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Coronavirus - Temporary amendments to Insolvency Law: restriction on statutory demands and winding-up petitions – UK/Northern Ireland

  • Ireland
  • Northern Ireland
  • General

29-05-2020

The much anticipated Corporate Insolvency and Governance Bill (the “Bill”), which will enact various new corporate restructuring tools as well as the temporary changes to insolvency law that have been announced by the government since the onset of the COVID-19 pandemic, was finally published on Wednesday 20 May.

View our series of articles summarising the Bill:

View our article covering a summary of the Corporate Insolvency and Governance Bill

View our article on suspension of liability for wrongful trading

What if I have already served a statutory demand?  Or, if I have already been served with a statutory demand?

Unless the statutory demand was served on the debtor before 1 March 2020 then, until the later of 30 June 2020 or a month after the Bill comes into effect, the creditor cannot rely on the statutory demand to support the presentation of a winding-up petition.

But can you still present a winding-up petition?

Perhaps: you can present a winding-up petition provided that you are not relying on a statutory demand served on a debtor after 1 March 2020, and that you have reasonable grounds for believing either that

- coronavirus has not had a financial effect on the debtor; or

- the debtor would have been insolvent even if coronavirus had not had a financial effect on it.

We will call that belief the “Pre-existing Insolvency Requirement”. There is no guidance on “reasonable grounds” that must be shown as regards the Pre-existing Insolvency Requirement, but the court will want to see evidence that the debtor was in financial difficulty before the onset of the COVID-19 pandemic, such as:

unpaid invoices, or evidence of late payment, from before 1 March 2020; or

annual accounts from the previous financial year showing deteriorating cash flow and asset base against increasing liabilities.

There is a very important point to note in respect of Northern Ireland, in that the Bankruptcy Master in Belfast is currently not accepting the issue of any new winding up petitions at the present time, and save perhaps for exceptional circumstances, the Master is not making any winding up orders at the present time. How the proposed new legislation will dovetail with the Master’s guidance as it stands will no doubt play out over the coming weeks.

What if I have already presented a winding-up petition?  Or, if one has been presented against my company?

If a creditor has already presented (or goes on to present) a winding-up petition after 27 April 2020, but before the Bill comes into effect, and the evidence in support of the petition did (or does) not satisfy the Pre-existing Insolvency Requirement, then the court may make an order restoring the position to what it would have been if the petition had not been presented.

If you are the petitioner, to mitigate the risk that your winding-up petition is dismissed on this basis, you should prepare and submit an affidavit setting out your reasonable grounds for believing the Pre-existing Insolvency Requirement is satisfied.  The onus is on you, as the petitioner, to show this.

If a winding-up petition has been presented against your company (or if you are dealing with a company which has a petition pending against it), then, if the Bill comes into force, you need not be concerned that payments, or dispositions of assets, made whilst the petition is pending will be voided (under Art.107 Insolvency (Northern Ireland) Order 1989): the automatic avoidance of such transactions during the period between presentation of a petition and a winding-up order will be suspended.

Where you are the target company, you should also consider preparing a response to the winding-up petition showing that its failure to pay the petition debt is solely a result of coronavirus.

Again, the Bankruptcy Master’s position on new winding up petitions as set out above should be borne in mind when considering this.

Will the Court make a winding-up order?

The Court can still make a winding-up order based on a winding-up petition presented during this period, but – if it appears to the Court that coronavirus had a financial effect on the debtor before the presentation of the petition – it will only make such an order if satisfied that the debtor would have been unable to pay its debts as they fell due even if coronavirus had not had that financial effect on the debtor.

The Bill provides that coronavirus “…has a ‘financial effect’ if (and only if) the company’s financial position worsens in consequence of, or for reasons relating to, coronavirus”.

If the Court is not satisfied that the debtor would have been insolvent even if it were not for coronavirus,  the Court may not wind it up, and may make an order restoring the position to what it would have been if the petition had not been presented.

Again, the Bankruptcy Master’s position on new winding up petitions as set out above should be borne in mind when considering this.

What if a winding-up order has already been made against a company?

If the winding-up order was made (or is made) after 27 April but before the Bill comes into force, and the winding-up order was (or is) one that the court would not have made under the Bill (because the insolvency of the company was caused by coronavirus), then it will be void. The Bill does not explain how it will be determined clearly which orders are void and which are not: presumably the relevant liquidators should apply, where there is any doubt.

The liquidator of the company is not liable for anything done because of the winding-up order and the court may direct them to restore the company to the position that it was in immediately before the petition was presented.

For further information, please contact:

Matthew Howse, Partner in our Dispute Resolution & Litigation department - matthewhowse@eversheds-sutherland.ie

Damian McElholm, Senior Associate in our Banking & Financial Services department - damianmcelholm@eversheds-sutherland.ie

Disclaimer

This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full terms and conditions on our website.

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