Coronavirus: Debt Collection, Demands and Winding Up Petitions

Last Updated: 09:30, 14 September 2021

Although the courts have regularly stressed that creditors should not present a winding up petition against a company as a means of collecting a debt, there is no doubt that it is far more effective at concentrating a debtor's mind on paying a debt than commencing a regular claim in the County Court.

This is largely due to the threat of the company being wound up in a relatively short timescale and the likelihood of the company's bank account being frozen (and its ability to trade therefore being impacted) following the advertisement of the petition. Lockdown and COVID-19 have impacted significantly on the financial position of many companies and their ability to pay their debts as they fall due. In an attempt to support businesses and the economy through these unprecedented times, a number of measures were introduced by Government to provide some temporary protection to companies that were unable to pay their debts due to the effects of the pandemic and various lockdowns. On 26 June 2020 the Corporate Insolvency and Governance Act 2020 came into force, which, amongst other things, introduced the following temporary measures (as subsequently amended):

1. A prohibition on the service of any statutory demand on a company between 1 March 2020 and 30 September 2021. (Ordinarily as a precursor to a winding up petition a creditor may, but is not obliged to, serve a statutory demand on the debtor company requiring it to pay the debt within 21 days. A winding up petition may then be presented at the end of that period if the debt has not been paid;
2. A prohibition on presenting a winding up petition based on a statutory demand served between 1 March 2020 and 30 September 2021; and
3. A prohibition on presenting a winding up petition, unless the creditor can show that it has reasonable grounds to believe that:

1. 1. Coronavirus has not “had a financial effect” on the company (i.e. the company's financial position has not worsened as a result of, or for reasons relating to, Coronavirus); or
   2. The debtor would have been unable to pay the debt, even if Coronavirus had not had a financial effect on the company.

The above restrictions have continually been extended throughout the pandemic to ensure that viable businesses, which were financially affected by the restrictions on trade during the lockdown periods, were not forced into insolvency unnecessarily.   However, The Insolvency Service announced on 9 September 2021 that these measures will be phased out from 1 October 2021.New measures are to be introduced by the government with a view to helping smaller businesses by increasing the minimum value of the debt against which a winding up petition can be presented and to give debtor companies more time to trade their way back to financial health before creditors can take action to wind them up.  These new measures will temporarily:

1. Increase the debt threshold for a winding up petition from £750 to £10,000. Consequently, creditors will not be able to commence winding up proceedings where the debt owed is below £10,000;
2. Require creditors to seek payment proposals from a debtor company and then allow 21 days for the debtor to respond before they are able to proceed with a winding up petition; and
3. Prevent landlords from presenting a winding up petition in respect of rent or any sum or payment that a tenant is liable to pay under a business tenancy and which is unpaid by reason of a financial effect of coronavirus.

These new measures will remain in force until 31 March 2022.There continue to be no similar protections in place for individuals in the context of bankruptcy. Commercial Rent Arrears In addition to the restrictions on presenting winding up petitions, the additional protection under the Coronavirus Act 2020 that is currently available to tenant companies in respect of rent arrears will continue.  These measures prevent landlord action such as forfeiture and CRAR being taken against companies for rent arrears until 25 March 2022.New legislation is being introduced to ring-fence outstanding unpaid rent that has built up during the period that a business has had to remain closed during the pandemic.  Landlords will then be expected to make allowances for the rent arrears from those specific periods of closure due to the pandemic, and share the financial impact with their tenants. The new legislation will help tenants and landlords work together to come to an agreement on how the debt owed should be dealt with - whether this be by waiving some of the debt or by agreeing a repayment plan over a longer period.  Landlords and tenants will be encouraged to agree terms and, where they are unable to do so, the new legislation will provide for a binding rent arbitration process. In an attempt to provide some protection to landlords, the government has made it clear that, if a business is able to pay its rents, it must do so. If you are in any doubt about whether you may present a winding up petition against a debtor company, or how this should be done under the new temporary provisions, then please do not hesitate to contact us.

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If you would like to talk through the consequences for your business, please email us and one of our team will get in touch.