With fears that insolvencies are set to rise this year once Government support is withdrawn and businesses must 'stand on their own two feet', it is important to understand what options are available to creditors to maximise their recovery of undisputed debts from individuals and companies alike.

As a starting point, under the Corporate Insolvency and Governance Act 2020 ("CIGA"), you cannot issue a statutory demand, which is a precursor to presenting a winding-up petition, against a company for an outstanding debt between 1 March 2020 and 31 March 2021 based on the company's inability to pay said debt. However, there are loopholes in the act so that, if you have reasonable grounds for believing COVID-19 has not had a financial effect on the company, or the debtor company would have been in financial distress in any event, you can still succeed in having a winding up order made against your debtor.

What is a statutory demand?

A statutory demand is a formal prescribed form which you issue to a debtor company as a warning shot that, unless payment is made within 21 days, you will proceed to then present a winding up petition under the Insolvency Act 1986. A debtor does have the option of applying to set this demand aside within 18 days if they have a reason to do so, for example if the debt is disputed.

What is a winding up petition?

A winding up petition is a powerful tool. A creditor can present a petition when an undisputed debt remains unpaid following expiry of the statutory demand. Under CIGA, there are temporary restrictions that prohibit winding up proceedings where non-payment is COVID-19 related. It is the death knell of a company and it is easy to see why many debtors often pay following a petition being presented.

These restrictions were due to come to an end on 31 December 2020 but have been extended until 31 March 2021.

Whilst it is hoped the restrictions will be lifted in April, it is possible the Government will extend this deadline again, so we have provided below some hints and tips should you wish to pursue insolvency proceedings in the interim.

Do the CIGA restrictions mean I cannot issue a statutory demands or present a winding up petition at all? The short answer is no. however, it is not as simple as it was before Covid.

Prior to CIGA, it will possible to issue the 21 day demand, present the petition and obtain the order relatively easily if the debtor did not respond. It was simply an exercise in filing the relevant documentation. However, CIGA has now provided additional documentary and evidential burdens hurdles to jump over.

The main difference is that there is an exception to CIGA in that a creditor can issue a statutory demand and then present the subsequent winding up petition if it has reasonable grounds for believing that:

  • Coronavirus has not had a financial effect on the debtor, or
  • The debtor would have been unable to pay its debts even if coronavirus had had a financial effect on the debtor.

"Financial effect" appears to be a low threshold, for example, if the debtor's financial position worsens because of, or for reasons relating to, coronavirus. It is therefore important to note the tips below on how to succeed in pursuing a debt down the insolvency route;

  • Checking the debtor's financial position pre and post Covid is critical. For example, if your debtor is a construction specialist, they would likely have been impacted significantly compared to, say, a supermarket. This due diligence exercise should encompass checking the latest Companies House filings, credit reports, or even a simple google search could yield some results if there is any publicity regarding recent earnings reports.
  • Assessing any reasons given for non-payment. Importantly, if the outstanding debt has recently accrued, has your debtor explained anything about them struggling in the current climate – whether this be financially or practically as a business? If they have, we would, subject to us providing legal advice, advise against issuing a petition otherwise you run the risk of being liable for your debtor's costs if the Court finds that your debtor has been negatively impacted by the current climate.
  • Was the debt outstanding before the Covid crisis? If the debt was outstanding pre-COVID-19, there is a higher chance of proving that the debtor's financial ability was not purely affected by COVID-19 and that the debtor was merely reluctant to pay for a debt before the financial/commercial impact of COVID-19.
  • Prepare for the long haul. Prior to COVID, it would not be impossible to get through the process from issuing the demand to being granted the winding up order within 2 months. However, now that it may be necessary to file additional documents or a witness statement affirming why you believe you fall into one of the exemptions above, along with delays in the Court process, it could easily take twice as long to obtain a result if the debtor does not pay following the presentation of the petition.
  • Engage in communication following the petition being presented. If the debtor makes contact after this point, it is not the end of the matter because you have a petition. You should still endeavour to reach a resolution, and if you enter a repayment plan, take into account the deadlines for advertising a petition (7 working days prior to the hearing) when deciding on the length as you may need to withdraw the petition or adjourn it based on what you agree.

Don't:

  • Leave it until to the eleventh hour to try and recover your debts. If the debt is undisputed and the debtor is a company, a winding up petition is an extremely powerful and effective tool.
  • Prior to this however, it is critical that you obtain legal advice to ascertain whether you may fall into one of the exemptions
  • Think a dispute is not a dispute because it is small, or seemingly trivial or petty. This is critical because a debtor could apply to set aside a statutory demand within 18 days of it, or could apply for injunctive relief to restrain the presentation or advertisement of a petition and this can have significant cost consequences for you.
  • Stop communication. Communication is key to all relationships. If you can reach an agreement with the debtor by way of settlement or instalments, this may be more cost-effective and beneficial to your business relationship going forward than proceeding with a statutory demand or petition.
  • Have unrealistic expectations. In some cases, a debtor will not pay even with a petition being presented, or more to the point may not be able to pay. As noted above, prepare for the long haul in terms of the timescales involved, but do not let this put you off trying to recover your debt at all.

In summary, It is important to note that it is not impossible to pursue insolvency proceedings despite the CIGA restrictions. However, it is advisable to tread on the side of caution, fully evaluate the current climate and your debtor's position before commencing insolvency proceedings and importantly, seeking independent legal advice.

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.