by Patrick Finn - Senior Associate, Restructuring & Insolvency
The Insolvency Service has announced that the 1st October 2021 will mark the end of restrictions on winding up petitions introduced in June 2020 by the Corporate Governance and Insolvency Act 2020.
The measures were intended to provide struggling companies with a respite from cash-flow problems contributed to or caused by the Covid-19 pandemic.
The government intends to maintain some restrictions, with the debt threshold for a winding up petition being temporarily raised from £750 to £10,000. The petitioning creditors must also give debtors 21 days to respond to any demand for payment in order for them to provide proposals for repayment before a winding up petition may be presented.
These temporary measures will remain in place until 31st March 2022.
It should be noted however that the ending of the restrictions is not expected to apply to debts relating to non-payment of commercial rents. The government has already announced proposed legislation to ‘ring-fence’ commercial rent arrears accrued during periods where a tenant has had to close its business premises for reasons related to Covid-19.
Under the separate proposed legislation, landlords and tenants will be encouraged to agree appropriate compromises/arrangements in respect of rent arrears accrued between March 2020 and March 2022. Where an agreement cannot be reached, the parties will be required to engage in a mandatory binding arbitration process to determine the dispute.
It is not clear on the basis of information currently available whether it will be open to commercial landlords to petition for commercial rent arrears after March 2022 in respect of rent arrears incurred between March 2020 and March 2022 or whether those arrears will remain ring-fenced and subject to the binding arbitration procedure. The devil will be in the detail of the draft legislation, once published.
The revised restrictions are intended to support the small businesses as they rebuild their financial position with a particular focus on the retail and hospitality sectors.
However, it is far from certain that these proposals will provide any practical assistance to small businesses. The majority of debts due to small businesses are often below the £10,000 threshold. That could mean some SMEs face winding up petitions from their creditors who are owed a significant debt without being able to effectively recover the smaller debts they are owed in order to facilitate cash-flow and make reliable proposals to their creditors to avoid being wound up up.
The changes will also mean more temporary legislation is likely to be introduced which may create even more uncertainty. No further guidance has yet been provided regarding the requirement to wait 21 days for repayment proposals and what the impact of these proposals will have on the ability to present a petition. Perhaps it will be analogous to recent case law on proposals by a debtor facing a bankruptcy petition. The precise wording of the legislation will therefore be a matter of keen interest to practitioners, small businesses and creditors.
Business Minister Lord Callanan said: The success of our vaccine rollout means we are seeing life and the economy returning to normal with a strong rebound, and the time is right to lift the insolvency restrictions that were needed during the pandemic. At the same time, we know many smaller businesses are rebuilding their balance sheets and reserves, and some will need more time to get back on their feet. These new measures protections will help them to do that.