How directors should be dealing with them

In the BC days (before Covid) if you didn’t pay an acknowledged debt then you could expect to receive a statutory demand which could lead to a winding up petition which would close the business down if it remains unsettled. 

But in March 2020 along with the first national lockdowns, the government brought in restrictions on the ability of creditors to use these legal instruments against creditors as part of the Corporate Insolvency and Governance Act 2020 (CIGA). 

This meant that a winding up petition could only be issued if the debtor company had not been materially financially affected by Covid-19 or if that company would have become insolvent in any event even if the pandemic had a financial impact on it.

These measures undoubtably kept many companies that would otherwise have entered insolvency operating but the flip side of this equation is that it has led to some of them accumulating even higher levels of debt which has brought us to the following paradox. 

A business that might now be having severe cash flow issues, has accrued additional debt that will be difficult if not impossible to pay off and they remain restricted from pursuing debtors that may owe them money because of these same restrictions.  

The situation changed on October 1st 2021 when several support measures were discontinued and some restrictions on winding up petitions were partially lifted.  

Now creditors were able to:

  • Present a winding up petition against a debtor where the outstanding amount is £10,000 or more (the pre-pandemic threshold was £750)
  • Use the service of a statutory demand on a debtor to demonstrate their insolvency –  due to their inability to pay their debts (Under CIGA this was a requirement for presenting a winding up petition and was previously limited)

Some important caveats remain that will stop a winding up petition from being served. 

The first is that If the debtor hasn’t been served a notice under Schedule 10 of CIGA by the creditor requesting that they put forward some satisfactory proposals to pay the debt in full within 21 days.

The other is that if the owed debt is classed as “excluded debt”. 

This includes any unpaid commercial rent or any other amount payable under a relevant business tenancy where the debt has accrued as a result of the financial effect of Covid-19. 

Under these circumstances the remaining restrictions on landlords being able to forfeit commercial leases in relation to non-payment of rent until March 2022 apply and a winding up petition may not be issued. 

What happens if you receive a winding up petition (or Schedule 10 notice)?

The latest quarterly and monthly company insolvency figures are rising and confirm a recent Bank of England statement that “the increase in company debt, though moderate in aggregate, has likely led to increases in the number and scale of more vulnerable businesses. 

“As the economy recovers and government support, including restrictions on winding-up orders, falls away, business insolvencies are expected to increase from historically low levels.”

If there were no restrictions in place it’s probable that there would be a rise in insolvencies as a result but this is based on the already backed-up court system working through existing and new applications with some speed. 

So if your business receives a schedule 10 notice or a winding up petition there are some consequences you should be aware of that show how serious it should be treated:

  • Receipt sets the clock ticking on further action. You will have 21 days to act from the date of the initial receipt 
  • If the winding up petition is advertised in the London Gazette or elsewhere then your business bank account will be frozen. This will needless make it practically impossible to trade or function until it’s unfrozen. 
  • Reputational damage could occur as a result of the action being made public. Not every customer, debtor or creditor will know or find out but enough might to either withdraw their business or look to alter their terms of service as a result. 
  • The company’s credit rating will be adversely affected even if the debt is ultimately paid off and the petition withdrawn
  • A court also has the power to reverse any payments made after the date the petition is presented. Any money moved out of the company in anticipation of this action (also considered to be wrongful trading) or other payments could be ordered to be returned which could have further consequences for payer and payee. 

What to do next

Time is limited from the moment a winding up petition or schedule 10 notice is received from HMRC or any other creditor owed £10,000 or more and the recipient will have to act quickly and carefully from this point on. 

The most sensible first step they should take, if they haven’t already, is to get some professional advice about the situation and understand what options are available to them. 

There may be legal defences that can be used such as an injunction to prevent the presentation or advertisement of the petition if the debt is disputed or if the debtor has a cross-claim.

If the Schedule 10 notice is valid then the 21 day period can be used effectively. 

If the debt can be paid, it can be settled during this time and the winding up threat disappears. Similarly, the period can be used to agree an extension of the repayment term if possible.

Directors also have to maintain their legal duties to act in the best interests of the company and its creditors. This is especially important as they could potentially be found personally liable and face claims for breaching directors duties and any possible wrongful trading claims which could lead to potential directors disqualification. 

Depending on the specific circumstances there could also be sufficient time to consider alternatives to liquidation. 

An insolvency moratorium could be approved to give additional protection and time to work on a restructuring plan. 

A company voluntary arrangement (CVA) or administration could prove to be more suitable and provide a better outcome for the business and its creditors although any of these would have to be overseen by a licensed insolvency professional. 

If you get one, the clock is ticking so there is not time to lose

Chris Horner, Insolvency Director with BusinessRescueExpert.co.uk said: “Receiving a valid schedule 10 notice sets a 21 day process into motion that will end with a winding up order or a liquidation.  

“The business will either need to negotiate payments with its creditors or enter another form of insolvency procedure.  

“A company that can’t pay its debts as they fall due or whose liabilities exceed its assets is considered insolvent but it doesn’t mean they have to automatically cease trading or close. 

“Getting professional advice will give them a degree of certainty at what is a very stressful time. What happens next will depend on the individual circumstances of the company but the earlier they act, the more options they will generally have to move forward.”

Receiving a schedule 10 notice or a winding up petition might come as a surprise – especially as many business owners or directors might think that they continue to be suspended. 

If your company receives one, the first step will also be the easiest – get in touch with us.

Our experienced team will use the free initial consultation to get a clearer understanding of the situation about the business and its creditors and liabilities and will then work with the directors to produce a clear path forward. 

If it is possible to restructure the business, they will work on this strategy or if debts make the enterprise ultimately unviable, we can work together towards an orderly closure which will give creditors their best return and allow the owners to move onto their next venture more quickly. 

No matter what the ideal end scenario, the beginning is always the same – acting right now to arrange that all important initial conversation.