Temporary restrictions on the presentation of winding up petitions and the making of winding up orders due to the COVID-19 pandemic
June 1, 2020
The restrictions on the presentation of winding up petitions and on the making of winding up orders proposed in the Corporate Insolvency and Governance Bill (“CIGB”) provide a series of temporary measures intended to alleviate the inevitable financial pressures felt by many companies as a result of the COVID-19 pandemic. This note examines the scope of those restrictions; from the issuing of statutory demands, to the effect of the CIGB on winding up orders already made.
The CIGB is not yet in force, but is due to next be considered on 3 June 2020. For the avoidance of doubt, the period during which the below provisions will be applicable is deemed to end one month after Schedule 10 of the CIGB, in its entirety, comes into force. This is so even where a specific provision has retrospective effect and will be regarded, pursuant to the CIGB, as having come into force on 27 April 2020.
Pursuant to the CIGB, no petition can be presented to the Court on or after 27 April 2020, in respect of a statutory demand which has been served on a company in the period between 1 March 2020 and one month after the coming into force of Schedule 10 of the CIGB.
This specific provision, of course, will be regarded as having come into force on 27 April 2020.
The General Rule
The general rule is that winding up petitions cannot be presented and winding up orders cannot be made in the period between 27 April 2020 and one month after the coming into force of Schedule 10 of the CIGB (“the Relevant Period”), unless coronavirus has not had a financial effect on the company (“the General Rule”). The CIGB goes on to explain that:
“…coronavirus has a “financial effect” on a company if (and only if) the company’s financial position worsens in consequence of, or for reasons relating to, coronavirus”.
Again, this specific provision will be regarded, pursuant to the CIGB, as having come into force on 27 April 2020; but the period during which it applies will not end until one month after Schedule 10 of the CIGB, in its entirety, comes into force.
Exceptions to the General Rule
There are exceptions to the General Rule (“the Exceptions”). Winding up petitions can be presented and winding up orders can be made during the Relevant Period even if coronavirus has had a financial effect on the company:
- in circumstances where the petition will be, or has been, presented pursuant to section 123(1)(a) to (d) of the Insolvency Act 1986, if the facts by reference to which the relevant ground applies would still have arisen if coronavirus had not had a financial effect on the company; or
- in circumstances where the petition will be, or has been, presented pursuant to section 123(1)(e) or (2) of the Insolvency Act 1986, if the relevant ground would still apply even if coronavirus had not had a financial effect on the company.
An important practical consideration is that the CIGB temporarily modifies rule 7.5(1) of the Insolvency Rules 2016 (contents of the petition) to provide that a winding up petition must now contain a statement to the effect that the petitioner considers that one of the Exceptions is met (and therefore the petition can be presented, and a winding up order is able to be made (if the usual tests are also satisfied), pursuant to the CIGB).
Petitions presented and Orders made before the coming into force of the CIGB
Where a petition has been presented in the period on or after 27 April 2020, but before Schedule 10 of the CIGB came into force, if the Court is satisfied that the petition should not have been presented pursuant to the General Rule and the Exceptions in the CIGB:
“…the court may make such order as it thinks appropriate to restore the position to what it would have been if the petition had not been presented.”
Furthermore, where a winding up order has been made against a company in the period on or after 27 April 2020, but before Schedule 10 of the CIGB came into force, if the order is not one the Court could make pursuant to the General Rule and the Exceptions in the CIGB:
“…[t]he court is to be regarded as having had no power to make the order (and, accordingly, the order is to be regarded as void).”
An interesting point is that pursuant to the CIGB, the usual rules in relation to the advertisement of a winding up petition do not apply:
“…until such time as the court has made a determination in relation to the question of whether it is likely that the court will be able to make an order under section 122(1)(f)…”.
This suggests that, in practice, the Court will have a preliminary decision to make as to whether or not the CIGB would permit a winding up order to be made in the circumstances of the case. The Court will only expect the formalities as to notice of the advertisement to be complied with after this initial determination, and only if the Court decides that it is likely to be able to make a winding up order pursuant to the CIBG.
Furthermore, the CIGB temporarily modifies the deemed date of the commencement of the winding up of a company. Pursuant to the CIGB, for petitions presented during the Relevant Period the commencement of the winding up is at the date of the winding up order, not on the presentation of the petition (as was previously the case pursuant to section 129(2) of the Insolvency Act 1986). This will relieve companies of the usual potential concerns in relation to post-petition dispositions pursuant to section 127 of the Insolvency Act 1986; and should mean that a company’s bank account will not be frozen by the bank following the presentation of a petition.
The CIGB can be said to impose an almost impossible burden on creditors tasked with being able to properly ascertain whether or not a debtor company has failed to satisfy outstanding debts due to the consequences of coronavirus (in which case, a petition cannot be presented, unless one of the Exceptions is satisfied); or not (in which case, a petition can be presented). Though an understandable response to the COVID-19 pandemic, the implementation of these temporary measures will no doubt lead to uncertainty, as well as a great level of wariness, amongst creditors in these unprecedented times.
Jodie Wildridge is a second six commercial pupil at Exchange Chambers who practices in the areas of commercial dispute resolution, insolvency and property and who appears regularly in the District Registries of the High Court and in the County Court on a wide range of matters.
 Or, section 222, 223 or 224(1)(a) to (c) of the Insolvency Act 1986 for unregistered companies.
 Or, section 224(1)(d) or (2) of the Insolvency Act 1986 for unregistered companies.