The government has confirmed that the “COVID rules” for winding-up petitions and statutory demands will be further extended to 30 June 2021. This news will be some relief to businesses whose finances have been hit hard by the pandemic and frustrating to creditors who have had their ability to enforce their debts curtailed for more than a year.
Ordinarily an unpaid creditor can serve a statutory demand on a debtor for a debt greater than £750 for companies and £5,000 for individuals, which – if the debt remains unpaid – permits the creditor to apply to court for the debtor’s insolvency. For a company, this is achieved through a winding-up petition, requesting that the company be dissolved and its assets realised to fund distributions to creditors. Given their stark effect, statutory demands are a powerful tool in the arsenal of creditors looking to enforce a debt, as failure to meet a statutory demand deems the company unable to pay its debts and therefore liable to winding-up.
Since March 2020, the law has restricted the courts and creditors from presenting winding-up petitions based on statutory demands except where:
- In the case of an application based on an unmet statutory demand, the statutory demand was served before 1 March 2020; and
- The creditor has reasonable grounds for believing that coronavirus has not had a financial effect on the company, or that the debt issues would have arisen anyway.
As such, the only enforcement currently possible through a winding-up petition is for petitions based on statutory demands served before 1 March 2020, or where the creditor can demonstrate that they have a reasonable belief that the company’s inability to pay its debts is not the result of coronavirus.
Given the wide-ranging effect of the pandemic, that is a high bar for creditors to clear which makes it very difficult to bring successful winding-up proceedings at present.
While secured creditors retain the right to appoint administrators in certain circumstances, that is little solace for unsecured creditors who are being asked to sit and wait.
With the extension of the COVID rules to the end of June, businesses will be relieved at the prospect of a few more months’ breathing space from their creditors, while creditors themselves will be frustrated at having to take the risk that their debtor’s financial position will not be in as good shape in July as it is now.
Once the protection from the statutory demand process expires, the new legislation in this area aims to encourage cooperation between debtors and creditors. For instance, the new ‘moratorium’ procedure allows companies in certain circumstances to obtain protection from insolvency procedures (such as administration or winding-up) for up to a year with the consent of a majority of their creditors.
The aim of the moratorium is to allow the company to focus on its recovery and continued survival and to rescue struggling businesses which will be viable once normality returns. It involves the supervision of an insolvency practitioner ‘monitor’ and effectively protects a company from various forms of enforcement action, including forfeiture of leases, enforcement of security and the crystallisation of floating charges held by secured creditors. None of these measures can be taken by a creditor without the court’s permission, which will reassure businesses that they are free to focus on their recovery without the threat of creditor action disrupting their business. It offers substantial protection for struggling businesses that will be viable post-COVID and is an option worth considering for businesses in sectors that are particularly affected, such as hospitality, travel and retail.
As we move through this year and hopefully towards something approaching normality, businesses will be considering what the post-COVID landscape looks like for them and the challenges they will face. Creditors will be considering how best to protect their position, either through working with their debtors or through enforcement once it is again possible.
Gibson & Co.’s Newcastle team is experienced in advising on corporate debt and insolvency issues and in bringing or defending enforcement proceedings. We act for major regional, national and international clients and Legal 500 described our business acumen as “second to none”. You can get in touch with us using the details on the Contact Us page. The law stated in this update is as at the date of publication on 20 April 2021.