![Temporary Restrictions on the Presentation of Statutory Demands and Winding-Up Petitions](https://chadlaw.dnsupdate.co.uk/wp-content/uploads/2018/08/ben-rosett-10614-unsplash-740x388.jpg)
28
Sep 2020
Temporary Restrictions on the Presentation of Statutory Demands and Winding-Up Petitions
On 26 June 2020, the Corporate Insolvency & Governance Act 2020 (“the Act”) came into force and introduced new temporary and permanent measures in an attempt by Parliament to relieve the burden on many businesses operating during the Coronavirus outbreak with a view to providing much needed ‘breathing space’ during this time and to seek to alleviate the financial burden many companies presently face as a result of the Covid-19 pandemic. This note focuses on the temporary restrictions presently restricting the use of Statutory Demands and Winding-Up Petitions in line with the 2020 Act.
Initially, the restrictions surrounding Statutory Demands and Winding-Up Petitions, as contained within the 2020 Act, were due to expire on Wednesday, 30 September 2020. These have now been extended and are due to expire on 31 December 2020 but may face further extension should Parliament see fit to do so. For further guidance on the 2020 Act including guidance relating to the permanent fixtures of the 2020 Act, Chadwick Lawrence LLP are keeping up to date with the latest developments and will continue to publish further notes or upcoming legal guidance which may be of interest on our social media channels and website.
Key points of the 2020 Act relating to Statutory Demands / Winding-Up Petitions
A few key points to note in respect of the 2020 Act are as follows:-
- The 2020 Act applies largely in the corporate and not the personal insolvency context meaning that these restrictions presently impact corporate entities only at this time;
- The 2020 Act is designed mostly to be temporary in nature (with some features such as the Company Moratorium being a permanent fixture to the 2020 Act) and some measures adopted in the 2020 Act place restrictions on certain periods which are not likely to be permanent but may be subject to change pending the Government’s further views surrounding Covid-19. This we have already seen with Parliament’s first extension to the restrictions of Statutory Demands and Winding-Up Petitions as contained and set out within this note;
- The restrictions contained within the 2020 Act will apply to all creditors / debtors in the commercial context and are not solely restricted to Landlords or commercial tenants as had been previously envisaged when the 2020 Act was in its early stages. Therefore, these provisions are not sector specific and apply to any registered or unregistered commercial entity that can be subject to a Winding-Up Petition and apply largely in relation to any debt owed by a debtor company at present; and,
- As indicated above, some of the provisions contained within the 2020 Act have not been created in response to the Covid-19 pandemic but have been previously discussed and proposed for a number of years and these provisions will likely remain as permanent provisions of the 2020 Act, the Insolvency Act 1986 and the accompanying 2016 Insolvency Rules, irrespective of Covid-19.
The restrictions on Statutory Demands and Winding-Up Petitions as set out in the 2020 Act
In brief, while presenting a Statutory Demand or Winding-Up Petition is not conclusively prohibited by the 2020 Act, the 2020 Act places significant restrictions based on the circumstances in which a Winding-Up Petition or Statutory Demand can be presented. These restrictions which were due to conclude on 30 September 2020 have now been extended by Parliament and now restrict the presentation of Statutory Demands and Winding-Up Petitions until 31 December 2020. These may be further extended at the discretion of Parliament and it is advisable to keep up to date with any further developments of the 2020 Act.
The two key restrictions as set out in the 2020 Act are as follows:-
- No Statutory Demands served or presented between the periods 1 March 2020 – 31 December 2020 (inclusive) can be relied upon as the basis to present a Winding – Up Petition (i.e a company’s inability to pay its debts as and when they fall due in accordance with Section 123 of the Insolvency Act 1986, unless key criteria are met);
- No Winding-Up Petition presented between the periods 27 April 2020 – 31 December 2020 (inclusive) may be presented without the Petitioning Creditor having ‘reasonable grounds for believing’ that the Debtor Company would be deemed insolvent regardless of the impact of Covid-19.
(Referred collectively as “the restricted periods”)
Therefore, any Petition issued between the periods 27 April 2020 – 31 December 2020 (inclusive) will now be required to demonstrate either of the threshold tests in order to allow a Winding-Up Petition to proceed and a Winding-Up Order made as follows:-
- That the Coronavirus has not impacted the debtor company; and/or
- That the debtor company would be deemed insolvent regardless of the circumstances of the Coronavirus.
