Winding Up Proceedings And The Pandemic
Courts have regularly stressed 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 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 31 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 31 June 2021; and
- A prohibition on presenting a winding up petition, unless the creditor can show that it has reasonable grounds to believe that:
- 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 what amounts to “Coronavirus has not had a financial effect on the company” or “the company would have been unable to pay anyway”.
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 balance 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.
The above restrictions are due to come to an end on 30 June 2021, there is provision in the new Act for this period to be extended by parliament on short notice.
This restriction on debtor collections could therefore extend beyond the end of June 2021.
How Athena Debt Recovery Can Help
- Your debt is treated as if it were money owed to us, and we collect it as quickly as possible
- We can call on and you can draw on the additional expertise of our Commercial litigation and Insolvency teams
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The recovery of debts is extremely important to avoid financial pressure of your business.
We offer a range of services to help you do this and a highly skilled team of commercial debt recovery lawyers who specialise in Pre-Action Collection, Court Proceedings, Enforcement of Judgments, Bankruptcy and Winding Up and Foreign Debt Collection.
We offer a competitive quality debt recovery service for general debt matters.
We also provide a bespoke service for difficult debts or where insolvency proceedings are appropriate.
We can undertake bulk recoveries or debt portfolios.
About the author
Senior litigation executive and manager
Iain is a senior litigation executive and manager of Athena Debt Recovery which is part of the firm’s commercial litigation department supervised by our head of commercial litigation partner Stephen Boyd.
Iain has over 28 years’ experience in Commercial Debt Recovery having worked in both Private Practice and Industry and has extensive experience working across all industry sectors and has a particular expertise in working with Insolvency Practitioners in advising and recovering outstanding insolvent company ledgers.
Iain brings a pragmatic and commercial approach to recovering debts.
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