Restrictions on winding-up petitions: update by Zara McGlone

October 18, 2021

The Corporate Insolvency and Governance Act 2020 (‘CIGA 2020’), which entered into force on 26 June 2020, introduced the most significant changes to insolvency law in the United Kingdom for almost twenty years.

These changes included temporary restrictions on creditors’ actions, which were set out in Schedule 10 to CIGA 2020 and were introduced in order to support businesses during the COVID-19 pandemic.

However, as the world and the economy open up, those restrictions are being phased out gradually by the Corporate Insolvency and Governance Act 2020 (Coronavirus) (Amendment of Schedule 10) Regulations 2021, which came into force on 29 September 2021. Those Regulations amend Schedule 10 to impose new restrictions on winding-up petitions which will apply from 1 October 2021 until 31 March 2022, and which are aimed at protecting companies from aggressive creditor enforcement as businesses seek to return to a more normal way of working.

During the period from 1 October 2021 to 31 March 2022, creditors will be able once again to present winding-up petitions based on statutory demands. It will also no longer be necessary to consider the financial effect of COVID-19 on the company in question. Instead, a creditor will need to satisfy four conditions in order to present a winding-up petition.

Condition A

The first (Condition A) is that the creditor is owed a debt by the company which is for a liquidated amount, which has fallen due for payment, and which is not an excluded debt. Excluded debts are defined at paragraph 4(3) of Schedule 10 as a debt in respect of rent, or any sum or other payment that a tenant is liable to pay under a relevant business tenancy (England and Wales) or a lease as defined in s7(1) of the Law Reform (Miscellaneous Provisions) (Scotland) Act 1985(a) (Scotland), and which is unpaid “by reason of a financial effect of coronavirus”. As such, commercial tenants ought to remain protected from some of the worst effects of the pandemic.

Condition B

The second (Condition B) is that the creditor has delivered a written notice to the company in accordance with subparagraphs 1(4) to 1(6) of Schedule 10. Those subparagraphs provide that the notice must contain, inter alia, a statement that the creditor is seeking the company’s proposals for the payment of the debt, and a statement that if the company does not make a proposal to the creditor’s satisfaction within 21 days of the date of delivery of the notice, then the creditor intends to present a petition to the court for the winding-up of the company. The stipulation that the creditor must seek proposals for payment is aimed at encouraging debtors and creditors to engage with each other in a constructive manner, but it remains to be seen whether that will in fact be the case. It is also important to note that the time period of 21 days in this condition can run concurrently with the time period for responding to a statutory demand served on the company.

Condition C

The third (Condition C) is that at the end of the period of 21 days from the date of the delivery of the written notice under Condition B, the company has not made a proposal for the payment of the debt which is to the creditor’s satisfaction. As yet, it is unclear whether and to what extent the courts will examine any rejections by creditors of proposals for payment, but it seems unlikely that they will not be subject to some scrutiny.

Condition D

The fourth (Condition D) depends on whether the petition is being presented by one or more creditors. In both cases, Conditions A to C need to be satisfied. If the petition is being presented by one creditor, Condition D is that the debt owed to that creditor is £10,000 or more. If the petition is being presented by more than one creditor, Condition D is that the sum of the debts owed to those creditors is £10,000 or more. In either case, this threshold ought to ensure that small businesses continue to have some protection against potential insolvency as a result of the pandemic.

The government has indicated that these measures will be kept under constant review whilst they remain in force; further changes are therefore to be expected.

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