Insolvency: Winding up easier, but hurdles remain

Schedule 10 to the Corporate Insolvency and Governance Act 2020 introduced a number of measures in response to the global pandemic. These temporary measures, examined in previous briefing notes, were intended to protect those businesses whose downturn in fortunes could be traced to the impact of the coronavirus.

The Government has recently begun the task of unwinding these measures as it eyes a more business as usual approach for the UK economy. The first step on this road is the snappily named Corporate Insolvency and Governance Act 2020 (Coronavirus) (Amendment of Schedule 10) Regulations 2021 (SI 2021/1029), in force from 29 September 2021.

Conditions A to D

Creditors will welcome the news that the restrictions imposed on the use of statutory demands are to be abolished. However, in place of those restrictions a number of conditions have been introduced in relation to any petition for winding up lodged against a company. Those conditions, referred to in the regulations as conditions A to D, are considered below in turn.

Condition A provides that the debt which forms the basis of the petition must be a liquid debt which has fallen due for payment. It must also not be an “excluded debt”, which is defined as including commercial rents that are unpaid due to a financial effect arising from the coronavirus.

Condition B requires the creditor to provide the debtor company with a written notice in terms of the regulations. This must be delivered to the company’s registered office unless there are reasons why that cannot be achieved. Notably, the content but not the form of the notice is set out in the regulations.

In terms of the regulations, the notice must set out certain prescribed information. This includes statements to the effect that the creditor seeks the debtor’s proposals for payment and that if no such proposals are forthcoming within 21 days, the creditor intends to proceed with a winding up petition. Condition C stipulates that no petition can be presented until that 21-day period has expired without any satisfactory proposals being received.

Significantly, there is provision in the regulations for a creditor to apply to the court to dispense with or shorten the 21-day period. The regulations don’t give any guidance as to the grounds on which such an application might proceed. One assumes that some urgency would require to be demonstrated, but case law may be required in order to give clarity as to the test to be applied. The application may be made at any time and must be made by petition. It is unclear whether an application may be made retrospectively on the lodging of the winding up petition.

Condition D provides that where a petition is presented by a single creditor, the debt must be £10,000 or more. That is a significant change from the £750 limit that was in place pre-pandemic. The regulations also allow for creditors to band together, provided the sum of their debts amounts to at least £10,000 in total. The law has always had provision for such a banding together, though it is rarely exercised. One might surmise that it will become far more common in the coming months.

Where a creditor satisfies the foregoing conditions and presents a petition for winding up, the petition must contain averments to the effect that the conditions have been satisfied and that no proposals for payment have been made during the 21-day period. If proposals have been made and rejected, the creditor must explain in the petition why those proposals have been rejected. It’s not explicit in the regulations, but one assumes that the intention is for the court to refuse the petition if satisfied that a proposal in settlement was rejected unreasonably.

Summary

The regulations, which do open up the option of insolvency to a degree, will remain in place during the “relevant period”. This is defined as 1 October 2021 until 31 March 2022.

However, the exclusion of rent arrears and the increase in the debt level to £10,000 present significant barriers for a large swath of creditors. While the measures to date have been very successful in limiting insolvency cases during the pandemic, many creditors will themselves be struggling due to non-payment by their debtors. Notably, the World Bank has suggested that such measures “have merely postponed the coming of the tide to the months and years ahead”. Consequently, it is anticipated that from 31 March 2022, some further liberalisation of the regulations will take place and a rebalancing can ensue.