The landscape relating to winding-up petitions has changed due to the COVID-19 pandemic. Hundreds of petitions have been adjourned already, and the new Temporary Insolvency Practice Direction has now adjourned all hearings due to take place before 21 April across the country. It also sets out new procedures and timings for the listing and re-listing of petitions, with many hearings in London and the regions moving to hearings by video-conference for the foreseeable future.
It was thought that a moratorium might be imposed on winding up petitions to ease the pressure on companies faced with cash flow issues as a consequence of Covid-19, but the announcement about the changes to the UK insolvency legislation made no mention of this. Given the fact that there are now temporary court procedures in place to deal with winding up petitions over the coming months, we do not expect the changes in the UK insolvency legislation to invalidate existing petitions but it is possible that directors will be able to apply for an extended moratorium, whether they can do if there is an existing petition remains to be seen when the draft legislation is published. For now, it is clear winding-up petitions can be issued. So should you?
Timing issues for petitioning creditors
It could be many months before the hearing of a winding-up petition, and unless it is a public interest petition, it is unlikely to be expedited.
Any creditor using the process will need to take this into account since in some cases their action may not see a reaction for some time, particularly if a company is itself in lockdown and trading has come to a halt as the pressure to preserve a trading position may not be as great as they were previously.
There are also potential barriers to presenting a winding up petition given current social distancing measures, not least, how does the petitioning creditor serve the petition if the company has shut the premises (albeit only temporarily)?
Finding someone willing to carry out service may also be difficult as well as there being nobody present on site to serve.
Payments may be at risk
Even if a petition elicits payment, petitioners should also consider, with added pressure on the court system, the speed at which a petition can be withdrawn could also be delayed.
If a company is willing or able to settle or pay the petition debt it would usually be conditional upon the withdrawal of the petition. If the petition cannot be withdrawn quickly, there is a risk that other creditors will find out about it and support it.
If a supporting creditor takes over carriage of the petition and eventually obtains a winding up order any petitioner who has received payment, will have to repay this if it was paid using company monies under s127 of the Insolvency Act 1986 – for that reason it would better for the petitioner to insist on payment from a third party.
Impact on companies
There are still many companies who would need to deal with a petition now, not least because of the complications that arise due to s127 Insolvency Act 1986.
S127 states that, in a winding up by the court, any disposition of a company’s property made after the commencement of the winding up is void unless the court makes a validation order in relation to the transaction.
Whilst this only applies if a winding-up order is made, the commencement of the winding up is deemed to be the time of presentation of the winding-up petition, so any disposition following issue of the petition is potentially at risk (assuming of course the company can continue trading after the petition has been issued, and its company’s account not frozen by a financier).
It may now take longer to apply for a validation order – more so where such application is not considered ‘urgent’ (as appears to be the case currently in London) which would put additional pressure on the company.
Accordingly there remain good reasons for a company to want to reach an acceptable position with a creditor quickly (if it can) upon receipt of a petition.
Note that for many companies expecting existing petitions to be heard imminently, adjournments may cause particular hardship in the circumstances, particularly for those who were going to defend them and are now facing a period of additional uncertainty whilst they wait for it to be re-listed.
Viable option for landlords?
Whilst landlords are currently prevented from forfeiting a lease for non-payment of rent (due to restrictions announced as a consequence of Covid-19), winding-up petitions are still an option.
One might argue that this circumvents the intended effect of preventing forfeiture, but of course many landlords are facing hardship in the current climate too. Like any other petitioner, they should consider the points discussed here in deciding whether to take that action.
As matters stand, winding-up petitions can still be issued, and there is a route map in place for dealing with them over the next few months. In this unprecedented climate, extra thought may be required as to whether a petition against a particular company is likely to achieve the petitioner’s goals.