COVID-19: Winding-Up Petitions
July 2020
On 3 July Robert Buckland, Secretary of State for Justice, approved a new Insolvency Practice Direction (IPD) and an amendment to the Insolvency Proceedings Practice Direction 2018.
The IPD includes a number of additional restrictions on Winding-Up Petitions that all creditors will need to consider and meet before proceeding. Further complications arise because the new restrictions have also been imposed retrospectively on Winding-up Petitions already correctly issued according to the procedure laid down at the time of issue.
Restrictions on Winding-Up Petitions
The IPD imposes a number of temporary provisions restricting the presentation of debt-based Winding-Up Petitions:
No Winding-Up Petitions are to be presented on or after 27 April 2020 if they rely upon statutory demands served between 1 March 2020 and 30 September 2020; and
No Winding-Up Petitions are to be presented between 27 April 2020 and 30 September 2020 unless the creditor has reasonable grounds for believing that: i) coronavirus has not had a financial effect on the company; or ii) that the company would have become unable to pay its debts even if coronavirus had not had a financial effect on the company.
The Court is only permitted to make a Winding-up Order if the Court is satisfied that the company would be unable to pay its debts even if COVID-19 had not had a financial effect on the company. If it appears to the Court that COVID-19 has had a financial effect on the company before presentation of the petition, the Act prohibits a Winding-Up Order from being made.
What does this mean for anyone wishing to present a Winding-Up Petition?
The restrictions on presenting a Winding-Up Petition are likely to make it extremely difficult for any debt-based petitions to be presented unless the debt arose a considerable length of time before the current situation.
All Winding-Up Petitions are now subject to “the coronvirus test” with addditional burden being placed on Petitioners to prove a negative - that the defendant’s inability to pay has not arisen as a result of COVID-19 and that the company would be insolvent even if COVID-19 had not had a financial effect[1]. It is too early to say what standard of evidence is likely to be required, so petitioners are bound to take a cautious approach.
In addition to the increased evidential burden Petitioners also face an additional procedural burden because the Court’s practice is to assess the coronavirus test at a non-attendance pre-trial review. Thus many Petitions subject to the test are unlikely to be decided at the first hearing, adding cost and delay to the procedure. This will even apply to uncontested Petitions.
The Practicalities
Contents of the petition: The petition will not be accepted for filing unless it contains a statement of the petitioner’s reasonable belief that the company’s inability to pay their debts has not arisen as a result of coronavirus or that the company would have been unable to pay the debt regardless of the financial effect of COVID-19.
It will be extremely difficult for petitioners in many circumstances to satisfy this requirement as it demands a level of knowledge regarding a company’s financial dealings and structure that those outside of the company will have neither have access to nor a complete understanding of.
Initial listing: Petitions shall be listed for a non-attendance pre-trial review with a time estimate of 15 minutes for the first available date after 28 days from the date of its presentation. The purpose of the pre-trial review is for the Court to give directions for a preliminary hearing to determine whether the Court is likely be able to make an Order of the Insolvency Act 1986 having regard to the coronavirus test.
Petition to remain private: All petitions will be marked private and will not be available for inspection.
Filing of evidence: If the petitioner wishes to rely upon any evidence at the preliminary hearing, a witness statement must be filed and served on the company at the same time as the Petition.
Non-attendance pre-trial review: If supporting evidence is filed, the Court will not look at this until the pre-trial review (PTR). At the PTR, the Court will either list an unopposed petition for a hearing in the winding up list or give directions for a preliminary hearing[2]. A decision as to whether to grant a Winding-Up Order will not be made at the PTR.
Preliminary hearing: During the preliminary hearing, the Court will consider any evidence which has been served and whether it is satisfied that a Winding-Up Order can be made.
The Winding-Up process will be significantly frustrated by the IPD and will not only affect the ability of creditors to bring legitimate claims before the Court, but it will also increase the time it will take for a Petition to be decided.
