On Friday 1 October 2021 new rules on winding-up petitions will come into effect which may make it easier for many creditors, except commercial landlords, to recover debt.
As a consequence of Covid-19, the UK Parliament passed emergency legislation in March 2020 that restricted many companies’ ability to trade. Parliament also passed legislation to assist companies that were struggling to pay their debts either directly because of the restrictions on trading or because of the wider economic effects.
One of those emergency measures was a restriction on creditors winding up companies that were unable to pay their debts. A new condition was applied to such petitions, which was that in order to start court proceedings for winding up a debtor company, the creditor had, in effect, to show that the virus was not the reason the company was unable to pay or had not paid. That condition all but stopped any winding up petitions being brought. It is practically very difficult to use a winding-up petition as a means of debt recovery because of the burden the creditor has to show that the debt is not due to Covid-19.
The restrictions on trading have of course now been eased to a very great extent. The rules on winding-up petitions are changing as a result.
The new rules
The UK parliament has just passed new legislation setting out the new rules which come into force on 29 September 2021 and mean that a winding-up petition for unpaid debt can only be brought if:
- The debt is known to be a definite amount, i.e. it cannot be an unascertained damages claim or otherwise be dependent on some further condition or calculation;
- The debt is due for payment and the debtor has been given notice that the debt is claimed, as well as details of the claimant, how much the debt it is, why it arises and how it is calculated. The creditor must also state in the notice that proposals for settlement are sought and that a winding-up petition will be presented if it is not paid within 21 days of delivery of the notice, then send it to the debtor’s registered address or other prescribed address;
- The total debt owed to those presenting the petition (which may be one creditor or several acting together) must be more than £10,000; and
- The debt is not “a debt in respect of rent, or any sum or other payment that a tenant is liable to pay, under [a commercial lease] and which is unpaid by reason of a financial effect of coronavirus”.
The first three of those conditions are not especially onerous and many creditors may find the new rules make it significantly easier to use winding up petitions, or the threat of them, as a tool for debt recovery.
However, commercial landlords are, in effect, still excluded from using winding up to recover debt. The restrictions mean that there is still a requirement for a landlord to show that any debt due under a commercial lease is not a “financial effect” of the coronavirus. “Effect” is not limited to a direct effect, so the landlord’s burden of showing that the debt was not caused by the virus is a heavy one. It will likely remain very difficult to succeed in raising a winding-up petition for lease debt except where it is very clearly demonstrable that the debt is in no way related to coronavirus.
Even where a landlord has succeeded in obtaining a decree from the court stating that a debt is due, it is likely that a court would not allow that decree - and any charge for payment served under its authority – to be used to wind up the debtor company. This is because the restrictions are based on how the debt itself arose in the first place rather than whether it is constituted by a decree.
Separate from the provisions on winding up, the UK Government has indicated that it intends to introduce a mandatory arbitration process to resolve claims for debt due under commercial leases. Details of how that scheme will work, and when it will begin, are eagerly awaited. In the meantime, commercial landlords have very limited options for recovering debts due to them from tenants.
