CIGA 2.0: The New Restrictions on Winding-Up

Authors
Paul Fradley

CIGA 2.0: The New Restrictions on Winding-Up

On 30 September 2021 the current restrictions on winding-up petitions and statutory demands implemented in the Corporate Insolvency and Governance Act 2020 (‘CIGA’) will come to an end (‘the Original Restrictions’). They will be replaced by new provisions introduced by way of amendment to Schedule 10 to CIGA (‘the New Restrictions’).1 The Original Restrictions were originally due to expire on 30 September 2020. They were initially extended to 31 December 20202 and then further extended as the pandemic continued to 31 March 2021,3 30 June 2021,4 and finally to 30 September 2021.5 The Original Restrictions, along with the other provisions of CIGA, were discussed in the July 2020 “Special Edition” of the Digest by Mark Phillips QC, William Willson and Clara Johnson and the restrictions on winding-up petitions and statutory demands in particular were discussed by Hilary Stonefrost and Daniel Judd.

Now that restrictions on businesses have (hopefully finally) come to an end, the Government has decided not to extend the Original Restrictions beyond 30 September 2021. Instead, the Government has announced the New Restrictions, which are designed to “create a tapering effect” for business and “protect companies from aggressive creditor enforcement as the economy opens up whilst allowing business to get back to a more normal way of working”.6 The New Restrictions will “help business get back to normal without facing a “cliff edge” following withdrawal of the current provisions”.7 The Government hopes these will give companies which are “viable but cash poor” a breathing space to recover and where necessary work out a rescue.8

The New Restrictions are currently slated to last from 1 October 2021 to 31 March 2022. A creditor may not present a winding-up petition on the ground that a “company is unable to pay its debts” without satisfying four conditions.9 The restrictions apply to all form of creditors’ petitions including those based on statutory demands and judgment debts.10 The four conditions which creditors must satisfy are:

A. The creditor is owed a debt by the company which is: (a) for an amount which is liquidated, (b) has fallen due for repayment, and (c) is not an “excluded debt”.11

Requirements (a) and (b) restrict certain creditors from petitioning for winding-up, in particular those with prospective or contingent debts.12 An “excluded debt” means “means a debt in respect of rent, or any sum or other payment that a tenant is liable to pay” under a “relevant business tenancy and which is unpaid by reason of the financial effect of coronavirus.”13 Commercial rent creditors will be able to present a petition if they can demonstrate that non-payment of the debt is not related to coronavirus – a provision which tracks a requirement in the Original Restrictions.14 The restriction on presenting petitions in respect of debts unpaid by reason of the financial effect of coronavirus in the Original Restrictions will therefore continue for commercial rent debts but not for other types of debt. The Government have explained that this provision is designed not to undermine the extension of the moratorium on the forfeiture of commercial tenancies until 31 March 2022, which itself is a holding position awaiting a rent arbitration scheme being proposed by primary legislation.15

B. The creditor has delivered a written notice to the company with the content specified in para 1(5) and at the location specified in paras 1(6)-(7).16

The notice must include details of the debt, a statement that the creditor is seeking the company’s proposal for payment of the debt, and “a statement that if no proposal to the creditor’s satisfaction is made within the period of 21 days beginning with the date on which the notice is delivered, the creditor intends to present a petition to the court for the winding-up of the company”.17 This provision is broadly similar to the content of a statutory demand,18 however, it refers to a proposal for payment of the debt rather than the payment of the debt. The opportunity to make proposals for payment of the debt is central to the Government’s intention that viable but cash poor businesses should be supported to recover from the effects of the pandemic.19

C. “[A]t end of the period of 21 days beginning with the day on which condition B was met the company has not made a proposal for the payment of the debt that is to the creditor’s satisfaction”.20

This condition naturally dovetails with Condition B and ensures that creditors wait 21 days after the delivery of the notice before presenting a petition. The focus of Condition C is on the absence of a proposal which is satisfactory to the creditor. It is an open question whether the court will impose any limitation on the creditor’s decision, for example if a creditor unreasonably or irrationally rejected a proposal.21 Unlike in the context of bankruptcy petitions there is no express qualification that an offer must not be unreasonably refused.22 However, having no form of limitation on a creditors’ decision making is inconsistent with the Government’s stated ambition of preventing aggressive creditor enforcement.23 The fact that a winding-up petition must (if appropriate) contain a summary of the reasons why proposals for payment are not satisfactory indicates that some form of court consideration of the creditor’s decision is envisaged.24 Creditors would be ill-advised not to engage with any proposal from the company for the repayment of their debt.

