How does the Corporate Insolvency and Governance Act 2020 affect your ability to pursue debts?
The Corporate Insolvency and Governance Act 2020 came into force on 26 June 2020 (“the Act”). The Act makes a number of substantial corporate insolvency changes, but also temporary provisions restricting action to wind up companies in light of the coronavirus.
A statutory demand is often used as a tool to demand payment of an undisputed debt. A precursor to issuing a winding-up petition, it is often a robust way to apply pressure for payment of an undisputed debt. A company that fails to respond or pay a statutory demand is presumed to be unable to pay its debts, which satisfies the main ground on which a winding-up order may be made.
The Act aims to prevent aggressive creditor action and encourage resolutions to be reached between the parties.
The Act provides:
- A blanket restriction that prevents winding-up petitions from being presented to the court if it is based on a debtor’s failure to company with a statutory demand which was served during the period 1 March 2020 (it has a retrospective effect) until 30 September 2020; and
- If there are other valid grounds to present a petition, a creditor will, in addition, have to show the court that it has reasonable grounds for believing coronavirus has not had a financial effect on the company or the facts by reference to which the relevant ground applies would have arisen even if coronavirus had not had a financial effect on the company.
It is impossible at this stage to predict what is meant by “financial effect” but commentators believe this is likely to be a low threshold. It may be particularly difficult to prove there has been no financial effect against debtors for example in the non-essential retail, hospitality and leisure sectors. It should also be borne in mind that a debt which pre-dates the pandemic, alone, may not be sufficient to justify the presentation of a petition.
Whilst it is technically still possible to serve a statutory demand, the impact is unlikely to be as significant without the threat of a winding-up petition following. Debtors should be aware that this is only a temporary reprieve and once lifted creditors will be able to take action as they see fit.
For the time being, if a creditor wants to consider insolvency action, each case should be assessed on its own set of circumstances. If you are owed a significant sum of money from a corporate organisation and are wondering the best way to seek payment, please do contact us so we can help you to assess the best way forward.Back to Legal Updates →