A Statutory demand has been an effective tool, for years, when enforcing a debt that is not disputed , but simply left unpaid.

A Statutory demand has been an effective tool, for years, when enforcing a debt that is not disputed , but simply left unpaid. The consequence of ignoring this petition is liquidation/closure of a company or personal bankruptcy if it is a person owing the sums. This mechanism avoids costly court hearings and is often a deterrent and an effective tool.

Restrictions on winding up petitions and the Corporate Insolvency and Governance Act 2020 (‘CIGA’)

Shortly after the first of the national lockdowns last year was announced in March 2020, the Government brought in urgent measures to restrict creditors’ ability to use statutory demands or present winding up petitions against companies. These measures were introduced by Schedule 10 of the Corporate Insolvency and Governance Act 2020 (‘CIGA’), which came into force on 26 June 2020, wherein creditors could only present a winding up petition where it could be shown that:

  1. The debtor company had not been financially affected by Covid-19; or
  2. The debtor company would have been insolvent in any event even where Covid-19 had a financial effect on it.

The result of these measures, and the aim of the Government in bringing them in, was that many businesses that would otherwise have gone insolvent over the course of the pandemic have been provided much needed breathing space, but this has also led to companies accumulating rising levels of debt. This has though also left many with cashflow issues; accruing debt and an inability to pursue it debtors.

In September, the Government announced that it intends to gradually lift restrictions on insolvency action that can be taken against corporate entities. These changes are effective as of 1 October 2021 and will be in place until 31 March 2022 when it is anticipated that pre-pandemic insolvency measures will be restored.  Litigation and insolvency lawyers are unsure whether there will be an immediate rush ; a slow build up or at present whether companies have been effectively juggling the relationships, but this coupled with the end of furlough , repayment of the government loans coming in 2022 , higher utility bills and inflation companies are going to need to carefully consider their position be it restructure ; scale down or otherwise , if they are likely to face difficulties.

What is the position from 1 October 2021? 

Rather than lifting the restrictions in their entirety, the Government has opted for a partial relaxation of restrictions as well as introducing new requirements to be satisfied by creditors looking to pursue a winding up petition. As of 1 October 2021 a creditor can:

  1. Only present a winding up petition against a debtor where the amount of the debt is £10,000 or more (the pre-pandemic limit having been £750, representing a huge increase in the threshold for company insolvency proceedings); and
  2. Use service of a statutory demand on a debtor to demonstrate the debtor’s insolvency due to its inability to pay its debts (CIGA had previously limited a creditors ability to use service of a statutory demand as proof that the debtor is unable to pay its debts – a requirement for presenting a winding up petition).

However, a creditor will still not be able to present a winding up petition in the following circumstances:

  1. Where the creditor has not first served a notice under Schedule 10 of CIGA on the debtor requesting that they put forward satisfactory proposals to pay the debt within 21 days (there is an exception to this in cases of sufficient urgency where a creditor can seek an order from the Court to avoid having to take this step); or
  2. The debt is less than £10,000; or
  3. The debt is owed in respect of an ‘excluded debt’, that is, unpaid commercial rent or any sums payable under a relevant business tenancy where the debt has accrued as a result of the financial effect of Covid-19 on the debtor. In relation to such debts, the Government had already announced an extension of the restrictions on landlords being able to forfeit commercial leases in relation to non-payment of rent until March 2022.

What is a debtor to do if presented with a Schedule 10 notice or winding up petition? 

Experts have long predicted a wave of corporate insolvencies may ensue following the easing of the unprecedented restrictions put in place by CIGA due to the rising levels of debt businesses have amassed. This could cause a huge court back-log ; close many businesses or it could keep cash flowing subject to circumstances that we just cant predict at this stage.

Once a debtor is presented with a notice pursuant to Schedule 10 or a winding up petition, it should not be ignored . The business should seek advice and consider its options to pay, set it aside or go through the process as below, but there are some serious consequences :

  1. If the winding up petition has been advertised, the debtor’s bank account will be frozen.
  2. It can inflict reputational damage on the debtor as this action will be made public.
  3. A Court has the power to reverse payments made by the debtor after the date that the winding up petition was presented. So if money has been moved in contemplation of this action or it is considered that it has been made whilst aware wrongfully trading these transactions can be unravelled which can have serious consequences for all parties involved ;
  4. The debtor’s credit rating will be impacted even if later addressed and they remain liquid.

It is important to act quickly in this situation and think carefully about how to act, specialist advisors can help you resolve matters be it through litigation, resolution or restructuring :

  1. Seek legal advice immediately – it may be possible to seek an injunction to prevent the presentation or advertisement of the petition if the debt is disputed or if the debtor has a cross-claim against the petitioner.
  2. Attempt to use the 21 day period of the Schedule 10 notice or agree an extension of time to negotiate a settlement of the debt if it is admitted or can be resolved informally.
  3. Continuing to adhere to the duty of directors to act in the best interests of the company. Directors must act in the best interests of creditors of the company in circumstances where insolvency is foreseeable, otherwise they can potentially be found to be personally liable and face claims being made against them for breach of directors duties, wrongful trading claims and possibly directors’ disqualification proceedings. Juggling protect themselves and the company can be difficult so advice and careful guidance needs to be implemented; and
  4. Consider the possibility of a Company Voluntary Agreement (CVA) or Administration, which are alternatives to liquidation and could result in a better outcome for the business and its creditors. This is where the company is closed but on the more favourable terms through agreement.

A company is considered to be insolvent where the value of the company’s liabilities exceed its assets or if it cannot pay its debts as they fall due. However, even where this is the case, it does not necessarily mean that the business must be closed down or cease trading. Specialist advice from an insolvency solicitor or insolvency practitioner should be sought at an early stage to allow for the opportunity to implement a proper strategy that may avoid the need for the company to fail. It doesn’t have to be doom and gloom and the end of the line, working with professionals restructuring , scaling down , taking in investment ; rejuggling loans and generally creating a workable strategy can work.