10
Jul
20
Articles, Property, Chancery & Commercial
Corporate Insolvency and Governance Act 2020

The ‘new normal’ for Statutory Demands and Winding Up Petitions under the Corporate Insolvency and Governance Act 2020

On 26 June 2020 the Corporate Insolvency and Governance Act 2020 (‘the 2020 Act’) finally entered force.  Now it is in its final form, Simon Newman and Christopher Pask of 1 Chancery Lane’s Property, Chancery & Commercial team will be providing their views on its provisions and their impact over a series of updates.

First, in this update, Simon Newman addresses the temporary requirements of Schedule 10 of the Corporate Insolvency and Governance Act, aimed at the Statutory Demand and Winding Up process.  This is because these temporary measures have been designed to address concerns arising in light of the COVID-19 pandemic and not only do they apply immediately, they also apply retrospectively.

Requirements under Corporate Insolvency and Governance Act 2020

Amendment to the Insolvency regime to address what was considered as aggressive debt collection techniques by landlords and to protect the UK High Street in light of the COVID-19 pandemic were first proposed as long ago as April.

Statutory Demands

What has entered force amounts to a ban on all Statutory Demands served for the purpose of issuing a Winding Up Petition and it applies to Statutory Demands served from 1 March 2020 to 30 September 2020.

Winding Up Petitions

The 2020 Act introduces two further tests in respect of a creditor issuing a Winding Up Petition and the court making a winding up order.

Under paragraph 2(3) and (4) of Schedule 10 to the 2020 Act a creditor who wishes to petition based on a debt can still present a Petition, but it will only be issued if it can satisfy the court that it has reasonable grounds for believing COVID-19 has not had a financial effect on the company, or that the company would have been unable to pay the debt regardless of the financial effect of COVID-19.

Paragraph 5 of Schedule 10 then states that the Court, when faced with considering a Petition that satisfies those criteria, can only make a Winding Up Order if satisfied that the company would be unable to pay its debts even if coronavirus had not had a financial effect on the company.

These provisions are expressed to apply to Winding Up Petition issued from 27 April 2020.

Retrospective Effect

For these unusual times, the 2020 Act has the unusual impact of being retrospective and applies to all Petitions issued between 27 April 2020 and 30 September 2020[1], including those that are were issued before the 2020 Act came into force and are currently making their way through the system.  The 2020 Act provides scope for the unwinding of the impact of Petitions which have already been issued[2] and Winding Up Orders that have already been made[3].

Whilst provision has been built in to ensure that an office holder or the Official Receiver cannot be liable for steps properly taken when in office[4], it seems The 2020 Act is intended to be much less creditor friendly.  The Explanatory Notes to the bill stated that the process of restoring the Company to the position it would have been in could lead to the Petitioner being liable for costs of doing so.

Time Limits

The 2020 Act also acts to impose some temporary adjustments to other steps in the life of a Petition.

The requirement to advertise a Winding Up Petition in accordance with the Insolvency Rules is now disapplied until such time as “the court has made a determination in relation to the question of whether it is likely that the court will be able to make an order under section 122(1)(f)”.

Importantly for debtor businesses, the time that a winding up is deemed to start is adjusted from the traditional date of presentation of the Petition, to the, now later, date of the Winding Up Order.  This step is of particular relevance to applications for Validation Orders or claims under s.127 of the Insolvency Act 1986.

What the Corporate Insolvency and Governance Act 2020 Means in Reality

After a draft Bill was first laid in parliament in May and became subject to amendments what has entered force is much more wide-ranging than was initially anticipated.  That is so in that it applies to all debts, not just those claimed by landlords, or against Companies based on the High Street or in those sectors most severely affected by COVID-19.

The 2020 Act doesn’t act as a blanket ban on issuing Winding Up Petitions, these can still be issued in the usual way without being preceded by a statutory demand.  However, Petitioners are going to be required to address on the Petition the issue of the impact of COVID-19, and it appears that the bar is not set very high in terms of the circumstances that will prevent a Petition being issued.

‘Financial effect’ appears to be a low threshold.  It is defined as where the company’s financial position worsens in consequence of, or for reasons relating to, coronavirus.[5]   It would therefore mean that this would be satisfied by any COVID-19 impact on causing the debt to arise, or causing a company’s financial circumstances have worsened since the pandemic ensued.

