The temporary ban on enforcement action by creditors for debts incurred during Covid came to an end on 30 September.
Ant Milnes discusses what these changes mean for business owners.
The restrictions on statutory demands and winding up petitions which were in place under the Corporate Insolvency and Governance Act 2020 came to an end on 30 September 2021. However, new temporary restrictions on the criteria for presenting a winding up petition came into force on 1 October 2021 and will remain in place until 31 March 2022 (unless extended), which should provide some continuing protection for small businesses and tenants of commercial premises.
The restrictions are that:
- the debt cannot be for rent or other payments due under a commercial lease of a premises
- the debt has to be £10,000 or more and
- the petitioning creditor must provide 21 days’ notice to the debtor that they intend to present a winding up petition and invite the debtor to provide a proposal for repayment of the debt. The winding up petition can only then be presented if a satisfactory repayment proposal is not made within 21 days of receipt of the notice of the intention to present a winding up petition against the debtor.
So, as we are now past 21 days since the lifting of the restrictions, the first winding up petitions since March 2020 can now be issued against companies where Covid-19 has had an impact on their businesses.
What does this mean if you are a director of a company in debt?
What is a statutory demand?
A statutory demand can be served on a company to prove an inability to pay the debt due, as a precursor to a winding up petition being issued. A statutory demand gives 21 days for a company to repay the debt, after which time a winding up petition can normally be served although currently, notice of a winding up petition being served must be provided and a further 21 days must be given for the debtor company to provide a satisfactory repayment proposal.
What if the debt is disputed?
If the debt is disputed, then it may be possible to apply to get it set aside, as a statutory demand should not be served on a company in relation to a disputed debt. Professional legal advice should be sought as soon as possible as the application to set aside must normally be made within 18 days of receipt of the statutory demand.
What is a winding up petition?
Directors should be mindful that once a winding up petition is issued against a company then any transactions from this date may be voidable (as post-petition dispositions, should the winding up order subsequently be made). The winding up petition is also advertised in the London Gazette and once this occurs, the company’s bank account is normally frozen straight away which renders it unable to make payments and effectively forces the cessation of trade. At this stage, an application to court for a validation order would be required to unfreeze the bank account which can be costly, takes time to obtain and is unlikely to be successful unless substantial evidence can be provided to the court to show that the bank account should not have been frozen.
Therefore, it is important that business owners seek advice before the matter progresses to this stage as early action can maximise the range of options available.
Whilst a period of 21 days has been introduced to allow a company facing a winding up petition to put forward satisfactory repayment proposals to discharge the debt, it is up to the petitioning creditor to decide whether the proposal is satisfactory. However the court would have to agree that the proposal is unsatisfactory for the creditor to proceed with presenting the winding up petition.
There is no guidance on what a ‘satisfactory’ repayment proposal is and therefore, once at this stage, there is a risk that the petition will be presented against the company unless payment can be made in full. There is also a risk that the petitioning creditor has made a successful application to court to negate the 21 days of notice for a repayment proposal and therefore can move straight to a winding up petition without notice.
It should be noted that creditors who are owed less than the £10,000 threshold can join together with other creditors in order that the combined debt reaches the threshold so the group of creditors can proceed with presenting a winding up petition. Therefore, directors of companies in debt should consider the possibility that if the total debt of the company exceeds £10,000 then creditors may get together to present a winding up petition.
If a debt is close to the threshold, you should be aware that interest and/or charges may be applied which then causes the threshold to be reached.
Coupled with the restriction of commercial landlords being unable to present winding up petitions against their tenants for arrears of rent, there are also separate restrictions on commercial landlords from taking their usual enforcement action such as forfeiture (e.g. changing the locks) or taking control of goods for unpaid rent which will remain in force until 25 March 2022 (unless extended). Directors should be mindful that all creditors (including commercial landlords) can still obtain CCJs against companies and instigate bailiff action. A CCJ will likely hamper a company in being able to obtain credit with suppliers and bailiffs can be used to take control of company assets to be sold to repay the debt which may render the company unable to continue trading.
What does this mean if you are trying to recover a debt from a company?
Although a statutory demand is not designed as a tool for a creditor to pursue a debt, it can often create the leverage to secure payment as the debtor company may wish to avoid having a winding up petition presented against it for the reasons outlined above.
A statutory demand should not be issued in relation to a disputed debt and if it is, an application can be made by the recipient to have it set aside and the costs of the same could be levied against the creditor who served the statutory demand.
Although the threshold of debt required for a winding up petition to be served on a company has been temporarily increased to £10,000, it appears that the legislation for the threshold of issuing statutory demands has not changed and remains at £750. Therefore, a statutory demand may still be issued against a company for a debt of £750 or more and this may result in payment, particularly if the debtor has not sought legal advice. However, to then proceed with a winding up petition, the debt must be for £10,000 or more.
As noted previously, for a creditor owed less than £10,000 wishing to proceed with issuing a winding up petition, legitimate interest and/or charges may be added so that the debt accrues to £10,000. Alternatively, they could join with a number of other creditors in order that the combined debt exceeds the £10,000 threshold.
A creditor (including a landlord of a commercial premises) can still enforce a debt by obtaining a CCJ against a company, normally at a relatively small cost. Subsequently, bailiffs can be used in an attempt to recover funds by taking control of assets in repayment of the debt owed. However, if there are no available assets to take control of, then the creditor may be liable for the bailiff’s costs.
This can be a complex area and one where legal advice is recommended. For further information or to discuss any of the above, please do not hesitate to get in touch with Ant on anthony.milnes@leonardcurtis.co.uk or contact your local team.