Surprisingly corporate insolvencies have been very low during the pandemic, even when compared to good trading conditions. There are many reasons for this, but one is undoubtedly the restrictions on creditors issuing winding-up petitions. July 2021 had 84% fewer compulsory liquidations than 2019 and 73% fewer administrations. From 1 October the restrictions have been relaxed and HMRC for one has indicated it will use the procedure in the appropriate cases.

The threat of a winding-up petition being issued is often the catalyst to make directors concentrate on cash flow and look at restructuring options. This is often too late to save the company and runs the risk of directors being in breach of their directors’ duties.

The government is looking at ways to encourage businesses to address payment options rather than unreasonably hoping things will sort themselves out. With regard to winding-up petitions this can be seen by the imposition of a 21-day period for proposals to pay to be advanced.

What are the changes?

Businesses suffering from financial distress due to the pandemic have been protected from creditor action pursuant to provisions in the Corporate Insolvency and Governance Act 2020 which came into force on 26 June 2020. These provisions were put in place to prevent viable businesses being pushed into insolvency solely as a result of the pandemic.

New regulations mean that as of 1 October 2021 creditors are now able to issue winding-up petitions against companies in respect of unpaid debts if the following four conditions are satisfied:

• Condition A: that a debt of a clearly defined amount has fallen due for payment and is not an ‘excluded debt’, eg, commercial rent arrears
• Condition B: the creditor must deliver to the debtor a written notice seeking the company’s proposals for payment of the debt and allowing the debtor 21 days within which to either pay the debt or make a payment proposal;
• Condition C: following the expiration of the 21-day period referred to in Condition B, the debtor has not made a proposal which is to the creditor’s satisfaction; and
• Condition D: the debt must be for an amount of £10,000 or more.

The increase in the petition debt threshold from £750 to £10,000 is an attempt to continue to assist small businesses with their recovery from the pandemic and to avoid creditors demanding the payment of smaller debts.

Creditors do have the option to ‘club together’ with one creditor taking an assignment of a collection of smaller claims in order to reach the £10,000 threshold and try to obtain payment or to present the petition together in order to meet the threshold.

Commercial landlords are still unable to submit a winding-up petition against tenants for any unpaid rent or related payments due under a lease as the partial lifting of restrictions does not apply to commercial rent arrears as these are defined as ‘excluded debts’ under the regulations if it is unpaid due to a reason of a financial effect of coronavirus.

How to prevent or deal with a winding-up petition

The partial lifting of restrictions will see several creditors restart their debt collection efforts, for example HMRC. Many businesses will have already agreed ‘Time to Pay’ payment plan arrangements with HMRC where affordable installments are agreed between the two parties.

One of the key elements here is to start communications as soon as possible and work with creditors such as HMRC to come to a reasonable arrangement whether that is through a payment plan, a deferral or to discuss other forms of support that might be available.   

HMRC has warned that from September 2021, if customers are unwilling to discuss a payment plan or are continuing to ignore communications then they may proceed with collecting the debt using their enforcement powers, which include taking control of goods, summary warrants and court action including insolvency proceedings. Early engagement is therefore advisable in order to find an affordable way forward and to avoid enforcement action being taken. 

The issuing of a winding-up petition can have a devastating effect on a corporate. The bank is likely to freeze the company’s bank accounts upon learning of the petition and trading will become very difficult as disposals of assets may be deemed void by the court.

If you are threatened with a winding-up petition it is important to consult with an insolvency expert usually a solicitor or financial adviser specialising in insolvency. If the petition is unwarranted then injunctive relief should be considered. It is imperative that the directors of the company act quickly.  

If the threat of a winding-up petition is a symptom of a bigger problem of dealing with creditors and the viability of the business with its current level of debt, then other options should be considered as the directors’ duties are likely to be owed to the company’s creditors.

The UK has a comprehensive range of tools and a great depth of expertise in dealing with these matters so again reaching out to a solicitor or financial adviser is critical to help navigate this challenging environment. 

Directors will need advice to help work out if the business should continue to trade or if it could it be rescued by the use of administration, a company voluntary arrangement, a scheme of arrangement, a moratorium, or the recently introduced restructuring plan. These procedures may help protect the directors from liability and where possible save the business.