Further to our blog last week regarding the restrictions on presentation of winding-up petitions being (partially) lifted, the draft legislation replacing the existing restrictions has now been published and is due to come into force on 29 September 2021.
Following the end of the current restrictions on 30 September 2021 (please see our previous blogs for further detail on current restrictions), new rules on presenting a winding-up petition will be in force from 1 October 2021 to 31 March 2022. In order for creditors to present petitions on the ground that a company is unable to pay its debts, certain “new” conditions must be met.
Debts in respect of commercial leases
As expected, there remains a prohibition on presenting a petition in relation any debt due under a Landlord and Tenant Act 1954 lease (i.e. not just rent arrears). However, this prohibition only applies if the debt is unpaid by reason of a financial effect of coronavirus. This “coronavirus test” is the same as the test under the previous restrictions, so it is likely that the existing case law will be followed (please see our latest blog on the “coronavirus test” here).
The new legislation therefore continues to protect commercial tenants, some of whom have significant rent arrears that have accrued since March 2020. The ban on presenting winding-up petitions, coupled with the fact that commercial tenants remain protected from eviction until 25 March 2022 may aggrieve many landlords. Unlike the proposals for arbitration, this restriction is in relation to any debt payable under the lease, so will include unpaid service charge and insurance payments. In addition, the restrictions are not limited to tenants in hard-hit sectors (such as retail and hospitality), but apply across the board. Given that there are no longer any restrictions on businesses opening, and trade is seeing a return to normal, we may see more winding up petitions as the impact of coronavirus on a business lessens.
Other petition debts
In respect of non-rent debts the new rules provide that 4 conditions must be met:
- Condition one: the petition debt must (a) be for a liquidated amount, (b) have fallen due and (c) not be an ‘excluded debt’ (i.e. debts in respect of commercial leases – see above).
- Condition two: the creditor must deliver written notice (which is effectively a demand), seeking the debtor company’s proposals for the payment of the debt:
- The court may waive this condition upon application by the petitioning creditor. However, there are no grounds specified for the basis of such an application, so it remains to be seen how the court will exercise its discretion here.
- This should provide greater flexibility and streamline of the process for creditors to recover debts in appropriate cases. However, the uncertainty of how this discretion will be used may dissuade petitions until there are some established precedent.
- Condition three: a satisfactory proposal (in the opinion of the petitioning creditor) for the payment of debts has not been made within 21 days of providing written notice (in condition two):
- Under pre-COVID winding-up procedures, petitioning creditors could rely on a 2-day letter as evidence of inability to pay as the basis of a winding up petition. Under the new rules, they will have to wait 3 weeks to be able to proceed.
- In addition, if the proposals are unsatisfactory, the petitioning creditor must explain why they have formed that view. Again, it remains to be seen how much scrutiny the court will give to these reasons and whether leniency will be given to the debtor or the petitioner.
- However, as with condition two, the court may waive condition three or make the time for providing proposals shorter. Again, no grounds are specified.
- Condition four: the petition debt is £10,000 or more.
- Under current legislation, the threshold is £750. The increase to £10,000 seems to be intended to protect smaller businesses and decrease the number of debts that can form the basis of a petition.
- However, for those smaller businesses that might have hoped to proceed with a winding up petition to collect overdue debts, this could have the opposite impact, by limiting its debt collection options and ability to recover monies owed to it.
Save for in relation to commercial leases (see above), the draft legislation has removed the “coronavirus test” (i.e. the assessment of whether the financial difficulty experienced by a business is due to the impact of the COVID-19 pandemic). There is now more of a balance between creditor and debtor interests in contrast to the (almost) blanket prohibition that has been in place since these restrictions were first introduced.
Although creditors will have an easier route to presenting winding up petitions than the current restrictions allow, there remains a number of hoops to jump through with measures still protecting debtors. Allowing debtors to make a proposal provides further opportunity to prevent a winding up petition being made and, much like the proposed arbitration rules for rent arrears, demonstrates a legislative push towards achieving consensual deals.