In June 2020, numerous measures were introduced by the Corporate Insolvency and Governance Act 2020 (CIGA) restricting a creditor’s ability to present winding up petitions which had retrospective effect from 01 March 2020 in light of the pandemic.
Current CIGA restrictions in place until 30 September 2021
Whilst initially implemented as an interim measure, the restrictions have been extended and are currently to remain in place until 30 September 2021. Under the current restrictions, a creditor cannot present a winding up petition on the basis of a statutory demand or on the basis of a company’s inability to pay its debts as they fall due, unless the creditor has reasonable grounds to believe:
- that COVID-19 did not have a financial effect on the debtor company; or
- that the debtor company would have been unable to pay its debts irrespective of whether COVID-19 had a financial effect on the debtor company.
New CIGA restrictions
The Government has announced an ease on the current restrictions but not the removal of the restrictions in their entirety, which have been extended to 31 March 2022.
From 01 October 2021, it will be possible to present a winding up petition without considering the financial effect COVID-19 had on the debtor company, provided the following conditions are satisfied:
- the debt is for a liquidated sum, is due for payment and does not relate to unpaid rent or other sums due under a relevant business tenancy;
- the creditor has delivered a written notice to the debtor company of its intention to present a winding-up petition unless satisfactory payment proposals are received from the debtor company within 21 days of service of the notice;
- the debtor company has not made a proposal for payment of the debt to the satisfaction of the creditor within the 21-day period; and
- the sum of the debt owed to the creditor is at least £10,000 (previously £750).
Should these conditions be met, the winding up petition will need to contain a statement confirming the satisfaction of these conditions and an explanation that either no proposals were received from the debtor company or any such proposal was inadequate with an explanation of why this was not satisfactory to the creditor.
It is clear that the changes, whilst allowing creditors to take further action, are still intended to protect smaller businesses and tenants who have suffered the effects of the COVID-19 pandemic harder than most.
The Government’s intention to continue to protect commercial tenants falls in line with the ongoing restrictions which remain in place in respect of forfeiture and commercial rent arrears recovery. This may come as a blow to commercial landlords who are restricted in their ability to recover outstanding rent arrears from commercial tenants as the Government has yet to put in place further legislation detailing the new binding arbitration scheme mentioned early this summer.
What does this mean for creditors?
The extension of the restrictions, albeit it slightly eased, is a reminder that insolvency action should only be used as a last resort and is not encouraged to be used as a means of routine debt recovery. However, should all the conditions be satisfied, it can be an effective tool to recover outstanding debts by focussing the attention of debtor companies to making sustainable proposals for payment of their debts.
Insolvency action can sometimes be a costly process with uncertainty as to whether any recovery of the debt will be likely either during the insolvency process or following a winding up order being made. However, whilst we advise that research into the debtor company’s financial assets and liabilities is carried out, sometimes there is simply no information available to give a clear indication as to whether the debtor company can’t pay or just simply won’t pay.
The increase of the winding up threshold to £10,000 is likely to cause frustration to smaller creditors. There is no restriction on multiple creditors being the petitioning creditor in order to satisfy this threshold; however, this will require a collaborative effort of creditors.
Whilst it may remain frustrating to creditors that some restrictions remain in place, the gentle easing of the restrictions will be seen as a benefit to creditors who are trying to gain some control over increased debt books. Whilst there are more conditions to be met than pre COVID-19, these conditions appear to be encouraging the parties to discuss proposals for payment of the debts rather than resorting to insolvency action which, overall, is likely to benefit the creditor.
For more information and support with winding up petitions and CIGA restrictions, or to arrange a confidential discussion about your debt recovery requirements, please call us on 01332 226 474 or email .