The Court System was already struggling with a backlog prior to the present situation and adding additional layers to such well-established processes as the winding-up process, will doubtless add to this backlog. Once the restrictions are lifted, we are likely to see an influx of petitions from creditors who have been forced to wait, causing additional strain.
The new IPD is being applied retrospectively to Winding-Up Petitions issued since the COVID-19 outbreak dating back to 27 April 2020 meaning that anyone who issued a Winding-Up Petition prior to 3 July 2020 will be required to amend and re-serve their Petition so that the new requirements can be met, at the cost of additional pressure, strain and financial burden on the Petitioner.
As acknowledged by HMRC[3], the emergency measures also provide fraud opportunities for some. Whilst the IPD may be invaluable for those businesses who have genuinely been affected by COVID-19, it will also provide a shield for others to hide behind.
Alternative debt collection methods
Whilst not intended to be a comprehensive survey, other common means of debt collection that a creditor might consider, such as taking control of goods through the use of bailiffs, have also been subject to COVID-19 restrictions. Obviously a Court judgment is a pre-requisite, which may in turn pose its own COVID-19 related issues, except for rent arears.
Bailiffs and Control of Goods Orders
Back in April, The Taking Control of Goods and Certification of Enforcement Agents (Amendment) (Coronavirus) Regulations 2020[4] came into force preventing High Court Enforcement Officers’ visits to residential properties but did not prevent enforcement by other means (telephone) and at business premises[5].
A further amendment was made to the regulations on 24 June 2020 in relation to rent arrears (The Taking Control of Goods and Certification of Enforcement Agents (Amendment) (No 2) (Coronavirus) Regulations 2020) with two main effects[6].
The minimum net unpaid rent that must be outstanding before commercial rent arrears recovery may take place has been increased to an amount equivalent to 189 days’ rent, while protections for forfeiture for business tenancies are in place under the Coronavirus Act 2020.
The expiry date for the following measures is prescribed as 23 August 2020:
o The prevention of enforcement agents taking control of goods at residential premises and on highways;
o The automatic extension period for taking control of goods as set out by the Principal Regulations; and
o The automatic extension of certificates of enforcement agents as set out by the Principal Regulations
With the easing of lockdown, High Court Enforcement at commercial addresses is likely to become one of the first debt collection practices to resume.
County Court Judgements and Third Party Debt Orders
Enforcement action that does not involve seizure of goods has been considered a priority work for the County Courts throughout the current situation and is listed on the County Court Listing Priorities[7] meaning that enforcement of judgements can still be progressed by such means as Third Party Debt Orders and Charging Orders.
Final comment
The present climate can generally be considered less creditor friendly with all the measures currently in place providing additional, if only temporary, protection to debtors. In the long term, this action is likely to have a detrimental effect on both sides. Creditors face their own cash-flow issues and may find themselves pushed towards insolvency as a result of being unable to pursue debtors. Debtors may find that their debts continue to accumulate to unsupportable levels that will only result in action being taken against them further down the line. The effect of the legislation is merely to provide breathing room for debtors, and is not a full stop.
Whilst it is not impossible to pursue debt recovery actions at this time, there are many additional hurdles that will have to be considered before undertaking any action.
[1] Re A Company [2020] EWHC 1551 (Ch).[2] https://www.restructuring-globalview.com/2020/07/the-new-insolvency-practice-direction-providing-some-much-needed-clarity-for-uk-winding-up-petitions/[3] HMRC announcement on 8 April 2020, in context of Job Retention Scheme[4] https://www.legistlation.gov.uk/uksi/2020/451/note/made[5] https://thesheriffsoffice.com/articles/covid-19-business-contingency-plan-update[6] https://uk.practicallaw.thomsonreuters.com/w-026-1560?transitionType=Default&contectData=9sc.Default)&firstPage=true&bhcp=1[7] https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachmentdata/fil/901781/Ops_Update_Civil_Lisiting_priorities_w-c_20_July_2020.pdf