COVID-19 Business Insolvency Measures
30 September 2021
The COVID-19 legislation enacted by the Government in response to the pandemic has impacted on many areas of law.
The Corporate Insolvency and Governance Act 2020 was enacted in June 2020 in order to help UK businesses avoid insolvency and to maximise their chances of survival during the economic uncertainty created by the pandemic and the government enforced social distancing measures including national lockdowns. It had three main measures to achieve this purpose: (1) to give companies breathing space within the insolvency regime, (2) to temporarily suspend parts of insolvency law to support directors to continue trading and to protect companies from aggressive creditor action; and (3) to provide temporary easements on company filing requirements.
One of the main suspensions of insolvency law has been the moratorium on the presentation of a winding up petition against a company and the moratorium on being able to rely on a statutory demand to prove a company is unable to pay its debts, unless you have reasonable grounds for believing COVID-19 has not had a financial effect on the company. These measures were backdated to 1 March 2020 and are due to be lifted on 30 September 2021, although not completely.
What is a statutory demand?
A Statutory Demand is a formal document which demands payment within 21-days, failing which a winding-up petition can be presented, as if payment is not made following service of a Statutory Demand, a creditor is able to rely on the non-payment as evidence of a company's insolvency.
Prior to the Act, serving a Statutory Demand was used as a debt recovery tool as often the threat of presentation of a winding-up petition was enough to get a debt paid, although creditors had to exercise caution in serving a Statutory Demand where the debt was disputed.
Moratorium on statutory demands
While the Act does not prevent a statutory demand from being served, it has effectively prevented their use as a debt recovery tool during the pandemic. Under the Act, a Statutory Demand served between 1 March 2020 and 30 September 2021 can only be relied upon unless you have reasonable grounds for believing COVID-19 has not had a financial effect on the company or the debt issues would have arisen anyway. Clearly without a detailed knowledge of a company's financial position, it is likely to be impossible to believe COVID-19 has not had a financial impact, particularly if the company claims it has.
What have the measure meant both for creditors and for struggling companies?
There is no doubt that the measures have helped companies to survive during the pandemic.
Insolvency Service figures show that in the 12-months ending 31 March 2021, 25.3 per 10,000 active companies entered liquidation, compared to 40.5 per 10,000 active companies in the 12-month period ending 31 March 2020. Indeed, there were approximately 55% fewer compulsory liquidations in 2020 compared to 2019, and the figures for the first half of 2021 are even less.
My experience during the pandemic has shown generally a much more constructive approach between companies over the payment of debts. Creditors have been forced to be more accommodating as their only formal option has been pursuing court proceedings (which they have wanted to avoid due to the backlog in the courts), or they have been quicker to write off the debt.
As for the debtor companies, the restrictions have perhaps given them breathing space to continue to trade, although it remains to be seen whether the restrictions have simply delayed the inevitable. Indeed, figures from the Insolvency Service show that voluntary liquidations are on the increase and the number in Q2 of 2021 is the highest since the start of the pandemic.
The current restrictions come to an end on 30 September 2021, but a new set of measures will come into force from 1 October 2021 which are (presently) to last until 31 March 2022.
It is clear that the Government is keen to avoid a deluge of company insolvencies and its aim with the new measures is to introduce a "tapering" that will help businesses to get back to normal without facing a "cliff-edge".
The new measures provide for continued protection for companies which owe commercial rent, and for companies owing debts under £10,000, as the moratorium on the presentation of winding up petitions in respect of such debts remains.
For debts over £10,000, a creditor will be able to serve a Statutory Demand and be able to rely on non-payment of the Statutory Demand as evidence of a company's inability to pay its debts.
However, the new measures do provide some breathing room as the creditor will not be able to present a winding-up petition unless it has served a Schedule 10 Notice (following a strict format) seeking the debtor company's proposals for payment of the debt and the debtor company has not made a satisfactory proposal within 21 days.
It seems that the Notice can be served at the same time as a Statutory Demand, but the Government's explanatory notes to the new measures makes it clear that a creditor will need to demonstrate that it has sought to negotiate payment of the debt and will need to explain why any such proposal of payment is not satisfactory.
What can creditors do in the meantime?
Prevention is better than cure so companies should ensure they have rigourous credit control regimes which prevent significant debts from building up. Maintaining a constructive dialogue with debtors is also key.
If a company does have a debt of more than £10,000, then it can serve a Statutory Demand and should also consider serving a Schedule 10 Notice. If this still does not lead to payment or satisfactory payment proposals, then winding-up should be considered.