Winding-Up Petitions During the Coronavirus Pandemic - All Creditors Restricted
On 23 April 2020, the Government announced proposed measures to restrict the use of statutory demands and winding up petitions during the coronavirus (COVID-19) pandemic. These were finally presented to Parliament on 20 May 2020.
Contrary to initial publicity that suggested these measures would target aggressive action by commercial landlords in specific sectors, the Corporate Insolvency and Governance Bill ('the Bill') has introduced restrictions that bind all creditors, not just landlords. In particular, Schedule 10 of the Bill seeks to impose temporary limits on the abilities of creditors to apply for the winding-up of debtor companies in England and Wales.
Winding-Up on the Basis of Statutory Demands
A statutory demand is a formal demand for payment. It can be issued against a company in respect of any unpaid, undisputed debt of more than £750. Normally, upon the expiry of three weeks from the date of service of the demand, unless an alternative arrangement has been agreed, a creditor can apply for a winding-up petition against a debtor. Non-payment of a statutory demand will be evidence of insolvency.
Part 1 of Schedule 10 provides that a creditor will be prohibited from applying for the winding-up of a debtor company between 27 April 2020 and 30 June 2020 (or one month after this provision comes into force, whichever is later) if it is relying on failure to pay a statutory demand that was served between 1 March 2020 and 30 June 2020 (or one month after this provision comes into force, whichever is later).
Importantly, the statutory demand in question does not need to relate to rent arrears and could relate to any amounts owing and in respect of all sectors.
When it comes into force, this law will have retrospective effect from 27 April 2020. Any winding-up order already made on the basis above will be voided. The court may direct that the debtor company is restored to the position it was in immediately before the winding-up petition was presented.
Winding-Up on the Basis of Other Insolvency Grounds
Part 2 of Schedule 10 provides that a creditor may not apply for the winding-up of a debtor company on or after 27 April 2020 by relying on the debtor company being unable to pay its debts. For example, by reference to a statutory demand served outside the 1 March to 30 June period stated above, unsatisfied execution of a judgment, or cash-flow or balance sheet insolvency. This is unless the creditor has reasonable grounds to believe:
- coronavirus has not had a financial effect on the debtor company, or
- in the case of statutory demand or unsatisfied execution, the facts by reference to which the relevant ground applies would have arisen, or in the case of cash-flow or balance sheet insolvency the relevant ground would not have applied, even if coronavirus did not have a financial effect on the debtor company
Coronavirus will be treated as having a financial effect on the debtor company if the company's financial position worsens as a result of, or for reasons relating to, coronavirus. The threshold appears to be low as there is no requirement for the worsening of the company's financial position to be significant.
These provisions will also have retrospective effect from 27 April 2020. Therefore, where a winding-up order has been made on the above bases, the court may direct for the debtor company to be restored to its pre-petition position if the creditor applied for winding-up without having reasonable grounds in the belief.
What Does This Mean For Creditors?
The Bill should cause concern not only for commercial landlords, but all creditors. Statutory demands and the threat of issuing a winding up petition when used properly are some of the most potent weapons in a creditor's arsenal.
The proposed restrictions on use of winding-up petitions are likely to severely limit the recovery of commercial debts. This is also true for any statutory demands issued before 1 March 2020 which have yet to result in the presentation of a winding-up petition. What would normally have been a relatively straightforward procedure, accomplished in six weeks in some cases, will be more complicated now with debtor companies being given the opportunity to show that coronavirus had a financial effect on them.
The Bill has not yet been passed into law and it remains to be seen whether it will progress without amendment. The Bill is due to have its second reading in the House of Commons on 3 June 2020. In the meantime it is suggested that any creditor proceeds with caution and seeks professional advice when considering whether to issue a winding up petition.
What Does This Mean for Tenants and Other Debtor Companies?
The courts to date have attempted to interpret current law in light of the Government's previous announcement, but the judiciary has expressed its concerns in making decisions based on proposed prospective rather than current law.
The Bill suggests that when in force it will have retrospective effect. This could have an impact on any companies who have been wound up in the intervening period. Given the Bill's surprisingly wider reach, these decisions may have to be reviewed once it becomes law. Consideration will have to be given to how they are restored to their pre-petition state and the implications on any action taken by the Official Receiver in the interim.
We have already seen parties subject to winding-up petitions seek to rely on the coronavirus outbreak and the proposed changes to legislation. If you are a tenant or debtor who has been served with a statutory demand, or presented with a winding-up petition and are suffering financially due to the coronavirus outbreak, we would suggest you seek advice as to how best to present your position to the petitioning creditor and/or the court in order to avoid a compulsory winding-up and allow you to explore other insolvency options if needed.
The above reflects guidance as at 21 May 2020. We will continue to update this as the situation develops. While we aim to release updates as quickly as possible, it is important that readers check the latest Government advice for further updates.