Changes could end use of statutory demands as debt-recovery tool, says Fox Williams’ Ben Nolan
The Corporate Insolvency and Governance Bill is currently going through Parliament and, once approved, will introduce wide-ranging changes to the UK’s corporate insolvency regime.
The bill includes a number of temporary measures designed to protect businesses which are struggling as a result of the coronavirus pandemic. In particular, the bill seeks to remove the threat of statutory demands and winding-up petitions being served on companies which are unable to pay their debts as a result of the pandemic. This could be particularly relevant for travel companies hard hit by the coronavirus crisis and which are currently facing a spate of refund requests from customers who have had their holidays cancelled.
What are statutory demands?
Any creditor who is owed more than £750 by a company can serve a statutory demand on it, demanding payment of the amounts owed. If the company fails to pay the amounts owed within 21 days, or does not otherwise challenge the demand in court, it is deemed to be insolvent.
The creditor can then initiate winding-up proceedings and rely upon the unanswered statutory demand as proof that the company is insolvent and should be wound-up.
Statutory demands can be challenged if the underlying debt is disputed on substantial grounds, but where there is no such dispute statutory demands are a very effective debt-recovery tool. Companies will typically pay rather than run the risk of opposing insolvency proceedings on shaky grounds.
What does the bill say?
The government is introducing temporary restrictions on the use of statutory demands and winding-up petitions during the COVID-19 pandemic. Two key measures are being introduced which will have a significant effect on the use of statutory demands as a debt-recovery tool.
Firstly, statutory demands served between March 1, 2020, and 30 days after the coming into force of the bill, which is expected to be in late June or early July, cannot be used in support of winding-up proceedings commenced on or after April 27, 2020. These statutory demands will essentially be void, which will therefore prevent them from being used as a debt-recovery tool.
Secondly, the bill also prevents winding-up proceedings from being commenced by a creditor from April 27, 2020, to 30 days after the bill comes into force unless it has reasonable grounds for believing that:
- coronavirus has not had a “financial effect” on the company (the bill provides that coronavirus will be deemed to have a financial effect on a company if its “financial position worsens in consequence of, or for reasons relating to, coronavirus”); or
- the grounds which exist to wind-up the company would have existed even if coronavirus had not had a financial effect on the company.
Given that statutory demands are being used as a means of forcing travel companies to pay refunds for cancelled holidays, the bill will be widely welcomed by the travel industry and should (if passed) provide some breathing space for a limited period of time. In many cases, statutory demands which have been served on travel companies will be completely void.
Moreover, even if winding-up proceedings are brought, it will be difficult for the creditor to succeed in showing that coronavirus has not had a financial effect on the company or that grounds would have existed for winding up the company even if coronavirus had not had a financial effect on the company.
