Winding-Up Petitions – COVID-19 Temporary Restrictions Introduced by the Corporate Insolvency and Governance Bill 2020
A winding-up petition is one of the most critical pieces in a creditor’s armoury where a debt remains unpaid. However, in these challenging times, the government clearly wants to provide a temporary shield to companies who are unable to pay their debts due to COVID-19.
Although the announcement by the UK Government on 23 April 2020 referred to the restrictions on issuing winding-up petitions as being part of further measures to “protect the UK high street from aggressive rent collection and closure“, the Corporate Insolvency and Governance Bill 2020 (the “Bill”) is not sector specific – the changes apply to any company that can be wound up and to any type of debt, not just rent liabilities.
The proposed prohibitions and restrictions on the presentation of winding-up petitions are in force from 27 April to 30 June 2020 (or one month after the coming into force of the Act, whichever is the latter) (the “Relevant Period”) and cover the following key points:
- Prohibition of petitions on basis of statutory demands – no winding-up petition may be presented after 27 April 2020 as a result of a company’s failure to meet a statutory demand served on them between 1 March and 30 June 2020.
- Restriction on winding-up petitions – a creditor cannot present a winding-up petition unless they have reasonable grounds to believe that coronavirus has not had a financial effect on the company or the ground for petitioning would apply in any event, regardless of coronavirus. Further, the court will only make an order if satisfied that the grounds for petitioning would have arisen even if coronavirus had not had a financial effect on the company.
- Petitions presented before commencement – if a creditor presents a petition between 27 April 2020 and the Act coming into force, the court can make an order to restore the position to what it would have been, had the petition not been presented, unless satisfied that coronavirus had no financial effect, as outlined above.
- Void winding-up orders – any winding-up order made between 27 April 2020 and the Act coming into force, which would not have been made by the court had the Act already been in force, will be regarded as void and the company must be restored to the position it was in immediately prior to the presentation of the petition. Any liquidator (or provisional liquidator/official receiver) appointed is not liable for anything done pursuant to the order.
- Impact on other Insolvency Act time periods: consideration has been given to the longer term impact of these restrictions. For example, in the event a winding-up order is made (and the petition was presented within the Relevant Period), the calculation of “relevant time” for a transaction at an undervalue or preference, will now start on whichever is the later of the day 2 years before the day on which the petition was presented, and the day 2 years and 6 months before the day on which the winding-up order was made.
Practical Considerations
The test for whether or not a petition can be presented is whether the creditor had reasonable grounds for belief and the court being satisfied on the evidence presented. In practice the impact (or otherwise) of coronavirus on a debtor will often be very difficult to ascertain and evidence. It is likely, certainly until the law is tested, that many parties will seek to negotiate before risking issuing a winding-up petition.
A winding-up petition, being in the public domain (whether on the court file or from advertisement in the London Gazette), can have a devastating impact on a company. Helpfully, the Bill has confirmed that the court file cannot be inspected by third parties until such time as the court has made a determination in relation to whether it is likely they will be able to make a winding-up order or with the permission of the court. Similarly the rules on advertising do not apply until such time as the court has made a determination in relation to whether it is likely they will be able to make a winding-up order. The question of when the court will make this determination remains to be seen, however these protections will be a welcome addition for many companies.
See related posts:
UK Government Publishes UK Restructuring and Insolvency Law Reforms
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