Not quite opening the floodgates? Temporary changes to restrictions on winding-up petitions
The Government announced on 9 September 2021 that the temporary measures brought in by The Corporate Insolvency and Governance Act 2020 (CIGA) to support businesses from insolvency during the pandemic will be phased out from 1 October 2021.
The regime in place until 30 September provides a blanket prohibition on the ability of creditors to issue winding-up petitions, unless:
- Covid-19 has not had a financial effect on the debtor company, or
- the debt would have arisen even if coronavirus had no financial effect on the debtor (the "Coronavirus Test").
Under the Coronavirus Test, a creditor has to show that the debt would have arisen in any event regardless of any impact the coronavirus pandemic has had on the debtor company. This may be difficult to do, given that all a debtor needs to show is that the pandemic has had some effect on its financial position. Because of this evidential burden, it is not surprising that most creditors have, since CIGA was introduced, avoided the winding-up route when pursuing debts.
Those temporary measures will be replaced by new measures which continue to restrict the circumstances in which a winding-up petition can be issued. These new measures are aimed at helping smaller businesses get back on their feet, before the expected floodgates are fully opened for creditors to commence enforcement action for debts accrued during the coronavirus pandemic.
The Government has recently enacted these measures by passing the snappily titled Corporate Insolvency and Governance Act 2020 (Amendment of Schedule 10) Regulations 2021 (the Regulations), which introduces a new regime that is set to remain in place until 31 March 2022. The Regulations set out a new set of circumstances in which a winding-up petition can be presented, as summarised below.
The Regulations
The salient changes made by the Regulations are as follows:
- The restrictions are only lifted for debts of £10,000 or more.
- Before a winding-up petition can be presented, the creditor must first give the debtor 21 days' written notice of the debt to the debtor and seek proposals for payment.
- A petition can only then be issued in the absence of proposals for payment within this 21-day period, or if any proposals made by the debtor are not to the creditor's satisfaction.
Importantly, whilst the restrictions on winding-up petitions are lifted for almost all creditors, they will remain in place for "excluded debts", which include “a debt in respect of rent due under a relevant business tenancy” encompassing most commercial tenancies. As a result, (and subject to a modified version of the Coronavirus Test – more on which below) commercial landlords will mostly be unable to issue winding-up petitions against their tenants on the basis of rent arrears.
Effect on creditors
The Regulations are clearly geared towards protecting smaller business, whilst still gradually lifting restrictions. They do this by increasing the threshold of the debt for which a winding-up petition can be brought from £750 to £10,000. That is based on the Government's theory that “smaller businesses” are unlikely to have incurred debts of £10,000 or more, since CIGA came into force. This position seems questionable, although it will be interesting to see after 1 October 2021 whether the Government's prediction is correct.
The requirement to seek the debtor's proposals for payment is an interesting development, as it appears debtors are now afforded an opportunity to produce a reasonable payment plan to creditors which the latter are obliged to, at least, consider.
Perhaps unsurprisingly, there is no definition of what amounts to a “proposal to the creditor’s satisfaction”, in response to a written notice, which leaves open the possibility of disputes arising over whether the creditor's refusal to accept a proposal is unreasonable. No doubt the Court will grapple with this in the coming months. However, presumably as long as a creditor is able to justify a refusal of a debtor’s proposal, it will be difficult to see how a Judge could overturn what is essentially a commercial decision that the creditor is entitled to make.
Commercial landlords
The fact the Regulations do not apply to rent arrears arising from business tenancies is likely to frustrate commercial landlords, who continue to face hurdles in collecting rent and evicting tenants. Indeed, what may be particularly vexing for landlords is the likelihood of tenants paying other creditors ahead of them, knowing their landlord's hands are tied.
Additionally, the Coronavirus Test appears to remain alive under the Regulations for landlords, as the definition of “excluded debt” covers rent “which is unpaid by reason of a financial effect of coronavirus”. Therefore brave landlords wishing to issue winding-up petitions will need to prove the debtor’s circumstances have not arisen because of the pandemic. Establishing that may be difficult, not least given the latitude afforded to creditors by the Courts under the current regime, when determining whether the current Coronavirus Test has been met. Again, it will be interesting to see how the Courts deal with these arguments.
Effect on debtors
If the Government is right, the Regulations will protect mostly smaller businesses from landlords and creditors owed more than £10,000, giving them time to build up their balance sheets and settle the debts that they have most likely accrued in the past 18 months. However, it may equally be possible that those very same small businesses who may have considered bringing winding-up petitions of their own to recover long-overdue debts, may find they are unable to do so.
We will only know how the new regime will work in practice in the weeks and months after 1 October 2021, but it appears that the floodgates for bringing winding-up petitions, whilst not fully open, are at least ajar.