Changes to winding-up petitions announced
Thursday, 16 September 2021
The UK Government has announced changes to the regime for winding-up petitions, with effect from 1 October 2021 – withdrawing, at least in part, some of the protections currently afforded to businesses. How will this impact businesses facing the threat of insolvency and should you seek insolvency advice?
Currently, it’s not possible to present a winding-up petition based on a statutory demand. A winding-up petition based on a company’s inability to pay its debts is only permitted where the petitioning creditor has reasonable grounds to believe that COVID-19 did not have a financial effect on the company, or the debt issues would have arisen regardless of COVID-19.
These restrictions, which have been in place since 25 June 2020, are due to expire on 30 September 2021.
From 1 October 2021, the plaster will be (partially) ripped off. However, there will still be restrictions on creditors’ ability to file a winding-up petition:
- Excluded debt: Where a debt relates to unpaid rent or other sums due under a lease of premises used for business purposes, it will not be possible to file a winding-up petition where the debt is unpaid by reason of a financial effect of COVID-19.
- Increase to threshold: The threshold for presenting a winding-up petition will be increased from £750 to £10,000. It is possible for more than one creditor with a total aggregate debt of £10,000 or more to present a petition.
- Notice: The creditor first must have given a notice to the debtor which includes certain prescribed information, amongst which a statement that if no proposal for the payment of debt to the creditor’s satisfaction is made within 21 days then the creditor intends to present a winding-up petition (the Schedule 10 Notice).
These new restrictions will be in place until 31 March 2022.
It had long been anticipated that once we reached 1 October, it would signal the start of a mad rush of businesses commencing legal action and ultimately issuing winding-up petitions, given that they will have been suspended for 15 months.
Whilst the threshold has been increased, I suspect that a large proportion of petitions were brought in respect of debts of over £10,000 (certainly for non-crown debts). It’s not necessarily cheap to issue a petition and therefore a commercial decision has to be made about the risk of throwing more money after bad debts when pursuing smaller sums.
The Government clearly hopes that the new notice requirement will encourage discussion between the two parties. However, I still predict that there will be a surge of petitions being issued in the coming months, as and when the 21-day deadline passes.
Once a petition has been issued, it can have a catastrophic impact on the already struggling business. Bank accounts can be frozen without notice, and transactions entered into post-petition may ultimately be void. Actions of the directors after a petition has been presented will be scrutinised in the event the company enters liquidation.
The petition can also limit the number of options available to a business, such as filing for administration.
I therefore recommend that anyone facing the threat of a winding-up petition seek insolvency advice at an early stage to understand the risks and options available.