Courts have regularly stressed that a winding-up petition should not be presented by a creditor against a company as a means of collecting a debt. There is no doubt that it is far more effective at concentrating a debtor’s mind on paying a debt than issuing a claim in the County Court. Mainly due to the threat of the company being wound up in a relatively short space of time and the likelihood of the company’s bank account being frozen and its ability to trade being impacted following the advertisement of the petition.
The effect of the pandemic
The COVID-19 pandemic has had a massive impact on the financial position of many companies and their ability to pay their debts as they fall due. In an attempt to support businesses and the economy through these uncertain times, a number of measures have been introduced by Government to provide some temporary protection to companies that are unable to pay their debts due to the effects of the pandemic and lockdown.
The 26 June 2020 saw an introduction of the Corporate Insolvency and Governance Act 2020, which, amongst other things, introduced the following temporary measures (as subsequently amended):
- A prohibition on the service of any statutory demand on a company between 1 March 2020 and 30 June 2021. (Ordinarily as a precursor to a winding-up petition a creditor may, but is not obliged to, serve a statutory demand on the debtor company requiring it to pay the debt within 21 days. A winding-up petition may then be presented at the end of that period if the debt has not been paid;
- A prohibition on presenting a winding-up petition based on a statutory demand served between 1 March 2020 and 30 June 2021; and
- A prohibition on presenting a winding-up petition, unless the creditor can show that it has reasonable grounds to believe that:
(A) Coronavirus has not “had a financial effect” on the company (i.e. the company’s financial position has not worsened as a result of, or for reasons relating to, Coronavirus);
(B) The debtor would have been unable to pay the debt, even if Coronavirus had not had a financial effect on the company.
This asks the question of what amounts to “Coronavirus has not had a financial effect on the company” or “the company would have been unable to pay anyway”.
How will the courts interpret this?
It remains to be seen how the courts will continue to interpret these two provisions, but the common sense approach seems to be as follows:
It can reasonably be believed that Coronavirus has not had a financial effect on the debtor/ the company would have been unable to pay anyway, if:
The debtor company’s turnover and its own debtor collections have not been adversely affected by lockdown (for instance, if it is a key supplier);
The debt in question fell due for payment prior to the impact of Coronavirus (i.e. before January/February 2020) and had remained unpaid for some time beyond its due date, without reasonable excuse;
The debtor company’s accounts show it to have been balanced sheet insolvent for a significant period of time (i.e. in previous years) prior to the impact of Coronavirus.
If, the debtor’s business has been impacted by Coronavirus (whether through the suspension/a reduction of trade, the inability to obtain necessary supplies, the inability of its own debtors to pay, etc) and the unpaid debt was incurred within a relatively short period prior to the effects of Coronavirus (i.e. February or later) then it is difficult to see how a creditor could have any grounds, let alone reasonable ones, for believing that Coronavirus had not had a financial impact on it.
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About the author
Iain Bould is the head of our Commercial Litigation department.
Iain has over 28 years of experience in Commercial Debt Recovery having worked in both Private Practice and Industry and brings a pragmatic and commercial approach to recovering debts. With extensive experience working across all industry sectors, Iain has particular expertise in working with Insolvency Practitioners in advising and recovering outstanding insolvent company ledgers.
If you need any advice or further information please contact Iain at email@example.com