What is a winding up petition and/or a statutory demand?
A statutory demand is a written demand that a creditor can serve on a debtor company in the event that the company has not paid debts owed to the creditor, as and when they fall due. The statutory demand gives the company 21 days to respond and/or make payment of the debt before further action is taken by the creditor.
For a limited company, this further action is known as 'winding up' proceedings. 'Winding up' is a term for a legal procedure that results in a company being placed into compulsory liquidation by the Court and effectively signifies the end of the company, from a trading perspective. This article specifically focuses on winding up proceedings, being the procedure that has been mostly affected, following the changes implemented under the Corporate Insolvency and Governance Act 2020 ("CIGA 2020").
A Winding up Petition ("Petition") is a formal legal document that a creditor can serve on a company when it is unable to pay its debts to creditors, and is therefore deemed to be insolvent. The Petition is presented to the Court and asks the Court to place the company into compulsory liquidation, on the basis that it is just to do so. This is due to the evidence before the Court demonstrating that payment remains due to that creditor. Other creditors can support the action and generally, the more creditors that support a Petition, the more weight that is added to support the basis upon which a Court should consider granting a winding up order.
A change in the law relating to winding up proceedings
During the Covid-19 pandemic ("the Pandemic"), businesses sought protection from financial distress caused by the pandemic through temporary provisions implemented by the Government under CIGA. The Government have announced in this recent article that the temporary restrictions introduced under CIGA shall not be extended any further, and as a result, these restrictions ended on 31 March 2022. We consider that the reason the Government have taken this decision is largely due to the success of the vaccine rollout and due to the crippling effect that draconian lockdowns had on businesses in 2020 and 2021 respectively.
So what restrictions have now ended?
The temporary provisions that ended on 31 March 2022 are as follows:
- The requirement for a creditor to serve a Schedule 10 notice on a debtor company 21 days before they proceed with issuing a Petition. The purpose of the Schedule 10 notice was that it afforded debtor companies the opportunity to submit payment proposals to a creditor for their consideration, thus giving the debtor company further time to pay. From 31 March 2022, even if a debtor company is experiencing financial hardship, creditors are able to proceed with issuing a Petition without having to serve a Schedule 10 notice.
- The requirement that the debt must be to the value of £10,000 or more to proceed with a Petition. From 31 March 2022, the debt owed by a company to a creditor must be to the value of £750 or more for a Petition to be served. This is a big difference to the amount imposed under CIGA of £10,000.
The removal of the temporary provisions are bound to cause an upturn in the number of Petitions issued against companies, many of which are still, understandably, attempting to recover from the effects of the Pandemic.
However, despite the above changes, the newly introduced Commercial Rent (Coronavirus) Act 2022 which was introduced on 24 March 2022 does still contain one restriction. This essentially prohibits a creditor from presenting a Petition solely in relation to a protected rent debt and this restriction has recently come into force from 1 April 2022. Further details of this are outlined within our article here and the Government's article here.
When can a Petition be issued?
A Petition can be served for a debt of £750.00 or more as a result of an expired unsatisfied statutory demand. However there is no formal requirement for a statutory demand to be served in the first instance and it is simply possible to prove to the satisfaction of the Court that the company is unable to pay its debts as and when they fall due (usually by simply sending a letter of claim). It is also possible to serve a Petition where a creditor has a judgment in its favour and has attempted to enforce that judgment but it is returned unsatisfied, either for the full amount or part of it. Once a creditor has served the Petition on the company, a hearing will be listed with the Court and a Judge will consider whether the company is deemed to be insolvent, and subsequently, whether it is just for the company to be wound up.
The aim of doing so is to prevent the directors being permitted to continue wrongfully trading the company when it is inappropriate to do so, and to avoid other creditors incurring debts with a company that they will subsequently be unable to recover. This is on the basis that directors have duties under the Companies Act 2006 to act in the best interests of the company. Arguably, if insolvency is unavoidable, it is not in the company's best interests for the directors to continue trading and in such circumstances, directors should seek urgent advice from their accountant or an Insolvency Practitioner, at the earliest opportunity.
If you have received a winding up petition or a statutory demand, we strongly recommend that you seek independent legal advice as soon as practically possible.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
