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Our Restructuring and Insolvency Team are looking at the potential impact of the Corporate Insolvency and Governance Act 2020.  This article looks at the temporary restriction on lodging winding-up petitions.

The stated intention of the Act is to assist in the recovery of businesses which are suffering as a result of the coronavirus pandemic. The measures introduced by the Act are a combination of permanent changes to insolvency and corporate governance law in the UK and temporary provisions to assist with the short term recovery of viable businesses.  Section 10 and Schedule 10 (section 11 and Schedule 11 for Northern Ireland) of the Act set out the temporary measures introduced to restrict the presentation of winding up petitions at this time.

Temporary Restriction

In our previous article in relation to statutory demands for payment we discussed in some detail that winding up petitions cannot be presented based on an unsatisfied statutory demand that is served between 1 March 2020 and 30 September 2020. However, in addition to these measures Schedule 10 of the Act sets out further restrictions on the presentation of winding up petitions in the relevant period.  Like the other temporary provisions within the Act, the relevant period is 1 March 2020 and 30 September 2020.

The Act states that, unless certain conditions are met, a creditor cannot present a winding up petition of a registered company, or an unregistered company, based on its inability to pay its debts. 

In Scotland the inability of a company to pay its debts is demonstrated to the court by one of the following grounds; an unsatisfied statutory demand, an unsatisfied charge for payment, if it is proved to the satisfaction of the court that the company is unable to pay its debts or that the company’s assets are less than the amount of its liabilities.

In the case of an unregistered company an inability to pay its debts can also be demonstrated if an action has been commenced against a member for any debt or demand due, or claimed to be due, from the company that has not, within 3 weeks after service, been paid, secured or compounded or procured the sisting of proceedings, or indemnified the defender against the action and all costs, damages and expenses to be incurred by the member as a result of the action.

The Conditions

The conditions that would allow a creditor to present a petition for the winding up of a company are based upon having reasonable grounds for believing any of the following:-

  • that coronavirus has not had a financial effect on the company
  • the facts by reference to which the demand or charge applies would have arisen even if coronavirus had not had a financial effect on the company or
  • the company’s inability to pay its debts or the fact that its liabilities outweigh its assets would apply even if coronavirus had not had a financial effect on the company.

Therefore, it is still open to creditors to present winding up petitions against debtors during the relevant period but they will need to be in a position to satisfy the court that these circumstances would have arisen regardless of the pandemic. It is not yet known how the court will approach this test but it is anticipated that a petitioning creditor will need to have supporting evidence, such as overdue invoices in excess of £750 that predate the pandemic or a history of late payment.  In extreme or more complex cases a creditor may have to obtain financial reports based upon a company’s statutory accounts.  The evidence that will be required is likely to be case dependent.

Petitions Presented Prior to the Act

Where a petition has been presented to the court after 27 April 2020 but before the Act came into force on 26 June 2020, the court may make an order to restore the position of the company to what it would have been if the petition has not been presented.  The court is likely to make such an order if the conditions have not been satisfied. The purpose of this is to provide retrospective protection to companies that have been adversely impacted by the virus but not to protect companies that were failing in any event. However, it is difficult to see how a subsequent court order could repair some of the damage caused by first orders in a winding up petition.  For instance if there has already been advertisement of the petition in the local press and gazette, creditors and customers will already have an impression in mind of the company’s health and it is difficult to see how a subsequent order could remedy that.

If a provisional liquidator has been appointed on or after 27 April but before 26 June 2020 and it appears that the petition was presented but the conditions have not been met then they must refer this matter to the court in order for it to determine if there needs to be a further order to restore the company to its prior position. 

The liquidator will likely make this referral by lodging a Note in the Liquidation. Any insolvency practitioner who has taken office since 27 April, as the result of a creditor’s petition should as a matter of priority review the financial information available.  We consider that the belt and braces approach for insolvency practitioners in this situation will be to lodge a Note in the Liquidation and present the information available to the court.  It will then be in the hands of the court to make a determination in respect of how, and if, the liquidation should proceed.

Winding Up Orders Granted

If the court has granted the final winding up order between 27 April and 26 June 2020 but it would not have been granted if the Act had been in force then the court is to be regarded as having had no power to make the order, it is void.

If a liquidator is appointed in such a case and it appears to them that the order is void and it might be appropriate for the court to give directions then they must refer the matter to the court for directions on how to proceed. In particular the court will look to give directions to the liquidator as to how the company can be restored to the position it was in immediately before the petition was presented.

It is therefore very important that any liquidator appointed after 27 April considers taking steps to refer the matter to the court for directions. This should be done unless the liquidator is confident that it does not require directions. For instance this might be the case if the liquidator has done nothing at all since taking office. As part of an application for directions the court may request that they are furnished with a report setting out all of the facts or matters which are in the liquidator’s opinion relevant to the application.

As with petitions presented before commencement of the Act, we consider that it would be sensible for the liquidator to obtain directions from the court in any event and in order to certify their actions and how they should proceed.   

Summary

The provisions in respect of winding up petitions may on the face of it appear to be fairly limited in scope as a result of the temporary nature of the measures.  However, they raise a number of important issues for creditors, insolvency practitioners and debtors to consider.

Creditors

Presenting a petition against a debtor company before 30 September will now have a further layer of complexity.  In order for the petition to succeed creditors will have to satisfy the court that the financial difficulty faced by the company is not a result of the coronavirus pandemic.  Therefore, petitioning creditors will need to provide additional vouching, either from their own records or a report from an accountant, to support the proposition that the company was in difficulty in any event and that the petition would have been presented regardless of the pandemic.

We anticipate that there will be a limited number of petitions presented by creditors during this period but that there will then be a flurry of activity after 30 September in order to try and circumvent the additional requirements that the Act introduces.

Insolvency Practitioners

For insolvency practitioners it is important to consider any appointments taken since 27 April 2020 and consider if an application should be made to the court seeking directions. As part of the application the liquidator will need to present information to help the court determine if the company would have been in this difficulty in any event or if the pandemic is the cause of the immediate financial problems being faced by the company.

Where a winding up order is to be considered void the question will be, who meets the professional fees incurred to date by the liquidator. Practitioners will need to consider their terms of engagement to clarify if their fees are underwritten by the creditor.

Debtor Companies

If your company has been faced with a petition for winding up, or an order granting a winding up, after 27 April then you might have grounds to challenge the petition or the appointment of a liquidator. In order to competently challenge the appointment you will need to be in a position to demonstrate to the court that the financial difficulties being faced are the result of the coronavirus pandemic and not a pre-existing issue. In order to make such a challenge the debtor company should obtain advice from a solicitor and accountant who both specialise in insolvency and restructuring.

The Restructuring and Insolvency team at Stronachs have many years of experience in assisting creditors, insolvency practitioners and debtors and advising them in connection with the options available to them. If you have concerns in relation to the issues raised in this article please contact a member of our team who would be happy to discuss matters with you.

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