SMEs have faced many challenges during the COVID-19 pandemic from supply chain delays and staff shortages to a lack of cashflow and being unable to pay creditors. Quite early on, the Government recognised businesses would need financial breathing space (during the economic uncertainty created by the pandemic) particularly from potentially aggressive creditor action. It therefore brought in temporary changes to the insolvency regime to help UK businesses maximise their chances of survival.
One of the main changes within the insolvency regime was the moratorium on being able to rely on non-payment of a statutory demand as proof of a company’s insolvency, coupled with the moratorium on the presentation of winding up petitions. While these strict moratoriums came to an end on 30 September 2021, from 1 October 2021, limited restrictions still apply.
What is a statutory demand?
A statutory demand is a formal document which demands payment of a debt within 21-days – if payment is not made, the creditor can present a winding-up petition and is able to rely on the non-payment as evidence of a company’s insolvency.
If a company takes no action in response to a statutory demand, and a winding up petition is presented then the consequences are serious: the company’s bank account will likely be frozen, the company’s commercial reputation and credit rating will be harmed and directors may be at risk of personal liability for their actions.
Moratorium on statutory demands
Between 1 March 2020 and 30 September 2021, there was little point in a creditor serving a statutory demand because it could only be relied upon if a creditor had reasonable grounds for believing COVID-19 has not had a financial effect on the company, or the debt issues would have arisen anyway. Clearly without a detailed knowledge of a debtor company’s financial position, it will be nigh on impossible to show that COVID-19 has not had a financial impact, particularly if the debtor company claims it has.
Situation from 1 October 2021
Less restrictive measures came into force on 1 October 2021 and are (presently) to last until 31 March 2022.
The Government is keen to avoid a deluge of company insolvencies and its aim with the new measures is to introduce a “tapering” that will help businesses to get back to normal without facing a “cliff-edge”.
An important change is the lifting of the moratorium on statutory demands. Once again, non-payment of a statutory demand (served from 1 October) can be relied upon to show a company is unable to pay its debts. However, there continues to be a moratorium on the presentation of a winding up petition for debts under £10,000 and for arrears of business rent (unpaid because of a financial effect of COVID-19).
A creditor will also not be able to present a winding-up petition unless it has (1) served a notice (following a strict format) which requests the debtor company’s proposals for payment of the debt, and (2) can demonstrate that it has sought to negotiate payment and can explain why any such proposal from the debtor company is not satisfactory.
Have the measures helped struggling companies?
There is no doubt that the measures have helped companies to survive during the pandemic.
Insolvency Service figures show that there were approximately 55% fewer compulsory liquidations in 2020 compared to 2019, and the figures for the first half of 2021 are even lower.
The measures appear to have given businesses breathing space to continue to trade although it remains to be seen whether the measures have simply delayed the inevitable for some. Indeed, figures from the Insolvency Service show that voluntary liquidations are on the increase and the number in Q2 of 2021 is the highest since the start of the pandemic.
What should businesses do if served with a statutory demand?
If a company is served with a statutory demand and notice (from 1 October), the following steps are suggested:
- Check the amount of the debt – if it is under £10,000, then the creditor will not be able to present a valid winding up petition.
- Check the circumstances of the debt – if the debt is for commercial rent arrears arising because of a financial effect of COVID-19, then the creditor will not be able to present a valid winding up petition.
- Investigate whether the debt is owed. If the debt is disputed on genuine and substantial grounds, it is not appropriate for the creditor to use an insolvency process. Contact the creditor to make the creditor aware the debt is disputed and ask them to withdraw the statutory demand. If they refuse, seek legal advice on the next steps to be taken.
- If it is accepted that the debt is owed, analyse whether the company is able to pay the debt or not. If it can be paid without causing other financial difficulties then the debt should be paid within the 21 day period. If financial difficulties would arise, contact the creditor using the notice to make a payment proposal. The company may also want to seek legal advice and advice from an insolvency practitioner.
Most importantly, never ignore a statutory demand and if you are at all unsure, obtain legal advice.