The UK Government yesterday announced that it will proceed with the phasing out of temporary measures introduced to protect businesses from creditor action during the COVID-19 pandemic, whilst also announcing new measures to protect smaller businesses from winding up petitions. The legislation required to implement these amendments was laid before Parliament yesterday and will come into force on 29 September 2021.
The new measures will be in place from 1 October 2021 until 31 March 2022, and have the practical effect that a creditor will only be able to present a winding up petition against a debtor where:
- the debtor owes the creditor(s) at least £10,000;
- the creditor has issued written notice of the debt to the debtor, and sought payment proposals for the outstanding debt; and
- the debtor has not made a payment proposal satisfactory to the creditor within 21 days of delivery of the written notice.
Although the Government announced that new measures would protect smaller businesses from winding up petitions, under the relevant legislation released yesterday, the changes will apply to all businesses, whatever their size.
Any remaining hopes for landlords planning to use winding-up petitions from 1 October as a means of recovering rent arrears from tenants have been dashed. The new measures will replace the existing restrictions and will continue to restrict commercial landlords from presenting winding up petitions in respect of unpaid amounts due under commercial leases, regardless of the amount owing, unless the landlord can show that the non-payment is not down to a financial effect of coronavirus.
This phasing out of support was foreshadowed by announcements made by the Government in June and August, and follows previous extensions of the pandemic insolvency protection measures. Due to expire at the end of March 2022, the new measures track the extension to restrictions on commercial lease forfeitures announced in June 2021.
Other than the above, and landlords’ use of CRAR, the remaining package of temporary protections introduced at the outset of the pandemic will fall away at the end of this month.
Observations on the new measures
A debtor will need to owe at least £10,000 before a creditor can present a winding up petition based on the debtor’s inability to pay its debts. Whilst this makes sense for petitions based on a statutory demand (for which the current threshold is £750), there is currently no financial threshold for petitions based on an unsatisfied judgment debt, or on petitions where the creditor proves to the satisfaction of the court that the debtor is cashflow or balance sheet insolvent. For small companies in particular, this new financial threshold could provide significant protection.
The legislation provides explicit requirements that must be met when giving notice to the debtor, including statements in relation to the 21 day proposal period. Creditors will need to take care that those requirements are met, as failure to do so risks invalidating the notice.
The new measures will require creditors to seek payment proposals from debtor businesses prior to commencing winding up actions, and provide that debtor with a 21 day period to respond. This 21 day period may be shortened by an application to the court.
In the event that the debtor does come up with a payment proposal, it must still be satisfactory to the creditor. If it is not, the creditor may still proceed with a winding up petition. The current legislation seems to leave it to the discretion of the relevant creditor as to whether a debtor’s payment proposal is satisfactory. There is no requirement to negotiate. If the creditor considers the proposals to be unsatisfactory, it has to explain why in the petition. Whether the debtor and the court have to take the explanation at face value or whether the court will apply a level of scrutiny to the explanation remains to be seen.
Potentially, the changes leave commercial landlords worse off than before. Not only will they be prevented in most cases from using winding up petitions to enforce commercial rent arrears, but they may find that their tenants pay other creditors who will be able to use petitions in priority to landlords in order to avoid such action.