COVID-19: Winding up petition restrictions to be replaced from 30 September 2021

The government has announced that the current restrictions on the presentation of winding up petitions would be replaced with more limited restrictions with effect from 1 October 2021

29 September 2021

Background

The Corporate Insolvency and Governance Act 2020 (CIGA) came into force on 26 June 2020.

Schedule 10 of CIGA restricted the presentation of debt-related winding-up petitions where a company cannot pay its bills (including rent) due to COVID-19 in Great Britain.

These restrictions were initially due to end on 30 September 2020, but have since been extended until 30 September 2021.

The Current Position

Under the current restrictions creditors cannot present a winding-up petition against a company based on a statutory demand that was served between 1 March 2020 and 30 September 2021, nor present a winding-up petition between 1 March 2020 and 30 September 2021 based on a company's inability to pay its debts (including rent), unless the creditor has reasonable grounds for believing COVID-19 has not had a financial effect on the company, or that the company's debt issues would have arisen in any event.

What has been announced?

The Insolvency Service has announced that the Schedule 10 restrictions will not be extended beyond 30 September 2021.

However, new temporary measures will apply from 1 October 2021 until 31 March 2022. These are aimed at protecting smaller businesses, especially in the retail, hospitality and leisure sectors.

These measures include:

  1. An increase of the debt threshold which must be owed by a company to a creditor before that creditor can present a winding up petition from £750 to £10,000.
  2. A requirement that before presenting a winding up petition, creditors must seek proposals for payment from a debtor business, giving them 21 days for a response before they can proceed with winding up action.

What about rent arrears?

Under the new temporary measures, it is not possible to present a winding up petition in respect of rent or any other payment that a tenant is liable to pay under a business tenancy which is unpaid by reason of a financial effect of COVID-19.

Comment

The steps taken to loosen the restrictions will be welcomed by creditors, given the re-opening of the economy and the return of something approaching normality in many sectors.

The extension of restrictions in relation to commercial rent arrears appears designed to dovetail with the continuing restrictions on eviction of commercial tenants and the much anticipated mandatory rent arbitration process. Whilst consistency between these measures is clearly desirable, some commentators have questioned whether it is fair to place greater restrictions on recovering sums due under a commercial lease as opposed to under other commercial agreements. Commercial landlords will understandably feel aggrieved that they are continuing to be singled out for restrictions on debt recovery.

It is notable that the increase in the debt threshold represents the first such increase since the Insolvency Act 1986 came into force on 29 December 1986. The increase also represents more than a 13-fold increase over the previous threshold. Whilst the increase is aimed at preventing creditors owed relatively low sums exerting undue pressure under the winding up process, this may well place hardship on smaller trade creditors, for whom the recovery of sub-£10,000 debts could be vital for their own recovery.

The requirement to allow debtors 21 days to make payment proposals before the presentation of a petition appears to be designed to function as a mandatory and more conciliatory version of a statutory demand but we would question whether this really adds much to the process in practical terms.

The above issues notwithstanding, the approach does appear to strike a fair balance between a return to normality and ongoing protection for otherwise viable companies which are struggling with Covid-related debt.

If you have any questions about what we have discussed in this article, please contact James Sutherland or a member of the Real Estate Disputes team.

Key contact

James Sutherland

James Sutherland Partner

  • Head of Real Estate Disputes
  • Dispute Resolution
  • Professional Negligence

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