Winding-up petitions: back, but not fully

As part of the overall scaling down of the COVID-19 support provided to UK businesses, the UK government has announced changes to the regime for winding-up petitions, with effect from 1 October – withdrawing, at least in part, some of the protections currently afforded to businesses.

Current position

Currently, 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 to believe that COVID-19 did not have 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

From 1 October, the plaster will be (partially) ripped off. However, there will still be restrictions on creditors’ ability to file a winding-up petition:

• Excluded debt: 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 file a winding-up petition where the debt is unpaid by reason of a financial effect of COVID-19.
• Introduction of a threshold: the debt to which a petition relates must be for £10,000 or more. This is new – neither the Insolvency Act 1986 nor the Corporate Insolvency and Governance Act 2020 (CIGA) introduced a threshold for the presentation of winding-up petitions.
• Notice: the creditor must first have given a notice to the debtor which includes certain prescribed information, amongst which a statement that if no proposal for the payment of debt to the creditor’s satisfaction is made within 21 days then the creditor intends to present a winding up petition (the Schedule 10 Notice).

These new restrictions will be in place until 31 March 2022.

Interaction with statutory demands

The 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 by creditors – failure to settle the statutory demand after 3 weeks gives rise to a presumption that the debtor is insolvent for the purposes of a winding-up petition.

The CIGA stipulated that an unsatisfied statutory demand could not be used as a basis for the presentation of a winding-up petition. The new legislation has repealed this restriction – while adding a new threshold applicable to the actual winding-up petition (£10,000) rather than the statutory demand.

Therefore, a creditor who is owed £10,000 will be able to serve a statutory demand on the debtor at the same time as the Schedule 10 Notice. The time periods for the debtor to satisfy the debt will run concurrently (and indeed, although one is expressed in days and the other in weeks, are the same, namely 3 weeks). After such time, (a) the debtor will be presumed insolvent; and (b) the creditor can bring a winding-up petition.

The new Schedule 10 Notice requirement therefore seems to add little where creditors are relying on a  statutory demand, particularly given any proposal must be to ‘the creditor’s satisfaction’, though the aim is likely to promote a more compromise-building approach which a statutory demand does not necessarily invite.

Comment

The Government has introduced for the first time a threshold for the bringing of a winding-up petition.

It is perhaps surprising that the Government has not increased the amount required to serve a statutory demand from £750 to £10,000 which leads to two different thresholds in relation to the compulsory winding-up process. This however also means that when Schedule 10 is eventually repealed, the threshold for a statutory demand remains at the lower number of £750 and statutory demands for amounts between £750 and £10,000 served more than three weeks days before the repeal can be immediately relied upon.

The continued protection for businesses from winding-up petitions in relation to commercial rent arrears aligns with the announcement earlier in June of the extension on to the moratorium on the Commercial Rent Arrears Recovery (CRAR) and forfeiture of a commercial lease until 25 March 2022 (for more details, see our blog post from June here). COVID-19 related commercial rent arrears will therefore continue to be ring fenced from landlord recovery actions as we await the implementation of the government’s rent arbitration scheme to deal with these accrued debts. It is worth noting though the slight misalignment between the end of the forfeiture restrictions (25 March) and the new winding-up petition restrictions (31 March).

The new regime seeks to continue to support businesses as part of a tapering of the protections currently afforded to businesses. If COVID-19 continues on its current course, it seems likely that we will see the full end of the restrictions on winding-up petitions at the end of March 2022.