New restrictions on winding-up petitions
30 November 2021
Paul Sidle brings you an update on the government's latest Covid-19-related restrictions on winding-up petitions.
The Corporate Insolvency and Governance Act 2020 (Coronavirus) (Amendment of Schedule 10) Regulations 2021 impose new, but more limited, restrictions on winding-up petitions. The changes are particularly relevant for commercial landlords. The new tapering restrictions are being implemented so as not to undermine the new rent arbitration scheme which will be implemented in March 2022 and which will apply to pandemic related rent.
Four conditions
Schedule 10 of the Corporate Insolvency and Governance Act is amended and applies from 1 October 2021 to 31 March 2022 (the new 'relevant period'). During that 'relevant period', four conditions need to be met before a winding-up petition can be presented on the grounds of inability to pay:
Condition A: the debt is liquidated; has fallen due for payment; and does not relate to non-payment of rent under a business lease (where such non-payment is 'by reason of a financial effect of coronavirus').
Condition B: the creditor has delivered written notice to the debtor. That has to set out basic details about the debt and must be delivered to the company's registered office (or last place of known business or to a director/secretary if that is not practicable or it has no registered office). Importantly, this notice must include a statement that 'if no proposal to the creditor's satisfaction is made within the period of 21 days beginning with the date on which the notice is delivered, the creditor intends to present a petition to the court for the winding-up of the company'.
Condition C: 21 days have expired since that notice and no such proposals have been made to the 'creditor's satisfaction'. Presumably this is subjective.
Condition D: the amount owed exceeds £10,000 (on its own or cumulatively).
A creditor can apply to court for conditions B and C not to apply. Alternatively, they can apply to shorten the 21-day period in condition C.
Who are the changes aimed at?
The changes are clearly aimed at small businesses with commercial landlords - but are not limited to such application. Commercial landlords will therefore continue to be restricted from presenting winding-up petitions until 31 March 2022 (by which time, the new arbitration measures referred to should be in place) where the tenant's non-payment of rent was because of a financial effect of Covid-19. Where rent hasn't been paid for reasons other than Covid-19, then the landlord may present a petition (provided the other conditions are met or are disapplied).
Under the former restrictions and practice applicable to creditor winding-up petitions presented before 30 September 2021, such petitions will have been automatically marked as 'private' while the court determines if the company's problems were Covid-19 related. Any such petitions will not appear on searches of the Central Index/CE File while the court conducts a pretrial review and a preliminary hearing.
While this practice will not apply to creditor winding-up petitions presented from 1 October 2021, there is a residual risk that a search of the Central Index/CE File will not reveal a winding-up petition that has been presented but is being dealt with under the former practice.
There has, of course, always been a risk that a petition may not appear on the Central Index/CE File (eg while the court is processing the petition and uploading it), but the practice noted above has increased that risk temporarily. If the company/directors try to appoint an administrator out-of-court when there is an extant winding-up petition - even if they do not and cannot know about it - then the appointment would, it seems, under existing case law, appear to be invalid.
How many petitions will be affected?
It's not clear how many petitions, as at October 2021, are currently being dealt with by the court under the practice of being marked as 'private' or how many of those might be withdrawn and re-presented under the less restrictive measures. Clearly, as months pass, the risk of a creditor petition presented before 30 September 2021 not showing up on searches will pass. It becomes, therefore, something of a judgment call - and fact dependent - on whether to pursue the out-of-court company/director appointment route.
The problem can, of course, be avoided by using the QFC out-of-court appointment route or by applying to court for an administration order, since extant winding-up petitions do not invalidate such appointments.
This article first appeared on the Linklaters Insolvency Bitesize blog.
Paul Sidle is counsel PSL in the restructuring and insolvency group at Linklaters.
