The current provisions in the Corporate Insolvency & Governance Act 2020 (CIGA) which tightly restricted the use of winding up petitions during the initial phase of the Covid pandemic were due to come to an end on 30 September 2020. However, the government announced yesterday that it would be exercising powers reserved under CIGA to extend the temporary provisions, as it has become increasingly clear that measures to combat the pandemic will be required for much longer than first anticipated in March.
Among other changes intended to provide ongoing support to Covid-affected businesses - which we will cover in a separate briefly shortly - statutory demands and winding up petitions will continue to be restricted until 31 December 2020, in line with the recently extended moratorium on commercial landlords’ rights to forfeit and to enforce under CRAR.
In the final instalment of our bitesize series, we review the tests applied to Covid petitions, and look (a little further) ahead to the lifting of the restrictions for petitions presented from 1 January 2021 onwards.
Restrictions on Covid petitions
- Creditors may not present a winding up petition on or after 27 April 2020 on the basis of an unsatisfied statutory demand served between 1 March 2020 and 31 December 2020;
- Creditors may only present a winding up petition on or after 27 April 2020 if it has reasonable grounds for believing either Covid has not had a financial effect or that the company would not have been able to pay its debts even if Covid had not had a financial effect; and
- Any winding up orders made between 27 April 2020 and 31 December 2020 will be void if the order was not one that would have been made if the Court applied the relevant test in 2 above.
A Practice Direction was introduced to outline the court’s approach to Covid petitions which we outlined here.
In a handful of decisions during CIGA’s progression through Parliament and after it came into force, the ICC Judges confirmed that:
- whether or not Covid has had a financial effect is a low threshold which will be met if the company’s financial position worsens in consequence of or for reasons relating to Covid;
- the Court must then consider whether the company would not have been able to pay its debts even if Covid had not worsened its financial position; and
- the burden of proving these matters is on the petitioner.
Appointments over companies wound up on a Covid petition
In light of the above, insolvency practitioners considering taking an appointment as a liquidator over a company in compulsory liquidation should:
- Check whether the petition was presented between 1 March 2020 and 31 December 2020;
- Check with the Official Receiver/petitioning creditor as to whether the tests outlined above were addressed during the progression of the petition – this is more likely if the petition was presented in the High Court; and
- If the likely asset is an antecedent transaction claim, check whether other aspects of CIGA might affect realisations (see our article).
Presenting new petitions
As the months have progressed, there will inevitably have been pent-up demand from creditors who were unable to meet the threshold of the tests set out for Covid petitions above – predominantly as so many businesses will have been adversely affected by Covid – but whose debts remain unpaid by insolvent or intransigent debtor companies. Liabilities are only likely to increase by 31 December 2020, particularly with another rent quarter day falling due at Christmas.
From 1 January 2021 – unless the restrictions are extended further – creditors will be free to petition without the constraints of meeting the additional Covid tests above. To ensure a newly presented petitions are effective, creditors should:
- Check whether CIGA provisions have been further extended or additional/alternative measures introduced.
- If seeking to demonstrate the company is insolvent on the basis of an unmet statutory demand, produce a fresh demand, ensuring it is properly served and is brought to the attention of the relevant personnel at the debtor company (having regard to ongoing Covid related disruption/remote working/postal redirection etc).
- Check the insolvency status of the company – it may be subject to a stand-alone moratorium or already in an insolvency process.
- Be prepared for a longer petition process while the Court deals with a likely influx of petitions, and given limitations on court resources and remote hearings.
- If a landlord, note the voluntary Code of Practice for commercial property relationships during the Covid-19 pandemic, encouraging ‘transparency and collaboration’. Winding up a company is a nuclear option which should be used a last resort.