The Corporate Insolvency and Governance Act 2020 came into force on 26 June 2020 (“the Act”). The Act makes a number of substantial corporate insolvency changes, but also temporary provisions restricting action to wind up companies in light of the coronavirus.
A statutory demand is often used as a tool to demand payment of an undisputed debt. A precursor to issuing a winding-up petition, it is often a robust way to apply pressure for payment of an undisputed debt. A company that fails to respond or pay a statutory demand is presumed to be unable to pay its debts, which satisfies the main ground on which a winding-up order may be made.
The Act aims to prevent aggressive creditor action and encourage resolutions to be reached between the parties.
The Act provides:
- A blanket restriction that prevents winding-up petitions from being presented to the court if it is based on a debtor’s failure to company with a statutory demand which was served during the period 1 March 2020 (it has a retrospective effect) until 30 September 2020; and
- If there are other valid grounds to present a petition, a creditor will, in addition, have to show the court that it has reasonable grounds for believing coronavirus has not had a financial effect on the company or the facts by reference to which the relevant ground applies would have arisen even if coronavirus had not had a financial effect on the company.
It is impossible at this stage to predict what is meant by “financial effect” but commentators believe this is likely to be a low threshold. It may be particularly difficult to prove there has been no financial effect against debtors for example in the non-essential retail, hospitality and leisure sectors. It should also be borne in mind that a debt which pre-dates the pandemic, alone, may not be sufficient to justify the presentation of a petition.
Whilst it is technically still possible to serve a statutory demand, the impact is unlikely to be as significant without the threat of a winding-up petition following. Debtors should be aware that this is only a temporary reprieve and once lifted creditors will be able to take action as they see fit.
For the time being, if a creditor wants to consider insolvency action, each case should be assessed on its own set of circumstances. If you are owed a significant sum of money from a corporate organisation and are wondering the best way to seek payment, please do contact us so we can help you to assess the best way forward.