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Restrictions on creditors taking corporate insolvency action due to end

We have been monitoring the Corporate Insolvency and Governance Act 2020 ('the Act') closely since it came into effect on 26 June 2020 (see our previous blog here). Under the Act, the government has the power to make further temporary modifications without these modifications needing to be passed through Parliament (Part 2 (paragraphs 1 to 11) of Schedule 4 to the Act).

Under the Act, a creditor cannot present a winding-up petition against a company based on a statutory demand that was served between 1 March 2020 and 30 September 2020, nor present a winding-up petition between 1 March and 30 September 2020 based on the company's inability to pay its debts unless it has reasonable grounds for believing COVID-19 has not had a financial effect on the company or the debt issues would have arisen anyway. This can be an onerous burden for a creditors and has deterred many from pursuing what is often the most effective and efficient method of recovering a debt.

Despite the temporary restriction, creditors are not completely barred from taking insolvency action all together. The court still has a discretion to make a winding-up order during the pandemic if it is satisfied that the company's inability to pay its debts would have arisen anyway. In many cases, this may just mean properly addressing evidentiary issues.  Significantly, the Act is concerned with corporate insolvency does not capture the issue of statutory demands and the filing of a bankruptcy petitions against individuals (including sole traders and unincorporated partnerships). There are currently no restrictions in place to prevent creditors recovering undisputed debts against individuals through insolvency proceedings.

Whilst it is still possible for the relevant period to be extended beyond 30 September 2020, the expiration of this temporary restriction is barely a week away and there has been no update from the government as to whether it will be.  If the period is not extended (as we suspect will be the case), as of 30 September 2020, creditors will be able to serve and rely upon statutory demands or winding-up petitions without them being declared void to recover debts against companies.


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Legal Disclaimer

Articles are intended as an introduction to the topic and do not constitute legal advice.