D. The petition debt (or the combination of creditors’ debts) exceeds £10,000.25

Unlike in bankruptcy,26 there has prior to the Original Restrictions been a statutory minimum debt for a winding-up petition, but the court has long depreciated the presentation of a petition where the debt does not exceed the statutory demand limit (currently £750).27 Condition D will prevent creditors from seeking to wind-up companies for relatively small debts. The Government view this provision as providing additional benefits for SMEs who are more likely to have creditors with debts of under £10,000.28

A creditor has the right to apply to the court under para 1(9) of Schedule 10 to CIGA (as amended) for an order that Conditions B and C should not apply, or that condition C shall apply with a shorter time period than 21 days. The court is not empowered to disapply Condition D. There is no indication in the Amendment Regulations about the grounds on which a creditor will apply or the test that the court will apply when determining whether to grant an order under para 1(9). The Amendment Regulations also modify rule 7.5(1) of the Insolvency Rules 2016 so as to require in winding-up petitions a statement that: (a) the requirements in para 1 of Schedule 10 to CIGA are met, and (b) that no proposals for the payment of the debt have been made, or a summary of the reasons why the proposals are not to the creditor’s satisfaction (as the case may be).29

The continued commitment to supporting businesses, especially SMEs, through the pandemic and its aftermath is to be welcomed. The Amendment Regulations will give businesses a 6-month breathing space in which to adjust to what will hopefully be post-pandemic life and encourage creditors to accept proposals for payment which safeguard jobs and livelihoods. For creditors the New Restrictions represent a step towards the return of the normal functioning of the winding-up process and an end to the period in which they have largely been without a remedy in respect of the sums they are owed.

1Corporate Insolvency and Governance Act 2020 (Coronavirus) (Amendment of Schedule 10) Regulations 2021 (‘the Amendment Regulations’).

2Corporate Insolvency and Governance Act 2020 (Coronavirus) (Extension of the Relevant Period) Regulations 2020/1031.

3Corporate Insolvency and Governance Act 2020 (Coronavirus) (Extension of the Relevant Period) (No. 2) Regulations 2020/1483.

4Corporate Insolvency and Governance Act 2020 (Coronavirus) (Extension of the Relevant Period) Regulations 2021/375.

5Corporate Insolvency and Governance Act 2020 (Coronavirus) (Extension of the Relevant Period) (No. 2) Regulations 2021/718.

6Explanatory Memorandum to the Amendment Regulations, para 7.3.

7Explanatory Memorandum to the Amendment Regulations, para 7.1.

8Explanatory Memorandum to the Amendment Regulations, paras 7.3 and 12.1.

9Schedule 10 to CIGA, para 1(1) and 4(1).

10Where the company is deemed to be “unable to pay its debts” by section 123 of the Insolvency Act 1986 (‘the 1986 Act’).

11Schedule 10 to CIGA, para 1(2).

12See section 124 of the 1986 Act and Re Wolf Rock (Cornwall) Ltd [2020] EWHC 2500 (Ch), [2020] Bus LR 2348, [48].

13Schedule 10 to CIGA, para 4(3).

14Namely that the “relevant ground would apply even if coronavirus had not had a financial effect on the company”: see Re a Company (Application to Restrain Advertisement) [2020] EWHC 1551 (Ch), [40]-[44].

15Explanatory Memorandum to the Amendment Regulations, para 7.4.

16Schedule 10 to CIGA, para 1(4).

17Schedule 10 to CIGA, para 1(5).

18See rule 7.3 of the Insolvency Rules 2016.

19Explanatory Memorandum to the Amendment Regulations, para 7.3.

20Schedule 10 to CIGA, para 1(7).

21The courts have accepted such a limitation as an implied term in the exercise of contractual discretion: Braganza v BP Shipping Ltd [2015] UKSC 17.

22See section 271(3) of the 1986 Act and HMRC v Garwood [2012] BPIR 575, [23].

23Explanatory Memorandum to the Amendment Regulations, para 7.3.

24Schedule 10 to CIGA, para 2(2).

25Schedule 10 to CIGA, para 1(8).

26Where a minimum debt of £5,000 must be demonstrated: section 267 of the 1986 Act.

27/sup>See French, ‘Applications to Wind-up Companies’ (4th ed), 7.376-7.381.

28Explanatory Memorandum to the Amendment Regulations, para 12.1.

29Schedule 10 to CIGA, para 2(2).

The content of the Digest is provided to you for information purposes only, and not for the purpose of providing legal advice. If you have a legal issue, you should consult a suitably-qualified lawyer. The content of the Digest represents the views of the authors, and may not represent the views of other Members of Chambers. Members of Chambers practice as individuals and are not in partnership with one another.
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