Statutory Demands – the 2020 Act
Accordingly, Statutory Demands which have been served between the periods 1 March 2020 and 31 December 2020 (inclusive) cannot be relied upon to support any Winding-Up Petition presented to the Court during these periods unless the threshold tests can be satisfied. As above, the restrictions contained within the 2020 Act relating to Statutory Demands apply irrespective of whether Covid-19 has had any financial impact on the debtor company whatsoever; even if a company was entirely unaffected by Covid it will still be able to rely on these restrictions which have presumably been incorporated to allow a company trading during Covid-19 a degree of “breathing space” as per Parliament’s objectives in incorporating these restrictions.
Winding-Up Petitions – the 2020 Act
Accordingly, Winding-Up Petitions presented between 27 April 2020 and 31 December 2020 (inclusive) may not be presented against a debtor company without a creditor having “reasonable grounds for believing” that Covid-19 has not had a financial impact on the debtor company or that the debtor company would be deemed insolvent even if Covid had not had a direct financial effect on the company. In summary, this effectively ensures that a Court will not grant a Winding-Up Order unless it is satisfied that the company would be deemed insolvent regardless of the circumstances surrounding Covid-19.
In what circumstances can a Winding-Up Order be made in light of the 2020 Act?
As above, whilst there are restrictions placed on the presentation of Statutory Demands and Winding-Up Petitions as set out above, this does not prohibit the presentation of either mechanism in its entirety. Statutory Demands can still be served by a creditor chasing for an unpaid debt provided that they are not used for the purposes of presenting a Winding-Up Petition. In the same breath, there is not a blanket restriction on the presentation of Winding-Up Petitions so long as a creditor, and then later the Court, can be satisfied that either (1) Covid-19 has not had a financial effect on the debtor company or (2) the debtor company would have still been unable to pay its debts regardless of Covid-19.
It is therefore strongly advisable whether you are a creditor seeking to pursue a Winding-Up Petition against a debtor company or in the alternative, whether you are a debtor company who is facing increased hostility from its creditors by way of a Statutory Demand / Winding-Up Petition, that you are satisfied of the above parameters of the 2020 Act given that both parties will be required to satisfy the Court of the basis and circumstances of any Winding-Up Petition presented within the restricted periods before a Winding-Up Order is granted. This is because, if a Winding-Up Petition is presented by a creditor and the Court is not satisfied that Covid-19 has not had a financial effect on the debtor company, the Winding-Up Petition will be dismissed and the creditor presenting the Petition without regard for the same may be held liable for the debtor company’s costs (usually on an indemnity basis) and may even liable for damages if the Court is satisfied that the presentation of the Winding-Up Petition without regard for the 2020 Act has caused loss or damage to the debtor company.
Furthermore, the Court also has the power to make a remedial Order for the benefit of the debtor company to restore the debtor company to the position it was in, if a Winding-Up Petition had not been presented. As such, there can be significant cost consequences for a creditor company by presenting or relying on a Statutory Demand or Winding-Up Petition without regard for the 2020 Act and the general overarching advice whether you are a creditor or a debtor, is to tread carefully and obtain legal advice as your position and the implications of the 2020 Act at the outset.
The relevant exceptions – the grounds for presentation of a Winding-Up Petition
As above, creditors are advised not to present a Winding-Up Petition or rely on a Statutory Demand as the basis of presenting a Winding-Up Petition unless the circumstances surrounding the same are sufficient to showcase that the Petitioning Creditor has the reasonable belief that Covid-19 has not had a detrimental financial impact on the company.
In this regard, Winding-Up Petitions can be presented and Winding-Up Orders can be made during the relevant periods as set out above even if Coronavirus has had a financial effect on the company so long as the following criteria are satisfied:-
- In the circumstances where a Winding-Up Petition will be or has been presented pursuant to Section 123(1)(a) to (d) of the Insolvency Act 1986 if the facts by reference to which the relevant ground applies would have still arisen if Coronavirus had not had a financial effect on the company; or
- In the circumstances where the Winding-Up Petition will be or has been presented pursuant to Section 123(1)(e) or (2) of the Insolvency Act 1986 if the relevant ground would still apply even if Coronavirus had not had a financial effect on the company. As a result of the 2020 Act, the same temporarily modifies Rule 7.5(1) of the Insolvency Rules 2016 relating to the contents of the Winding-Up Petition which now requires that a creditor makes a statement to the effect that the Petitioning creditor considers that one of the exceptions as set out above is correct and therefore considers that a Petition can be presented and a Winding-Up Order can be made (if the Court is satisfied). It would appear that this test is seemingly rather low and we would expect that a Petitioning creditor would find it very difficult to illustrate that there has been no financial effect or otherwise argue against a debtor company that the Coronavirus has not impacted its trading (even slightly) given lock-down restrictions ect.
