Corporate Insolvency and Governance Act 2020: impact on winding up petitions

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The Corporate Insolvency and Governance Act 2020 became law on 26 June, bringing with it temporary and permanent changes to insolvency and restructuring law to support companies and businesses through the current pandemic and beyond.

A significant measure aimed at protecting companies from creditor action was the imposition of restrictions on the ability to pursue a winding up petition. So what are these restrictions and what do they mean for creditors and for companies in financial distress.

Restrictions on winding up petitions

In broad terms, while bringing a winding up petition is not prohibited, there are significant restrictions based on the circumstances that a petition can be brought. The two key restrictions are:

  • That no petition issued after 27 April can rely on an unpaid statutory demand made in the period from 1 March to 30 September; and
  • That any petition issued after 27 April will need to demonstrate either:
    • that coronavirus has not impacted the debtor company; or
    • that even absent coronavirus the insolvency of the debtor would have arisen. 

In addition, and perhaps most critically, for any winding up petition issued during the period from 1 March to 30 September, section 127 will only apply when the winding up order is made. This section normally makes void any disposition of a company’s property from the date the winding up petition and means that the very act of issuing a winding up petition exerts significant pressure as a debtor will normally need to seek court validation to continue trading which can prove an unhelpful sidetrack to seeking to implement a restructuring.

It is also worth noting that during the relevant period the filing of a winding up petition will not prevent a company from using the out of court route to obtain a moratorium. Again, this severely weakens the leverage that a threatened winding up petition might have. However, there is no change to the provision forcing a company to go to court to appoint administrators or rely on a floating chargeholder appointment, which does give some modicum of leverage if an administration is the likely outcome.

This restriction sits alongside other limitations on creditor rights such as the block on possession proceedings and enforcement proceedings which has been extended, albeit only to 23 August rather than 30 September.

Impact for creditors

The above changes mean that during the pandemic period, creditors’ ability to pressure debtors for payment will be curtailed. It will remain possible to petition for a winding up but there will be a higher than normal burden in doing so and so increased risk of adverse costs being incurred.

It is worth bearing in mind that it is rare that a winding up petition is filed with the primary goal of triggering a winding up. Winding up is a collective remedy which benefits all creditors equally, but for the petitioning creditor the threat of a winding up petition can be a powerful tool to achieving a better outcome than other creditors, whether through accelerating payment or obtaining better security of payment. 

Now the main points of leverage in filing a winding up petition are removed. The debtor will not need to seek validation to keep trading and can obtain the protection of a moratorium without having to go to court. A court application may still be required to appoint administrators (if the winding up petition cannot first be disposed of for not satisfying the coronavirus condition) but while there is cost associated with such an application, it is unlikely to be significant enough to leverage a deal in most cases, especially where the lack of need for validation removes the burning platform.

As such, we would expect that for the present time there would be little incentive for creditors to pursue a winding up petition.

This does not mean that creditors will have no leverage but will mean that creditors may need to take a more creative approach to protecting their position, including considering what rights and influences they may have on a commercial or legal level to affect or influence any potential insolvency process.

Impact for debtors

In many ways the flagship measure of the Corporate Insolvency and Governance Act is the new restructuring moratorium. It is this (and perhaps the new restructuring plan) which have the potential to permanently change the way restructurings are approached and implemented. 

However, the fact that this arrives alongside the restrictions on winding up petitions suggests we might have a short wait to see this fully utilised. The moratorium is intended to give protection against creditor action, but presently the rights of creditors are severely curtailed and as such creditor action is less likely.

Conversely, the moratorium might have adverse cashflow impact for a company. Presently landlords might be kept at bay with less than full payment of rent. If a company entered a moratorium then rent would need to be paid in full as an expense. As such, a well advised company might conclude that it can achieve a better result for all stakeholders without seeking formal protection during the relevant period.

More information

For more information regarding the impact of the Corporate Insolvency and Governance Act 2020 on winding up petitions, contact our expert listed below.

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