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Our Restructuring and Insolvency Team have been looking at the potential impact of the Corporate Insolvency and Governance Act 2020.  This article looks at the temporary provisions introduced in relation to statutory demands for payment.

What is a statutory demand for payment?

A statutory demand for payment sent to a company is a formal written warning issued by a creditor to a debtor stating that if payment is not made within 21 days a petition to wind the company up and appoint a liquidator may be presented to court.

The value of the debt must exceed £750 and the demand must be served at the company’s registered office address by recorded delivery or sheriff officer.

The address you carry on your day to day business from may also be your registered office address, or, your registered office may be that of your accountants, solicitors, or the home address of a director. Wherever your registered office is situated, it is important to ensure that the mail delivered there is being checked daily. Service can still be effected by sheriff officer even if premises are empty as a result of the move to remote working and/or employees being on furlough.  Procedures should be in place to get the correct mail to the correct person within your business and without delay to avoid demands or other important documentation from being overlooked or missed entirely.

An unsatisfied demand can be used to establish a company’s apparent insolvency by its inability to pay its debts as they fall due.  In most cases, service of a demand is sufficient to encourage a debtor to take the necessary steps to secure or pay the debt to the satisfaction of the creditor in order to avoid a winding up petition being presented to the Court. Demands are therefore a very effective debt recovery tool and are a method often favoured by creditors.

What is the temporary provision?

The Act (s.10, s.11 and Schedules 10 and 11) introduces a temporary provision which prohibits a winding up petition from being presented on the basis of an unsatisfied statutory demand served during the relevant period.  The relevant period is from 1 March to 30 September 2020.  Section 41 of the Act grants power to the Secretary of State to curtail the relevant period or to extend it by up to 6 months should it be considered reasonable to do so in order to mitigate the effect of coronavirus. .  

As we have discussed in the other articles in this series, the stated intention of the Act is the rescue and recovery of businesses. We expect that the timeline for recovery will not be as fast paced as the damage caused by the pandemic and anticipate that the measures in relation to statutory demands will be kept under close review. We would not be surprised to see this extended beyond 30 September 2020. 

What does this mean for debtors?

The intention behind the Act is to provide viable businesses with time to recover, however, businesses should be wary of complacency and should continue to engage meaningfully with their suppliers, including commencing discussions in respect of outstanding sums or  renegotiating payment terms.  It is important to not lose sight of the fact that these provisions are temporary and intended to provide relief where difficulty has arisen as a result of the pandemic. 

Debtors need to have cognisance that creditors struggling with their own cash flow issues will be considering what steps they can take to protect the viability of their own business.  Unable to use demands as a means of debt recovery, creditors may consider raising a court action for payment instead. Typically, a court action for payment will include additional claims for late payment, interest and expenses which will only serve to exacerbate any debt problem.  Any business receiving service of court papers should ensure that they take advice as a matter of urgency. There will still be an opportunity to negotiate settlement without recourse to the court but care must be taken to ensure that deadlines continue to be complied with until the action has been properly disposed of.   

When the temporary restriction on statutory demands is lifted we expect to see creditors swiftly return to demands as a means to recover debts. In Scotland, ‘caveat’ documents can be lodged with the court to act as an early-warning system to debtors that a creditor is taking certain types of action against it. If a caveat is lodged by a company or individual they will receive advance notice of the writ or application. This will trigger the option to have a caveat hearing before any interim order is granted by the court.

This notice is particularly valuable because when a court grants first orders in a winding up petition there is a requirement to advertise in the local press and Edinburgh Gazette online.  Banks and other institutions are quick to react to the threat of insolvency and often freeze accounts as soon as the advertisements are published.  The advance warning afforded by a caveat means that you will have notice of a winding up petition before an advertisement can be placed.  Caveats should therefore be considered as an integral tool of any business’s risk management strategy. This may become increasingly important in the face of aggressive debt recovery following the return to business post-lockdown. If you are interested in reading more about caveats please see our previously published article or if you consider that a caveat would be helpful for your business please contact a member of our Restructuring and Insolvency Team to discuss.

What does this mean for creditors?

At the second reading of the Bill in the House of Lords Lord Vaux of Harrowden observed:-

“insolvency rules are a delicate balance between giving a business the best chance of survival while protecting the position of creditors. In these difficult times, it is appropriate to move that balance a little towards the survival of the business for the greater good of the economy”

Creditors must be forgiven for their understandable concern that the pendulum appears to be swinging very much in the favour of the debtor. These provisions, however, are temporary but also narrow in scope.

As we now move out of the lockdown the courts are processing increasing levels of business and we are seeing an escalation of creditors who, unable to utilise statutory demands, are raising court actions for payment instead.  When raising an action for payment there is always the risk that it will be defended, however, in the majority of debt claims there is no dispute and the real issue is ‘can’t pay/won’t pay’.  As with a demand, service of court papers is often sufficient to put your debt at the head of the queue resulting in payment or at least satisfactory proposals.

The concern for creditors must be that if they do nothing to recover their debt the debtor may be making payment to other creditors who are shouting louder or they may be selling their assets. If there is a genuine concern about a debtor’s liquidity or that there are assets being dissipated then the court action can include an application to prevent any sale of assets or freeze funds due to the debtor from third parties until the action has been dealt with. 

If court action does not prompt extra-judicial settlement, and a court decree is granted, a Charge for Payment can be served by sheriff officer.  If the debt remains unsatisfied after 14 days the creditor is entitled to consider conventional enforcement such as the arrestment of funds in the hands of third parties or attachment of assets with the threat of sale. The most extreme form of diligence is to petition for the winding up of the debtor.

Whilst the temporary provisions introduced by the Act remain in place, a creditor may not present a petition to wind up a company unless the creditor has reasonable grounds to believe that the coronavirus has not had a financial effect on the company or the basis for the petition would have arisen even if coronavirus had not had a financial effect on the company.  It is expected that the test of whether Covid-19 has caused the company’s difficulties will present a high bar and is likely to be the subject of litigation in the coming months. Due to the uncertainties in relation to how the court might treat this we expect to see an increase in petitions lodged once the temporary measure ceases to have effect. In our next article we will consider how the Covid-19 test may be applied and the implications on the presentation of petitions during the temporary prohibition period, whether or not extended, and the impact when it ends.

In Summary

The Act gained Royal Assent on 25 June 2020 putting in place these temporary measures until at least 26 July 2020. Even the most resilient businesses will face challenges in the immediate to short term and these measures appear intended to assist their chance of survival.  A full recovery will continue to be a challenge for many and, as a result, we expect to see all sectors re-evaluate their business models in an effort to ensure their continued viability whether that be renegotiating payment terms with suppliers and customers or rent renegotiations between landlords and tenants.  Against this backdrop, cash will remain king and businesses will be reviewing their ledgers and considering what steps they can take to ensure there is a positive cash flow. 

There is a common perception among some that statutory demands should not be utilised for debt recovery but the reality is that they are and they will remain a very useful and successful tool for that purpose.  Debt recovery is about moving quickly to ensure that you are at the top of the list when debtors are making payment. This is going to be even truer as businesses emerge from the crisis. 

Some argue these temporary measures, aimed at assisting businesses in financial difficulty, is simply kicking the can down the road.  When the prohibition is lifted we expect business will take urgent steps to protect their ongoing financial viability and the service of statutory demands will resume. Businesses should make sure to be ready for that.

Should you have any concerns in relation to either recovering a debt or making payment please feel free to contact the Restructuring and Insolvency team at Stronachs. We have many years of experience in business recovery and debt management.

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