However, as in all cases, this is likely to be a determination as to the evidence and the respective circumstances of all parties concerned which will be determined by the Court before a Winding-Up Order can be made;
- It is also notable to understand that as a result of the 2020 Act, the general process when presenting a Winding-Up Petition has altered to take into account the increased scrutiny Petition’s are subject to by the Court during the restricted periods before the same are allowed to proceed. This is beyond the scope of this note and further guidance on the new procedures as adopted by the Court can be found at our website.
The views of the Court so far
There have been several reported cases where the Courts have considered whether to restrain the presentation or advertisement of a Winding-Up Petition in light of the 2020 Act.
The following case examples are provided to provide a blanket overview of the Court’s present dealings with Winding-Up Petitions since the commencement of the 2020 Act as follows:-
- Re A Company [2020] EWHC 1406 (Ch). In this case, the Court granted an interim injunction to restrain the presentation of a Landlord’s Winding-Up Petition which was based on rent arrears with the Judge finding that there was a strong case that Covid-19 had had a financial impact on the company given that the facts on which the Winding-Up Petition was based would not have arisen if Covid-19 had not had any financial impact on the company.
- The Court took a different approach when considering the case of Shortes Gardens LLB -v- London Borough of Camden Council [2020] EWHC 1001 (Ch) (which was handed down prior to the commencement of the 2020 Act) whereby the Court refused to grant an Order restraining the presentation of a Winding-Up Petition, despite the existence of the Covid-19 pandemic, as the Court was satisfied in the circumstances that the Petition debt which remained unpaid had had nothing to do with Covid-19. Notably, when determining the Court’s stance in respect of the Winding-Up Petition in these circumstances, the Court had noted and considered that a threshold test was pending under the proposed Bill but considered that these restrictions would only apply where a company was unable to pay its debts due to Covid-19 and in these circumstances, the Court was not satisfied that such circumstances in this case effected the Winding-Up Petition.
How will the restrictions relating to Statutory Demands / Winding-Up Petitions affect me?
It is clear from the above that there is at present, a difficult burden placed on creditors which are tasked with being able to properly ascertain whether or not a debtor company has failed to satisfy outstanding debts due to the consequences of the Coronavirus or whether they are simply refusing to pay and whilst it will remain possible to Petition for a Winding-Up Order against a debtor company, such a Petition presented during the restricted periods is likely to be scrutinised by the Court, paving the way for an increased burden on all parties concerned, coupled with increased associated time and costs and a higher level of risk.
Therefore, whether you are a creditor seeking to achieve payment of outstanding debts by the mechanism of presenting a Winding-Up Petition, it is advisable to obtain legal advice at the outset given the requirements of the 2020 Act and to discuss the alternative options available to you during this time.
Similarly, if you are a debtor facing increased creditor action, it is again advisable to seek early advice in respect of your options given the impact of the 2020 Act and the restructuring opportunities available to debtors which aim to afford companies much needed breathing space during these uncertain times and to find a way forwards for businesses out of the Covid-19 pandemic.
What next?
Therefore, whether you are a debtor or creditor seeking advice in respect of the 2020 Act and / or the restrictions surrounding Statutory Demands and Winding-Up Petitions, it is advisable to seek early advice from either a legal representative and / or a Licensed Insolvency Practitioner (or a combination of the two) to assist and guide you through the process.
The Corporate Recovery and Insolvency Team at Chadwick Lawrence offer a realistic and commercial solution to all your business and personal affairs with varied experience and expertise in all aspects of both corporate and personal insolvency. Our Team, who work very closely with Licensed Insolvency Practitioners, can offer you a strategic answer to solving and restructuring your financial affairs in a reliable and cost effective manner that suits your needs.
If you would like to receive some further information, please call 0113 2258811 or email zoeallen@chadlaw.co.uk to discuss your matter further.
DISCLAIMER
This note has been prepared to provide legal awareness surrounding current legal topics and is not intended to serve or replace the need to obtain independent legal advice. The contents of this article should not be relied upon as such advice. The author and Chadwick Lawrence LLP do not accept legal responsibility for the accuracy of this article’s contents and this article should not be reproduced without the consent of the author.
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