Advice Articles

The Restrictions on Winding Up Petitions are Changing

Advice Articles

Despite economic pressure placed on businesses during the Covid-19 pandemic, fewer businesses have faced insolvency thanks to temporary restrictions brought in under the Corporate Insolvency and Governance Act 2020 (CIGA).

These measures aimed to help businesses avoid insolvency and provide them with protection from creditor enforcement action.

As the economy returns to pre-pandemic levels of activity, the government has started to scale down these support provided to UK businesses and withdraw, at least in part, some of the protections currently afforded.

What has changed since 1 October 2021?

Government support packages and restrictions on creditors’ actions had made it difficult to petition for the winding up of a debtor company, but those restrictions expired on 30 September 2021.

From 1 October 2021, the financial effect of the pandemic will no longer be considered in order for creditors to present a petition based on an unpaid statutory demand. However, there will still be restrictions on their ability to file a winding-up petition.

These include:

1. Introduction of a £10,000 threshold in order to protect businesses from creditors insisting on repayment of relatively small debts

2. Introduction of a 21-day notice period for the debtor company to propose repayment terms before the creditors can proceed with winding up action

These measures will be in force until 31 March 2022.

What does this mean for companies in financial difficulties?

Undoubtedly, winding up petitions will be a renewed threat for many businesses, with many creditors eyeing the lifting of full restrictions keenly, and many debtors considering legal advice to protect themselves.

But the legislative text behind the measures designed to provide some clarity on how the proposals would work in practice have left some practitioners and businesses with concerns. Indeed, a company faced with the prospect of a petition should also consider the following:

The £10,000 Threshold

This threshold is not only subject to a single debt. An accumulation of debt to the same creditor that exceeds £10,000 is enough to validate a winding up petition.

Similarly, creditors of the same company can come together in a class action to present a petition, if the combined debts exceed £10,000.

The 21-Day Window

In addition to the 21-day window for a debtor to respond, a winding up petition can only be presented if the debtor company has not made proposals to repay the debt, or if the creditor has rejected proposals and explained the reasons for rejection.

How can I protect my business?

If you have any serious concerns about cashflow or are faced with the threat of being wound up, we advise you to seek legal and financial advice as soon as possible – ideally before you receive a request from HMRC, a creditor, or their solicitor, for payment proposals.

It is also possible to avoid a winding up petition through entering administration to restructure your business or negotiating a Creditors Voluntary Arrangement (CVA).

Remember, act quickly and seek professional advice to understand all the options available to you and your business.

Find out more

Here are a few helpful links if you want to find out more about this topic:

End of temporary insolvency measures’ Official Government press release

Corporate Insolvency and Government Act 2020 (CIGA 2020) full report

All Government Business Support schemes for Coronavirus on official Gov.uk site

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