Temporary Insolvency Provisions: Statutory demands and winding-up petitions

On the 20 May 2020, the Corporate Insolvency and Governance Bill was introduced to the House of Commons, in a bid to safeguard companies and maximise their chances of survival. The COVID-19 pandemic has taken its toll on companies of all sizes, not just in terms of profits, but also their ability to borrow money and keep operations afloat.

The temporary measures are designed to help businesses struggling with cash flow due to COVID-19, and they include prohibitions on presentation of winding-up petitions and orders, suspension of wrongful trading laws and the ability to apply for a moratorium.

Statutory Demands and winding-up petitions

A statutory demand is used by creditors to apply pressure on a debtor to pay a debt. Once the written request is served, the debtor has 21 days to pay the debt. If the outstanding debt is not paid (or settled to the creditor's satisfaction) within this timeframe, the debtor company is considered unable to pay its debts (under section 123(1)(a) of the Insolvency Act 1986). In this situation, a winding-up order can be used; however, it is generally accepted that insolvency proceedings should not be used as a means of collecting the debt. It's widely seen as the last resort, with creditors petitioning the court to have the company liquidated - often after several failed attempts to recover the debt.

New Moratorium: Providing some much-needed breathing space

The new moratorium is a procedure that enables companies that are, or are likely to become insolvent to apply for a 20-day business moratorium. The process of obtaining the moratorium is fast and easy because it does not require creditor approval before filing. It essentially allows businesses to continue operations, albeit monitored by an insolvency practitioner, without the pressure from creditors, as they will not be permitted to initiate legal or insolvency proceedings.

What are the restrictions?

Generally, companies are free to continue trading as usual, however, if no payment holiday is agreed with the lender, repayments must be met during the moratorium. The idea behind the moratorium is to enable companies in financial distress to explore rescue and restructuring opportunities. Ideally, this "breathing space" will result in a better outcome, and may (in some cases) help avoid formal insolvency.

A winding-up petition cannot be presented by a creditor during the period beginning 27 April 2020 until 30 June 2020 (or one month after the coming into force of the bill, whichever is later) unless the creditor has reasonable grounds for believing that;

(a) coronavirus has not had a financial effect on the debtor, or

(b) the debtor would have been unable to pay its debts even if coronavirus had had an economic effect on the debtor.

Statutory demands

Under the bill, creditors cannot rely on an unpaid statutory demand as evidence of an inability to pay debts to issue a winding-up petition against a company. The new measure applies to all statutory orders served during the period beginning 1 March 2020 and ending 30 June 2020 (or one month after the coming into force of the bill when enacted, whichever is later).

Rectification

The bill also includes provisions to rectify situations, where, following the announcement of the measure, but in advance of its enactment, a petition has been brought under the pre-existing law. In such cases, the court may make an order that it deems appropriate to restore the position of a company to what would have been if the petition had not been presented.

Part of a larger support package for businesses and workers

These new emergency measures form part of the government's support package for businesses and employees during the pandemic, alongside:

The Coronavirus Job Retention Scheme, where small and large employers are eligible to apply for a government grant of 80% of workers' salaries up to ¬£2,500 a month, backdated to 1 March and available until the end of October.
A deferral of the next quarter of VAT payments for firms, until the end of June - representing a ¬£30 billion injection into the economy.
A business rates holiday worth over ¬£9.5 billion to business across the UK.
Small business grants for retail, hospitality and leisure.

On introducing more protection for companies at risk of insolvency, Business Secretary, Alok Sharma, said:

In this exceptional time for the UK, it is vital that we ensure businesses are kept afloat so that they can continue to provide the jobs our economy needs beyond the coronavirus pandemic. Our unprecedented package of support can help commercial landlords, including through the recent expansion of the Coronavirus Business Interruption Loans Scheme. I know that like all businesses they are under pressure, but I would urge them to show forbearance to their tenants. I am also taking steps to ensure the minority of landlords using aggressive tactics to collect their rents can no longer do so while the COVID-19 emergency continues.

Currently, there is a possibility the ban on winding up petitions will be extended being June, with many arguing that for businesses to begin generating healthy levels of profit, the moratorium should be in place for at least 6 months.

At Noble Solicitors, we're extremely experienced in providing the best insolvency defence, advice and advocacy representation for companies that face winding-up petitions. With a team of talented insolvency lawyers, we will meticulously review your case to ensure it has the best possible chance of success from the outset.

If you would like to learn more about our expertise in this area or wish to talk to us about your circumstances, please call us today on 07000 81 82 83.