Covid 19 and Statutory Demands – Calling time on the temporary prohibition…?

What is a Statutory Demand?

In the context of a company, a statutory demand is a formal written demand issued by a creditor to a debtor stating that if payment of an undisputed debt (which must exceed £750) is not made within 21 days, a petition to wind the company up may be presented to the court, the consequences of which can be profound (and indeed ultimately terminal) for the debtor.

Current restrictions on serving a Statutory Demand

In response to the Covid-19 Pandemic, the Government introduced new legislation, known as The Corporate Insolvency and Governance Act 2020 (the “Act”), fast-tracking amendments to the existing corporate restructuring and insolvency framework that had been contemplated for some time. 

We have covered the temporary and permanent changes introduced by the Act in a separate article, and so do not propose to do so in this article.  If you wish to see our guide to key provisions of the Act in more detail, please refer to the previous article here.

Amongst the temporary changes introduced by the Act was the restriction on the use of Statutory Demands and Winding up Petitions, in a bid to safeguard against aggressive debt recovery actions in difficult and unprecedented economic times and to give businesses some breathing space to give them the best possible chance of trading again post Covid-19.  That is not to say that the use of Statutory Demands and Winding up Petitions was prohibited in their entirety – and indeed we have served a number of Statutory Demands and presented a number of Winding up Petitions during the period of the temporary restriction.  The requirement on the part of the creditor was to make a declaration to the effect that, to the best of their knowledge, either the Covid-19 pandemic has not had a financial impact on the company, or it did have a financial impact on the company, but it would have been unable to pay its debts in any event.

When are the temporary restrictions due to be lifted?

As things currently stand, the restrictions are due to be lifted on 30 September 2020. However, the Act makes provision for the Secretary of State to be able to extend the period by up to 6 months should it be considered reasonable to do so in order to mitigate the effect of the Covid-19 pandemic.

With the continued uncertainty surrounding Covid-19 levels in the UK and talk of extending other Government financial support schemes, such as the Furlough Scheme, there is a distinct possibility that the Secretary of state will also extend the temporary restrictions on the use of Statutory Demands and Winding up Petitions.

Should the temporary restrictions be extended & what will happen when they are lifted?

Businesses will naturally be concerned that once the temporary restrictions are lifted, the floodgates will open and creditors will take immediate action to recover outstanding debts, before they have had the opportunity to really get going again and generate cash flow to meet liabilities. Much like the balancing act being undertaken between protecting public health and trying to re-start the economy, a similar balancing exercise must be undertaken carefully about whether to extend the temporary restrictions or not.

On the one hand, it could be argued that the effects of the Covid-19 pandemic are longer-lasting and more profound than had perhaps been envisaged when the Act entered into force, and so a further extension is warranted – indeed, the government is considering doing so until 31 December 2020 at the point of writing this article. 

However, on the other hand, it is important to remember the basic premise upon which the insolvency legislation is based.  It is right and proper in a functioning free-market economy that competition exists in the market to promote creativity, development and ultimately prosperity.  Those companies that are unable to adapt, or become uncompetitive / unviable for any reason, will ultimately wither on the vine and the insolvency legislation provides (amongst other things) ways in which those companies can be restructured (in an attempt to make them more viable) or “terminated” (voluntarily or by order of the Court).

There is an oft-used phrase in insolvency circles of the “Zombie Company” – i.e. a company that exists essentially in name only as it has ceased to be viable but remains an “active” company.  There were a significant number before the Covid-19 pandemic, and that number is likely to have swelled as a result of it.  Whilst no-one likes to read stories about failing businesses, that is the harsh reality of the free-market economy – those that cannot survive any longer make way for those behind them.  If the ability to whittle out these “Zombie Companies” remains restricted by an extension of the temporary restrictions on the use of Statutory Demands and Winding up Petitions, that serves only to compound the issue and prolong the inevitable. 

Whenever the restrictions are lifted, this will unfortunately be inevitable to one extent or another. On that basis, it would seem preferable on balance for the restrictions not to be extended so that the “correction process” can begin. 

For more information on the restrictions and how they may affect your business, or if you have been served with / wish to serve a Statutory Demand, or present a Winding up Petition, please contact Tom Hall (Thomas.hall@bpe.co.uk), Natalie Ball (Natalie.ball@bpe.co.uk) or another member of the Restructuring & Insolvency Team.

These notes have been prepared for the purpose of an article only. They should not be regarded as a substitute for taking legal advice.