As a result of the effect of the Covid-19 pandemic, many companies will have encountered financial difficulties which often result in disastrous consequences. The knock-on effect has been that other businesses who are legitimately owed money by a struggling company have experienced problems in obtaining payment.

Historically, where liability for a debt payable by a limited company was not disputed, a creditor would often serve a statutory demand* (“demand”) upon the company in an attempt to recover payment of the debt. The effect of the demand would be to give the company notice that a petition for its winding up could be presented by the creditor unless the debt upon which the demand is based was paid within 21 days from the date of service of the demand. As such, the demand was an important and effective weapon in a creditor’s armoury.

Whilst, technically, it is still possible to serve a demand on a limited company, there is little point in doing so at present.

The reason for this is as follows:

In accordance with the provisions of the Corporate Insolvency and Governance Act 2020, a creditor cannot present a winding up petition against a company based on a demand that was served between 27 April 2020 and 31 March 2021 or present a winding up petition between those same dates based on the company’s inability to pay its debts unless the creditor has reasonable grounds for believing that Covid-19 has either not had a financial effect on the company, or the debt which gives rise to the petition would have arisen in any event (“the Coronavirus test”).

Where, before 31 March 2021, a creditor presents a petition against a company on the basis that it has reasonable grounds for believing that it can overcome the Coronavirus test, the petition must contain a statement to that effect. The court will then, before any notice, publication or advertisement of the petition takes place, determine, at a preliminary hearing, whether the circumstances of the matter are such that it is likely that a winding up order, based on the company’s inability to pay its debts, could be made. Only if the court gives such a determination will the petition proceed.

From the company’s point of view, if it can show that its financial position has worsened as a result of the pandemic it will no doubt argue that a winding up order should not be made. The threshold appears to be a fairly low one, and save for where a creditor has compelling evidence to overcome the Coronavirus test, presenting a petition whilst the restrictions are still in place would seem to be a risky strategy.

The present restrictions, to 31 March 2021, came about as a result of the making of the Corporate Insolvency and Governance Act 2020 (Coronavirus) (Extension of the Relevant Period) (No 2) Regulations 2020 on 8 December 2020.

With the current uncertainty surrounding the long-term impact of the Covid-19 pandemic, a further extension of the restrictions, beyond 31 March 2021, cannot be completely ruled out. 

*Previous articles on Statutory demands here, here, and here.

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