Guidance from the Courts

There are reported cases from prior to the entry into force of The 2020 Act which do offer some assistance in determining the approach that may be taken.  These decisions were made on the basis of the draft bill, however until there are reported judgments under The 2020 Act they are the best resource available to discern the potential approach.  There are two particularly useful cases in the context of application to restrain presentation of, or advertisement of a Petition.

Firstly, in Re A Company [2020] EWHC 1406 (Ch) the Judge found that there was a strong case that COVID-19 had had a financial effect on the company, and that the facts on which the winding-up petition would be based would not have arisen if COVID-19 had not had a financial effect on the company.  In such circumstances it is not difficult to identify why the court granted an interim injunction to restrain the presentation of a landlord’s winding-up petition.

More recently, in Re A Company [2020] EWHC 1551(Ch), the petition was in relation to a significantly aged debt.  The court held that although the petitioner did have, in the court’s view, reasonable grounds for its own belief that the company would be insolvent even without the impact of COVID-19, the court held that the petitioner had not provided sufficient evidence to the court upon which the court could be satisfied that the company would have been unable to pay its debts regardless of the financial effects of COVID-19.

It appears from these cases therefore that the burden of showing that a company would have been unable to pay its debts regardless may fall upon the creditor, whilst it will be sufficient for the company to defeat a petition if it can show that it COVID-19 has a financial effect.

Impact and Approach to Take

Statutory Demands

Although permissible, there seems to now be little point in issuing a Statutory Demand upon a Company since it lacks the teeth of performing the function of being a de-facto pre-action step prior to issuing a Winding Up Petition.  There could however remain some tactical considerations for a creditor that is aware that a Statutory Demand would trigger some form of redemption rights under crucial company facilities.

Winding Up Petitions

Petitioners will now need to address their reasonable belief that the criteria for issuing a Petition is met on the face of the Petition.[6]  It appears that the court is going to conduct a pre-issue filtering exercise as to whether this is satisfied before it will issue the Petition and allocate it a Petition number.  Petitions have already been returned for failing to satisfy the requirements of the 2020 Act.

One of the areas that is most unclear from the 2020 Act is the point at which a Petition can then be advertised.  This is determined by reference to when the court has made a determination of whether it is likely that the court will be able to make an order under section 122(1)(f).   The latest ‘Insolvency Practice Direction relating to the Corporate Insolvency and Governance Act 2020’ has sought to address this by building in a ‘preliminary hearing’ to determine the ‘coronavirus test’.  If this is satisfied the Petitioner will be required to comply with the usual advertising to allow other creditors the opportunity to play their part in what is much vaunted as a ‘collective remedy’.

For those companies that do find themselves facing a Petition, there is good news in that there is now no need to seek a validation order to engage in normal trading once a Petition is presented. Such an order is now only required for payments from the point in time that a winding up order is made, a period which is likely to encounter significantly fewer transactions than a contested petition would.

Summary

Of course, while the 2020 Act gives debtors breathing space and will not be welcomed by creditors, it does not strike down the debtor’s liability.   It is not hard to envisage that once these temporary measures expire the insolvency courts are going to be flooded with Winding Up Petitions with eager creditors waiting to issue the moment these restrictions are lifted.

Given the life of these temporary measures has been stretched beyond that which was initially proposed, and its impact made retrospective; creditors will no doubt be hoping that this temporary regime is not extended like so many of the other COVID-19 measures introduced by the Government during the current pandemic.

For anyone who requires assistance with the enforcement of debts, understanding the Corporate Insolvency and Governance Act 2020 and its application to their business or needs assistance with insolvency matters more generally, members of 1 Chancery Lane are ready to assist.

[1] Paragraph 21 of Schedule 10

[2] Paragraph 4(2) of Schedule 10

[3] Paragraph 7(4) of Schedule 10

[4] Paragraph 7(3) of Schedule 10

[5] Paragraph 21(3) of Schedule 10

[6] Paragraph 19(3) of Schedule 10 achieves this by effectively adding this requirement to rule 7.5(1) of the Insolvency Rules 2016.

Written by or involving: Simon Newman, Christopher Pask

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