New winding up restrictions call for creditor caution

The new Corporate Insolvency and Governance Act came into force on 26 June 2020. The comprehensive act includes temporary measures to account for COVID-19, with some debtor-friendly adjustments increasing the options for companies in financial distress.

To help any organisation involved in or contemplating insolvency matters, we’ve summarised the key points in a series of short updates. Let’s begin with an important note on winding up.

Winding up – what’s new?

When the time is right, winding up can be a useful tool for creditors. Getting that timing right however can be complicated, especially when dealing with uncertainty brought on by COVID-19.

Schedule 10 of the new Corporate Insolvency and Governance Act introduces a number of temporary restrictions on presenting winding up petitions to court and making winding up orders, which are intended to assist companies suffering financial pressure as a result of the pandemic.

Ban on presenting winding up petitions

With effect from 27 April 2020, unsatisfied statutory demands (formal requests for payment) served between 1 March 2020 and 30 September 2020, cannot be relied upon as grounds for presenting a winding-up petition.

There is a further general restriction on issuing winding up petitions between 27 April 2020 and 30 September 2020 unless the creditor has reasonable grounds for believing that:

• coronavirus has not had a financial effect on the company; or
• the issues would have arisen even if coronavirus had not impacted the company financially.

Caution: If you are a creditor considering putting a petition forward during the ban, be sure that your grounds meet the criteria above. If not, the court may rule to restore the position to what it would have been had the petition not been presented. This could potentially include ordering the petitioner to pay damages.

Advertising a petition

The usual rules on advertising a petition won’t apply unless the court has determined that it can make a winding up order. This amendment suggests that the court will first decide whether the petition may be pursued before the petition is actually heard.

Issuing winding up orders

Orders already made on petitions issued after 27 April 2020 will automatically be void, unless coronavirus cannot be blamed.

Winding up on petitions presented during the prohibited period will start from the date of the winding up order, rather than the date the petition was presented. The petition will not therefore prevent disposals of the company’s property (which would otherwise be automatically void unless ratified by the court).

The company will not be required to apply to court to continue to trade once a petition has been presented and may also mean that a company’s bank account will not automatically be frozen. It will also affect the various anti-avoidance powers that are available to an administrator or liquidator.

Insolvency expert view

Kelly Jordan, partner and head of restructuring & insolvency, says: “The new conditions requiring creditors to ascertain whether a debtor company’s failure to pay a debt is due to coronavirus or not, create a significant hurdle for creditors to overcome.

“It would be a brave creditor to confidently assert that the coronavirus has had no financial effect on the debtor company. It may be more obvious in some circumstances that the grounds for issuing the petition would have existed whether or not the company’s financial position had been impacted by coronavirus.

“Either way, the burden will fall on the petitioning creditor and, if the court is not satisfied that they have reasonable grounds, the petitioner could potentially be liable for costs.

“The requirements create an extra step in the process and will inevitably lead to uncertainty and caution amongst creditors, thereby reducing options available to creditors who may themselves be suffering financially from the impact of coronavirus.”

Coming up

Our next update covers new, temporary relief for directors when it comes to wrongful trading - or click here to view all five updates.

For more help and specialist insolvency and restructuring advice meanwhile, contact Kelly Jordan on 0191 211 7899 or email [email protected] for a free consultation.