The UK Government has published its Bill outlining temporary restrictions on use of statutory demands and winding up petitions and other measures – the Corporate Insolvency and Governance Bill 2020.
These measures will apply to:
The Bill will:
The Bill gives struggling businesses a formal breathing space to pursue a rescue plan. It creates a moratorium during which no legal action can be taken against a company without leave of the court. It is vital to introduce the moratorium now to ensure that companies which are struggling as a direct result of the pandemic are given the opportunity to survive.
Take this example case study:
An SME clothing company, Example Fashion Ltd, suffered a bad debt of £250,000 after one of its major customers, a department store, entered administration. According to its customer’s administrator, there was very little hope of receiving any of the £250,000 owed through the administration.
The department store had been the company’s largest customer. However, following media stories about the poor financial status of the department store over the previous few months, the directors had worked hard at sourcing new customers so as not to be as dependant on the department store for business.
Accordingly, at the time the bad debt is suffered, the company has a healthy order book for the following six months, but it is not due to receive payment for any of the new customer orders for at least three months. The company is receiving payment in invoices from other, smaller customers but does not have sufficient cashflow to pay all of the debts that are due now, many of which relate to goods and services procured to fulfil the department store contract. The company is what is known as ‘cashflow insolvent’.
While most of its suppliers are supportive, a minority of the unpaid suppliers are threatening to take legal action against the company, and one has already served the company with a– a formal demand for payment that can be a precursor to a winding-up petition.
One of the directors intends to raise money for the company by re-mortgaging her own house. Once these funds are invested in the company, it will be able to repay its creditors. However, the funds will not be available for a few weeks and creditors are threatening legal action now, unconvinced that money will otherwise be forthcoming.
The directors seek advice from an insolvency practitioner (IP). From what the directors tell the IP, the IP believes that the company can be saved via this investment. The IP advises that the company enter a moratorium, a rescue process that will protect the indebted company from creditor action while the additional finance is raised.
The directors and the IP complete the necessary paperwork and file a notice and other documents at court, commencing a moratorium for an initial period of 20 business days. The IP is appointed monitor. Using the income from the smaller invoices, the company is able to pay its ongoing liabilities: wages, rent, goods and services supplied in the moratorium etc.
Unfortunately, soon after the moratorium is entered the director’s re-mortgage is delayed and it becomes apparent that the funds will not be available for a further 6 weeks. The directors tell the monitor about this. Based on the information given to the monitor by the director, the monitor continues to believe the investment will be made and that the moratorium will bring about the rescue of the company as a going concern.
Accordingly, the monitor does not bring the moratorium to an end.
After 15 business days the directors file for a 20-business day extension to the initial period; the monitor completes another statement that it is likely the moratorium will bring about the rescue of the company as a going concern. During this second 20-day period, the re-mortgage is completed, and the funds are injected into the company. At this point, the company ceases to be cashflow insolvent; it is able to pay all of its older debts in full and the ongoing debts incurred following entry into the moratorium. Accordingly, the monitor files a notice at court terminating the moratorium on the grounds that rescue of the company has been achieved.
The measures on statutory demands and winding-up petitions included in the Corporate Insolvency and Governance Bill are temporary measures.
The Bill helps struggling businesses by temporarily removing the threat of winding-up proceedings where unpaid debt is due to Covid-19. It introduces temporary provisions to void statutory demands issued against companies during the emergency. This gives businesses the opportunity to reach realistic and fair agreements with all creditors.
A company supplies ingredients to the restaurant trade and others. As a result of the coronavirus emergency, demand has fallen and so it is no longer able to meet the debts it owes to its own suppliers who start to pressure for payment. The directors are worried the company will be forced into liquidation by the suppliers it owes money to, and that if a winding-up petition is filed with the court then its customers will look elsewhere regardless of the outcome.
During the period that these measures apply, the company will be protected from certain actions its creditors might otherwise take:
Under the Bill creditors cannot rely upon an unpaid statutory demand as evidence of inability to pay debts in order to issue a winding-up petition against a company, effectively rendering the statutory demand void for that purpose. The new measure applies to all statutory demands served during the period which:
A statutory demand is prevented from forming the basis of a winding-up petition presented at any point after 27 April 2020.
A petition cannot be presented by a creditor during the period beginning with 27 April 2020 until 30 June 2020 or one month after the coming into force of the Bill, whichever is the later, unless the creditor has reasonable grounds for believing that:
As to the meaning of “financial effect”, it appears to be a low threshold. Coronavirus has a “financial effect” on a debtor if the debtor’s financial position worsens in consequence of, or for reasons relating to, coronavirus. However, there is no clear guidance as to how low this threshold is and how creditors should evidence their findings to the court.
Furthermore, given the court is required to consider whether the debtor’s inability to pay is due to coronavirus, these measures will undoubtedly result in additional court time being taken up for this review.#
If you have any questions in relation to any aspect of the Corporate Insolvency and Governance Bill 2020, or if you would like to discuss how to maintain or improve your business's cash flow during these uncertain and challenging times, please do not hesitate to contact Stephen Cowan, Managing Director of Yuill + Kyle.
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