As part of the government’s response to the Covid-19 pandemic and the wide-reaching impact that this has had on businesses, their ability to trade and to generate income, measures were put in place to prevent creditors from taking insolvency action against limited companies as part of the Corporate Insolvency and Governance Act 2020 (“CIGA”).
So far as CIGA related to winding-up petitions, limited companies were protected by the following measures:
- The prohibition on presenting winding-up petitions based on statutory demands.
- The prohibition on presenting winding-up petitions or making winding-up orders based on any other definition of the company’s inability to pay its debts, unless coronavirus can be discounted as a reason for that inability.
These measures gave companies a fair amount of ‘breathing space’ whilst no doubt company debts continued to increase with limited, reduced or, in some circumstances, no trading income to pay off the ever-increasing list of creditors.
These protections came into force on 26 June 2020 and were originally in place for a limited time until 30 September 2020. However, given the continued and evolving effect of the pandemic on companies and their financial position, the protections were extended on numerous occasions most recently until 30 September 2021.
However, as the country moves away from lockdowns and is set to follow a different roadmap to deal with the pandemic, the government has recently announced that the protections afforded to companies in respect of insolvency action will change and will be replaced with more limited restrictions with effect from 1 October 2021 as follows:
- Winding-up petitions can recommence but a creditor may not present a winding-up petition in respect of a debt (or debts) totalling less than £10,000. This is an increase on the pre-pandemic limit of £750 and serves to give companies an additional ‘buffer’ of protection from creditor action.
- A creditor may not present a winding-up petition unless written notice (known as a Schedule 10 Notice) has been delivered to the debtor seeking the company’s proposals for payment of the debt and the company has not made a proposal that is to the creditor’s satisfaction within 21 days. A creditor may, however, apply to court for an order that they do not need to deliver a Schedule 10 Notice or give the debtor 21 days to make a satisfactory proposal.
- A creditor will again be able to rely on non-payment of a statutory demand to evidence a debtor’s inability to pay their debts provided the other conditions are met.
- However, a creditor may not present a winding-up petition in respect of commercial rent that is unpaid because of a financial effect of coronavirus. As such, the £10,000 debt threshold does not apply and there remains a blanket ban on winding-up petitions in respect of commercial rent provided that the reason for non-payment can be linked to the financial effect of coronavirus – a low threshold for any commercial tenant to presumably be able to satisfy.
These new limited restrictions are currently set to expire on 31 March 2022 but only time will tell if the restrictions are further extended or changed as part of the governments’ evolving response to the pandemic.
What does this mean in practice? Essentially (except in respect of commercial rent arrears), creditors now have a further potent option when seeking payment of debts which exceed £10,000 by pursuing winding-up petitions.
However, often the threat of a winding-up petition itself can be enough to bring a debtor to the table for the purposes of repayment either in full or by way of a repayment plan and this approach can be a cost-effective way of determining whether the debtor company will engage meaningfully with a repayment proposal or if, alternatively, further action is required.
On the other hand, companies who are experiencing cash flow problems and who potentially anticipate an influx of creditor actions above the £10,000 limit, should consider whether there are any other avenues open to it rather than running the risk of being wound-up.
Therefore, both debtors and creditors alike would be well advised to seek legal advice as to their respective positions so as to put themselves in the best position once when the new restrictions come into force on 1 October 2021.
Napthens is able to provide specialist advice from both perspectives and should you require any further information or advice as to how best to protect your position going forwards or would like to discuss any of the issues raised above, please do not hesitate to contact James Stephenson in our Commercial Litigation Team or Grahame Love and Laura Hartley-Williams in our Business Recovery team who will be happy to help.