Restrictions on when and how statutory demands can be deployed will remain in place until at least 31 March 2022 as the government tapers the removal of its pandemic business support measures. So, what are the new rules and what are your options if your business is on the receiving end of a demand or a petition?
The new restrictions
Creditors cannot present a winding-up petition:
- For a debt or debts of less than £10,000 – a significant increase on the longstanding pre-pandemic £750.
- For commercial rent that hasn’t been paid because of the financial effect of coronavirus.
- Unless they have given the debtor written notice of the debt (a Schedule 10 Notice) and the debtor has not made a satisfactory payment proposal with 21 days of receiving the notice. This effectively rules out the old style ’24/48 hour’ demand letter but creditors can apply to the court for an order dispensing with the need for a notice and/or the 21-day period.
What if you’re served with a statutory demand or a Schedule 10 Notice?
Don’t panic and don’t ignore the problem
Take stock and seek early advice where necessary.
The new rules should see creditors asking for payment proposals and, in practice, the 21-day window for these should operate in the same way as the three-week window for responding to a statutory demand.
The threat of winding-up proceedings always leads to heightened pressure and brinksmanship which can be managed by using that time wisely.
Demands (and petitions) are served by leaving them at a company’s, or LLP’s, registered office. Delays in forwarding them from there to directors/partners are not uncommon and businesses that are concerned about creditor pressure should check to make sure that anything received at an address that may not be staffed full time will be sent on quickly.
Analyse the demand/notice carefully
If you received a demand for payment, check to see if it’s valid and complies with the new requirements. Demands served without legal advice are common and I expect to see quite a few invalid ones early on.
If the demand is in the proper form minor errors won’t usually give a debtor any room to argue over validity unless the error is one that has caused prejudice. Ignoring a demand in the hope of defending a subsequent petition on the basis of a technicality is very risky and can have catastrophic consequences for a company its directors.
Analyse the debt carefully
Is it overstated? Can any of it be disputed? Do you have any cross-claims or amounts that you can set-off against the debt?
Debtors can still challenge demands on the basis that some or all of the debt is disputed on substantial grounds. Any dispute must be set out clearly in writing. Providing evidence in support will put pressure on a creditor to drop its threat to liquidate. The same applies to points taken in relation to cross-claims and set-offs.
Arrangements to pay any undisputed parts can be dealt with in the response to the creditor’s request for proposals. If nothing is said about undisputed elements, the company risks being deemed to be unable to pay its debts and give the court the power to wind it up.
The new rules say that proposals must be “to the creditor’s satisfaction” but contain nothing on what is, or isn’t, satisfactory. They don’t require creditors to negotiate either, but do force them to explain why an offer was unsatisfactory in any petition they may issue.
What approach judges will take to explanations remains to be seen and given the absence of any guidance including a proper explanation that justifies proposals seems sensible because it will give debtors something to fall back on.
Get an injunction
If a creditor won’t backdown and accept arguments over disputes, cross-claims or set-offs the court may accept that a petition would be an abuse of process and grant an injunction to stop one being presented.
Applications have to be made quickly and in the three weeks given for responding to a statutory demand.
Look at the bigger picture
Directors must reflect on the company’s financial position. Has the business reached the point of no return where they cannot realistically trade on without committing offences and potential personal liability? Appropriate professional advice can help manage directors’ risks and should be sought if there any concerns on this front.
Has service of the demand crystalised any loans or other financial obligations? If not, a petition commonly will lead to this. Thought will need to be given to how to deal with that as well as personal obligations under any personal guarantees they may have given.
If there is no option other than to defend a petition, get advice on seeking a ‘validation’ order under s. 127 of the Insolvency Act 1986. The order should ensure that transactions involving the company’s property that take place from the date of the petition aren’t rendered void (and so recoverable) if a winding-up order is made. The company’s bankers must also be kept apprised to manage their approach to a petition and ability to freeze the company’s bank accounts.
Last, but by no means least, the impact of a public fight over a petition, the potential commercial fall out, and the management time that must be devoted to a defence cannot be underestimated. Early steps to address each need to put in place.
How we can help
Our litigation and insolvency lawyers act for both creditors and debtors. They can help with all aspects of preparing, serving and responding to statutory demands as well as winding-up petitions.