The prohibition on the use of a statutory demand as a basis for serving a winding-up petition on a company was lifted on 1 October 2021. However, until 31 March 2022, winding-up petitions cannot be presented when the debt is less than £10,000 or when it relates to commercial rent. And a number of new conditions for presenting a winding-up petition have been introduced.
What are statutory demands and winding-up petitions?
A statutory demand is a formal written demand for payment from a creditor to a debtor company. Failure to satisfy the debt specified in the statutory demand within 21 days can be a ground for presenting a petition to wind up the company.
A winding-up petition is a legal action taken by a creditor (or creditors) against a debtor company. The petition amounts to a request by the creditor for the court to wind up the company on the basis that the company cannot pay its debts. This is evidenced by its failure to satisfy the statutory demand. If the court agrees to make the order, the creditor can seek to appoint an insolvency practitioner as liquidator.
What was the situation before?
Since the Corporate Insolvency and Governance Act 2020 (“CIGA”) came into force in June 2020, a creditor couldn’t present a winding-up petition against a debtor company based on a statutory demand that had been served on the debtor since 1 March 2020.
A creditor could also not present a winding-up petition based on a debtor company’s inability to pay its debts, unless it had reasonable grounds for believing that COVID-19 had not had an effect on the company or that their debt issues would have arisen anyway.
The intention behind these measures was broadly to give some breathing space to companies who found themselves in financial difficulties as a result of the pandemic.
What’s changed now?
A creditor will once again be able to use a statutory demand as a basis for serving a winding-up petition. Non-payment of the statutory demand will be evidence of a debtor company’s inability to pay its debts.
However, the debt in question will need to be in excess of £10,000. Prior to CIGA, the limit was just £750. So this represents a huge increase and very significant change to the pre-pandemic position.
And if a debtor company is unable to pay its commercial rent due to the financial effects of the pandemic, a creditor will still not be allowed to present a winding-up petition.
If a creditor wishes to present a winding-up petition in respect of a (non-rent-related) debt of more than £10,000, it will need to have served a new “Schedule 10 Notice” on the debtor company (in addition to a statutory demand). The Schedule 10 Notice will need to seek the debtor company’s proposals for payment of the debt. The debtor company will have 21 days to make a proposal that is to the creditor’s satisfaction. However, a creditor will be able to apply to court for an order that they do not need to serve a Schedule 10 Notice or give the debtor company 21 days to make a satisfactory proposal.
What does it mean for me?
The changes are designed broadly to strike a balance between the needs of creditors (who might themselves be businesses) who want a return to their pre-Covid rights and remedies, and those companies struggling with Covid-related debt.
If you’re a business struggling to stay on your feet coming out of the pandemic, the new measures should continue to provide some temporary relief from the threat of being wound up by creditors to whom you owe relatively low sums or for non-payment of rent.
For creditors, the changes revive an effective method of debt recovery that has been unavailable for well over a year.
However, the new measures are only in place until 31 March 2022, and we will have to wait and see whether and how the landscape changes then. We expect the measures to continue broadly to track the government’s recovery measures for the country and for business, meaning that any further changes will likely be incremental and on notice. If you would like to discuss any debt or insolvency matters with us, please don’t hesitate to contact us.
This information is necessarily of a general nature and doesn’t constitute legal advice. This is not a substitute for formal legal advice, given in the context of full information under an engagement with Bates Wells.
All content on this page is correct as of October 21, 2021.