A long-awaited partial lifting of the existing restrictions on the presentation of winding-up petitions came into force on 29 September 2021. What will the new rules mean for creditors, some of whom will have been waiting for over a year to be able to recover the debts they are owed? In this note, we look at the reasoning behind the restrictions that have been in place, the requirements under the new rules, and the practical implications for creditors and the court.
Old rules – effective until 30 September 2021
As most creditors will be aware, to assist businesses in financial difficulty as result of the Covid-19 pandemic the UK government's response was to introduce new legislation, namely the Corporate and Insolvency Governance Act 2020 ("CIGA 2020"), which received Royal Assent on 25 June 2020.
The objective of the temporary legislation was to provide businesses financially affected by the pandemic with breathing space from their creditors by restricting a creditor's ability to inter alia present a winding-up petition at court. The restrictions have been extended a number of times and have now been in place for over a year, which has resulted in a significant drop in the number of petitions being presented to court.
The effect of the CIGA 2020 on winding-up petitions and statutory demands:
The restrictions imposed by CIGA 2020 have meant that:
- There has been a prohibition on creditors presenting winding-up petitions between 27 April 2020 and 30 September 2021, save for where they can satisfy the two-limbed "Coronavirus Test" as set out in paragraphs 2-3, Schedule 10 to CIGA 2020.
The "Coronavirus Test" requires creditors to persuade the court that there are reasonable grounds for (i) believing that Covid-19 has not financially impacted the debtor company and that (ii) the debtor company would still be insolvent even if the financial effects of Covid-19 were ignored.
- There has also been a prohibition on creditors serving statutory demands on businesses between 1 March 2020 and 30 September 2021 as an initial first step before presenting a winding-up petition on or after 27 April 2021.
Caselaw suggests that the "Coronavirus Test" has not been an easy test for creditors to satisfy, with many creditors falling to meet both limbs of the test. By way of example, in the recent case of Re A Company [2021] EWHC 2289 (Ch), the creditor was unable to prove that the company would still be insolvent if the effects of the Covid-19 pandemic were ignored, by reference to a comparison of the amount owed to debtors against previous years.
New Rules – take effect on 1 October 2021
Amendment to Schedule 10 to CIGA 2020
The new legislation comes into force on 1 October 2021 and will apply until 31 March 2021, meaning that some creditors will now be able to present winding-up petitions, provided they satisfy the new requirements.
It should be noted that the restrictions on presenting a winding-up petition in relation to amounts owed in respect of commercial leases (including rent arrears) remain in place subject to the "Coronavirus Test".
The Corporate Insolvency and Governance Act 2020 (Coronavirus) (Amendment of Schedule 10) Regulations 2021 (SI 2021/2019) amends Schedule 10 to CIGA 2020, by introducing four conditions, known as Conditions A – D, which will need to be satisfied in order for a creditor to present a winding-up petition. The conditions are as follows:
Condition A: The debt owed to the creditor must be for a liquidated debt that has fallen due which is not an excluded debt (i.e. debts owed in respect of commercial leases).
Condition B: The creditor must have delivered to the debtor a written notice (which is effectively a demand for payment) but in addition to this, the creditor must (i) seek the company's proposals for payment of the debt and that (ii) allow the debtor a period of 21 days beginning with the date on which the notice is delivered, to pay the debt or make a payment proposal. Creditors will need to ensure any demand letters include the information set out in the amended paragraphs 1(4) – 1(6) of Schedule 10.
Condition C: At the expiration of the 21 day period referred to in Condition B, the company must not have made a proposal for payment of the debt to the creditor's satisfaction. This means that, if a payment proposal has been made, the creditor will need to explain why the proposal is unsatisfactory before they present a winding-up petition.
Condition D: The petition debt must be £10,000 or more. The increase in the threshold appears to be intended to provide protection for small businesses.
Next steps
Provided the above conditions are satisfied, creditors will now be able to present winding-up petitions.
Although it is not expressly stated in the new legislation, it is likely that the courts will expect creditors to present the demand letter on or after 1 October 2021 (i.e. once the new rules take effect). Condition C also suggests that creditors will be expected to engage with debtors and looks for consensual deals before presenting a petition, so we are unlikely to see an increase in winding-up petitions until the end of October. At present, it is unclear how the courts will cope with this increased demand and we may see delays in listing petitions over the next few months as the number of petitions being presented increases.
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