on Lexology.