The Corporate Insolvency and Governance Bill – Restrictions on winding up petitions

At the time of writing, the Corporate Insolvency and Governance Bill is about to commence the House of Lords Committee Stage and is expected to become law at the end of June. This Bill will introduce some key changes to the law of corporate insolvency and is likely to be a welcome development for struggling businesses. However, businesses that require outstanding debts to be paid might not welcome the developments with such open arms.

Why has the UK Government introduced the Bill?

The Bill has been introduced in order to provide struggling companies with greater protection, in light of the ongoing COVID-19 pandemic. The economic consequences of COVID-19 will be far ranging and undoubtedly could not have been anticipated by many companies.

One of the key changes (upon which this update will focus) is the restriction on the use of winding up petitions. These proceedings can be raised by a creditor in circumstances where a debtor company is unable to pay its debts. Crucially, if applied in their current form, the relevant provisions of the Bill will be retrospective and therefore applicable to petitions presented on or after 27 April 2020.

What are the new rules?

There are two key new rules, where the ability of a creditor to present a winding up petition is restricted:

  1. Where a statutory demand has been served between 1 March 2020 and 30 June 2020 (at the earliest), no winding up petitions may be presented on or after 27 April 2020.

  2. Winding up petitions presented between 27 April 2020 and 30 June 2020 (at the earliest) are not competent unless one of the following exceptions applies:

(i) The creditor has reasonable grounds to believe that COVID-19 has not affected the debtor company financially; or
(ii) The creditor has reasonable grounds to believe that the debtor company would have been unable to pay its debts even if the debtor company had been unaffected financially by COVID-19.

The court must also be satisfied that the ground relied upon in the winding up petition would have been applicable in spite of the financial impact COVID-19 has had on the debtor company.

How are the courts applying the rules?

Although not yet in force, the legislation has already been considered by the English Courts in the recent judgment of Mr Justice Morgan in A Company (Injunction To Restrain Presentation of Petition) [2020] EWHC 1406 (Ch). As this Bill is UK-wide, the interpretation by the English courts is also relevant in Scotland.

In this case, which involved a landlord claiming payment of rent from a High Street retailer tenant, Mr Justice Morgan granted an urgent application to restrain a winding up petition on the basis of the Bill, even though it is not yet binding law.

The court’s decision was based on the following considerations:

  1. If a petition were to be laid before the court, realistically, it would be unlikely to be heard until after the new Bill becomes law. Mr Justice Morgan also noted that the relevant provisions are not likely to change prior to coming into force.

  2. It appeared that the COVID-19 pandemic had financially affected the debtor company prior to the petition being presented and, based on the facts, the petition would not have been required had COVID-19 not had this negative impact on the company’s finances.

  3. The likelihood of a change to the law is a matter which courts may take into account.
What do creditors need to be aware of in light of this?

This case will act as a very strong deterrent against creditors lodging winding up petitions in the current climate.

The willingness of the English Court to apply the provisions of the Bill, even though they are not yet law, is significant. It is likely other courts will follow suit and, any petitions which do not satisfy the Bill’s stringent criteria are likely to be refused.

If creditors do wish to petition to wind up a company, the wording of the Bill means that they face the burden of proving that COVID-19 has not affected the debtor company, or that the company would have been unable to pay its debts even if the COVID-19 pandemic had not occurred. Given the far-reaching impact of the pandemic, it may be difficult to find any business that has not been affected.

What about existing petitions?

The Bill not only has retrospective effect but it makes it quite clear that winding up orders granted after 27 April but before the Bill comes into force may be void. Indeed, during the second reading stage in the House of Commons, it was acknowledged that there could be a number of void winding up proceedings out there at the moment.

Creditors will undoubtedly face difficulties in satisfying the tests set out in the Bill and it remains to be seen how courts will deal with the practicalities (including the associated costs) of void winding up orders.

This article was co-authored by Charlotte Fleming.

How can we help?

If your company is facing the threat of winding up proceedings, or if your company wishes to pursue outstanding debts, please contact MacRoberts' experienced Commercial Dispute Resolution Team or our debt recovery specialists at Yuill + Kyle. We can offer bespoke debt recovery and insolvency advice tailored to your business’s circumstances.

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