Winding up petitions – an update

In March 2020, temporary provisions were implemented by the government under the Corporate Insolvency and Governance Act 2020 (CIGA) to allow UK businesses a level of protection against a creditor presenting a winding up petition against it.

That level of protection has changed, and new temporary provisions introduced by the CIGA Schedule 10 Regulations were made effective on 1 October 2021, until 31 March 2022.

What’s new?

The CIGA Schedule 10 Regulations still provide a level of protection for businesses; however, creditors will not need to consider the financial effect of the pandemic when considering winding up action, as they did previously.

Instead, there are four conditions that must be met:

• the debt is for a liquidated sum (a specific amount due under an agreement or contract, such as invoices for goods, but not for rent or other charges under a relevant business tenancy)
• the creditor has delivered a written notice (“condition B notice”) to the business with a statement that it is seeking the debtor’s reasonable proposals for the repayment of the debt within 21 days, failing which, the creditor may petition for the winding up of the business
• that 21 days has passed since a condition B notice was delivered to the business and a satisfactory proposal for repayment has not been received
• the debt is at least £10,000.

The condition B notice is designed to encourage engagement between a creditor and its debtor, and in the absence of any visibility on the financial or asset position of a debtor, a creditor may not consider there is an alternative, cost effective action.

The legislation for the new process appears to leave it up to the creditor as to whether a payment proposal is deemed reasonable, and the creditor is under no obligation to counter propose. However, it is likely that a court will expect a good reason for a creditor to have rejected a fair proposal if a winding up petition is filed. There are no guidelines on acceptance or rejection parameters by the court, so until tested, it is unclear how the court will decide.

A condition B notice does not replace a statutory demand, the non-compulsory prerequisite to a winding up petition, served on the basis that in accordance with Sections 267 and 268 of the Insolvency Act 1986, a debtor cannot pay its debts as they fall due.

It should always be reiterated that the court states a winding up petition should not be used as a debt recovery tool, but it will certainly focus a debtor’s attention on engaging and resolving the unpaid debt.

Any creditor considering this action, or any debtor facing it, should seek legal advice to ensure that it is handled properly.