Statutory Demands, Winding up Petitions & COVID 19
Can I still petition for a debtor to be wound up?
In short the answer is yes, as long as the non-payment and insolvency can be proved to be independent of the pandemic.
It is much harder to wind up a company now because of the extraordinary steps that have been imposed to prevent the service of statutory demands and the presentation of winding up petitions. Those measures are to protect businesses that may not be insolvent but for the pandemic. It is still possible to wind up companies whose insolvency was not caused by the pandemic.
The 2020 Act
The steps to protect Covid affected businesses from winding up are contained in the Corporate Insolvency and Governance Act 2020 (CIGA). CIGA was laid before Parliament for 1st reading on 20 May 2020 and received Royal assent and came into force on 25 June 2020.
Controversially for a piece of legislation (well established principles of English Law being foreseeability and certainty) CIGA came into force with retrospective effect from 27 April 2020 and established the ‘Relevant Period’ from 1 March 2020 to 30 September 2020, subsequently extended by regulation to 31 December 2020.
The effects of CIGA and the Relevant Period for the purpose of this blog are:-
- to prevent the presentation of any winding up petition based upon a statutory demand that had been served within the Relevant Period; and
- prevent the presentation of any winding up petition within the Relevant Period without satisfying the court that:-
- a. the coronavirus pandemic has not had a financial effect on the debtor company; or
- b. irrespective of the financial effect of coronavirus on the debtor company, the company was insolvent in any event. (The Covid Test).
In normal times failure to satisfy a demand within 21 days or obtain an injunction against the presentation of a petition is evidence in and of itself of a company’s insolvency and makes it a relatively simple and cost effective means of providing the basis for a winding up petition. For more information on the use and effect of statutory demands generally we recommend you visit our blog at this link. In the case of personal insolvency the debtor has to apply to set aside within 18 days of service of the demand if they dispute it.
Most debtor companies who are able to pay their debts, but are simply avoiding doing so will on receipt of a demand (where there is no genuine dispute as to the amount demanded) satisfy the debt to avoid a compulsory winding up. This makes the demand an excellent tool for creditors to obtain payment. The effect of CIGA has been to remove this tool from the creditor’s armoury, whilst providing a shield for bad market actors. Nevertheless, it is critical to note that the courts have repeatedly warned that statutory demands and winding up are not to be used as a ‘cheap debt recovery service’ as one judge recently put it. Whether insolvency is the appropriate procedure will vary from case to case.
It is important to note that a statutory demand is not the only way to show insolvency for the purposes of winding up. Therefore, the fact you cannot rely on one in the Relevant Period does not mean you can’t petition.
Winding up Without a Statutory Demand
You can petition without demand if you can prove to the satisfaction of the court that the company is unable to pay its debts as they fall due (satisfying section 123(1)(e) of the Insolvency Act 1986), by showing that the debtor is balance sheet or cash-flow insolvent. You will also need to satisfy the Covid Test.
Alternatively if you have an existing court judgement against the debtor and have taken enforcement steps which have failed to deliver payment of the judgment debt then you can petition under section 123(1)(b) but as above you will still need to satisfy the Covid Test.
What is The Covid test?
This test requires the petitioning creditor to satisfy the court that coronavirus has not had a financial effect on the debtor company, or that but for coronavirus the debtor was insolvent anyway. Taking into account the lack of publicly available financial information on companies, it is clearly difficult for a creditor to pass this test and the burden is on them to do so.
Because of this evidential burden very few petitions have been presented since April and judicial consideration has been limited. In Re a Company (Application to restrain Advertisement of a Winding Up Petition) 2020 EWHC 1551 ICC Judge Barber found that:-
- the burden is on the creditor to pass the Covid Test;
- the threshold for finding that coronavirus has had a financial effect on a company is low;
- but where a creditor is demonstrably not viable irrespective of coronavirus a winding up order can still be made.
Further guidance can be found in the unreported case of Re Tundrill Ltd CR-2020-002351 where ICC Judge Mullen made a winding up order on a petition issued on 1 May. The order was made on the basis where the debt had been payable for over 12 months and the debtor company, according to its filed accounts, had been balance sheet insolvent for approximately 2 years. A further interesting observation was that although the burden is on the petitioning creditor to pass the Covid Test, the debtor will have to take meaningful steps to demonstrate the impact of coronavirus on them where the debt is longstanding.
Options For Creditors
The presence of insolvency and compulsory winding up is an important mechanism for creditors to prevent all of the assets of a debtor being frittered away. Formal insolvency allows what remains to be shared amongst the creditors. The current restrictions will not last forever. It is difficult to predict when these restrictions will end, having already been extended from 30 September by regulation to 31 December – this will be a political rather than legal decision.
Although there are severe restrictions on winding up the court is still able (and willing) to grant a winding up order.
Helix Law have had success over the summer and have wound up debtors who have fallen within the Re Tundrill Ltd type of case. If you require advice on presenting a winding up petitioning or general advice on pursuing a debtor you should contact Helix Law now.