Around March 2020 the Coronavirus arrived in the UK and caused severe problems for all businesses. The government had to protect the economy and provide additional tools for the inevitable stains on cash flow.
The Corporate Insolvency and Governance Act 2020 (CIGA 2020) received Royal Assent on 25 June 2020 and introduced temporary measures to protect companies from aggressive creditor pressure. It included ‘temporary restrictions’ until 30 September 2020, with retrospective effect from 27 April 2020, on the use of statutory demands and winding-up petitions.
The new rules meant that a creditor could not present a winding-up petition in respect of an unpaid statutory demand or unsatisfied judgement debt unless that creditor has reasonable grounds for believing:
- Covid 19 had not had a ‘financial effect’ on the debtor company or
- The grounds for presenting the winding-up petition would have arisen even if Covid19 had not had a financial effect on the company.
Hence the onus was on a creditor to present compelling evidence to the court that Covid19 was not the reason the debt could not be paid. Not an easy task.
On 24 September 2020 the Chancellor announced that these temporary restrictions would continue until 31 March 2021. These restrictions were subsequently extended until 30 September 2021.
Where are we now?
From 1 October 2021 – until 31 March 2022 – there have been some amendments to the process. Statutory demands can resume. The petition process will no longer require a creditor to set out how Covid 19 has financially impacted the debtor company’s ability to pay. However, the presentation of a petition is now only possible if four conditions have been met:
- The debt must be liquidated, due for payment and not classed as an excluded debt. This means the debt is one with a clearly defined amount. The creditor and debtor together have a clear understanding of how much is owed. For instance, contingent debts would be considered unliquidated since the amounts can’t be settled until the event upon which it is contingent event occurs. Excluded debts relate to rent or any other payments, for example service charges, that are due under a business tenancy;
- The creditor must have delivered a notice to the company containing a statement that if no proposal is made within a period of 21 days from delivery of the notice, the creditor intends to present a winding-up petition;
- A period of 21 days have passed since the notice was delivered, and the company has not made an acceptable proposal for the payment of the debt; and
- The debt owed to the creditor, or group of creditors if they have all met conditions 1 – 3 above, is £10,000 or more, up from the previous level of £750 established by the Insolvency Act 1986.
Continuing the restriction on winding-up petitions in respect of commercial rent supports the announcement on 16 June 2021 that commercial tenants will continue to be protected from eviction until 31 March 2022. This will allow the government to implement a rent arbitration scheme to deal with rent arrears accrued during the pandemic.
Our view
The costs of issuing a winding-up petition have meant that court proceedings to recover low-value debts has rarely been worthwhile and is generally used as a last resort. The position has got worse for many suppliers since 1 December 2020 when HMRC became a secondary preferential creditor for unpaid taxes, meaning the chances of a recovery for most trade suppliers is now very limited. A more consensual approach to debt repayment will be needed for many creditors, and the government’s forthcoming adjudication process to tackle rent arrears may well lead the way in dealing with unsustainable corporate debt.
