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Winding up petitions - the end of protection for struggling companies

View profile for Malcolm Niekirk
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Winding up petitions - the end of protection for struggling companies

Following the first lock-down, in March 2020, the government introduced many measures to help struggling companies. One of them was protection against winding up petitions (a court process by which a business that is owed money can shut down its debtor).

The protection was introduced in June 2020, but back-dated to 1 March 2020. Originally it was intended to end at the end of September 2020, but it had been extended in stages.

The protection ended on 30 September 2021.

New rules, taking effect from October 1st, give some protection to financially weakened companies; but companies are less protected than they were previously.

Before COVID-19 – the original ‘permanent’ rules

A creditor owed more than £750 could present a petition to ask the court to make a winding up order (put into liquidation) the company that owes them the money (the debtor). 

The creditor would normally start with a ‘statutory demand’; a particular form used to demand payment of the debt.

The statutory demand gives the debtor 21 days to pay. If they don’t pay – and don’t have a legitimate dispute over the whole debt – the next step is to ask the court to issue a winding up petition. 

When it does that, the court will set a date and time to consider the petition. It is likely to make a winding up order on that date. The debtor’s failure to pay, following the statutory demand, is treated as showing that the debtor is unable to pay its debts.

COVID-19 – the first temporary rules (1 March 2020 to 30 September 2021)

These brought in three main new rules:

Statutory demands.

Statutory demands had no legal effect if given to the debtor in this period.Debtors were free to ignore them.

Winding up petitions.

The courts’ powers to issue winding up petitions were greatly restricted.

To issue a winding up petition, the creditor would need evidence to show that:

  • The debtor was insolvent; and, either:
  • Coronavirus had not had a financial effect on the debtor; or
  • If coronavirus had a financial effect on the debtor, there was another reason why the debtor was insolvent.

Winding up orders

The courts’ powers to make winding up orders were greatly restricted.

To make a winding up order, the creditor would need to prove to the court that:

  • The debtor was insolvent; and, either:
  • Coronavirus had not had a financial effect on the debtor; or
  • If coronavirus had a financial effect on the debtor, there was another reason why the debtor was insolvent.

These temporary rules modified (but did not replace) the original ‘permanent’ rules.

COVID-19 – the new temporary rules (1 October 2021 to (currently) 31 March 2022)

These temporary rules replace the previous ones.  Like them, they modify, but do not replace, the original ‘permanent’ rules.

There are four new conditions; A to D.  They apply to winding up petitions.  A creditor cannot issue a winding up petition unless they meet all four conditions.

Condition A

  • This does not apply to landlords of business premises.  The debtor must not be the creditor’s tenant, and the debt must not be unpaid rent (or similar) where  coronavirus is a reason why it’s not been paid.

Condition B

  • The creditor must have given a formal notice to the debtor.  In it the creditor must have given the debtor 21 days to say how they propose to pay the debt.

Condition C

  • The debtor must have failed – within 21 days – to make satisfactory proposals to pay the debt.  It is for the creditor to decide whether the proposals are satisfactory.  But, if they think the proposals are not satisfactory, they must tell the court why.

Condition D

  • The unpaid debt must be at least £10,000.  Two or more creditors may join forces on a single petition to bring their combined debts to at least £10,000.

The court has a discretion to relax conditions B or C.

The new rules summarised

Landlords are still unable to use winding up petitions to put pressure on their commercial tenants to pay rent that is unpaid as a result of CoViD-19. This is to work with the other temporary rules that stop commercial landlords from evicting tenants who have not paid rent, as a result of CoViD-19. 

These temporary rules are currently scheduled to last until 31 March 2022.

Other creditors are able to use winding up petitions to put pressure on companies to pay debts (or to force them into liquidation, if they don’t pay).  But:

  • Only if they are owed £10,000 or more (a much larger figure than the pre-CoVid-19 £750).
  • They have to give 21 days’ notice to the debtor, and ask them for payment proposals. They aren't able to dismiss proposals casually; they will need a reason.
  • In most cases they still need to serve a statutory demand on the debtor too (which gives them 21 days to pay). They can serve the demand with the notice. There is no need to wait for one to expire before sending the other to the debtor.

This is a step back towards ‘normal’. HMRC has been an enthusiastic user of winding up petitions in the past, to collect unpaid VAT and PAYE contributions in particular. It will be interesting to see what their policy is on the exercise of their newly restored legal rights.

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