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Statutory Demands, Winding Up Petitions and Covid 19 – What to Expect Next

Although there has been welcome advance warning that the government will extend restrictions effecting residential and commercial landlords, the situation with respect to the restrictions under the Corporate Governance and Insolvency Act 2020 (CIGA2020) and whether they will be extended remains unclear. (See our blog here for a fuller analysis of the effect of CIGA on statutory demands and winding up petitions).

Current Position

Creditors have been unable (since 27 April 2020) to present a winding up petition based on a failure to satisfy a statutory demand which was served after 1 March 2020. You can still serve a demand, but it is essentially a toothless exercise and debtor companies are aware of this. Currently the relevant period is set to expire on 31 March 2021.

Likewise during the relevant period creditors have been unable to present a petition for the winding up of a registered company under section 124 of the Insolvency Act 1986 (IA1986) on any of the grounds at sections 123(a-e) or section 124 unless the creditor has reasonable grounds for believing that coronavirus has not had a financial effect on the debtor company, or that the debtor company would be insolvent irrespective of any financial effect of coronavirus. Unless the petitioner can satisfy the court of either of those limbs the court will not grant a winding up order. These requirements to are due to expire on 31 March 2021.

Will the Government Maintain the Current Position?

Nothing has been announced yet; but taking into account the recent announcements over commercial and residential possession and the fact that furlough is extended until September, the cautious observer is likely to conclude that the government is minded to extend the relevant period and support businesses effected by the pandemic.

Suspension of Wrongful Trading Provisions

Adding further weight to this view is a draft statutory instrument before parliament to amend s.24(1)CIGA2020 to give the Secretary of State the power to continue to amend insolvency legislation (by regulation) until 29 April 2022. The explanatory memorandum with the draft specifically refers to the suspension of liability for wrongful trading under s.214(IA1986) and the government looks certain to extend the suspension beyond its current 30 April 2021 end date. Whilst this will be welcomed by company directors trading through financial distress it will be of great concern to creditors who rely on the threat of personal liability to encourage reckless directors to think twice before trading whilst insolvent.

We continue to keep these developments under review, and it may be the case that statutory demands, winding up petitions and personal liability will shortly return to the pre coronavirus status quo, but taking everything into account this is unlikely and it is difficult to know what to expect next

Posted by:

Richard Chapman
Trainee Solicitor

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