25 Feb 2021
by Keebles

Hints and Tips When Pursuing Insolvency Proceedings

With fears that insolvencies are set to rise this year once Government support is withdrawn and businesses must ‘stand on their own two feet’, it is important to understand what options are available to creditors to maximise their recovery of undisputed debts.

What is a statutory demand?

A statutory demand is a formal prescribed form which you issue to a debtor company as a warning shot that, unless payment is made within 21 days, you will present a winding up petition under the Insolvency Act 1986. A debtor does have the option of applying to set this demand aside within 18 days if they have a reason to do so, for example if the debt is disputed.

What is a winding up petition?

Following the expiry of a statutory demand, a winding up petition can be used and is a powerful tool. A creditor can present a petition when an undisputed debt remains unpaid. Under the Corporate Insolvency and Governance Act 2020 (‘CIGA’), there are temporary restrictions that prohibit winding up proceedings where non-payment is Covid-19 related.

These restrictions were due to come to an end on 31 December 2020 but have been extended until 31 March 2021. Whilst it is hoped the restrictions will be lifted in April, it is possible the Government will extend this deadline again, so we have provided some hints and tips should you wish to pursue insolvency proceedings in the interim.

Do the CIGA restrictions mean I cannot issue a statutory demand or a winding up petition at all?

The short answer is no, however, it is not as simple as it was before the Covid-19 pandemic.

Prior to CIGA, it was possible to issue the 21-day demand, present the petition and obtain the order relatively easily if the debtor did not respond. It was simply an exercise in filing the relevant documentation. However, CIGA has now introduced additional documentary and evidential hurdles.

A creditor may now only pursue a winding up petition if it has reasonable grounds for believing that:

  1. Coronavirus has not had a financial effect on the debtor, or
  2. The debtor would have been unable to pay its debts even if coronavirus had had a financial effect on the debtor.

‘Financial effect’ appears to be a low threshold, for example, if the debtor’s financial position worsens because of, or for reasons relating to, Coronavirus.

This issue will be dealt with by the Court at an initial review hearing, usually dealt with on paper rather than in person.

Considering the additional hurdles, it is important to note the tips below when considering whether to pursue a debt via the insolvency route in the current climate:

  1. Check the debtor’s financial position pre and post Covid.

Is there a distinguishable difference between the debtor’s financial position? Are they generating the same, if not better, revenue/income than the did previously? After all, some businesses have done better during the pandemic.  This due diligence exercise should encompass checking the latest Companies House filings, credit reports, or even a simple google search could yield some results if there is any publicity regarding recent earnings reports.

  1. Assess any reasons given for non-payment.

Importantly, if the outstanding debt has recently accrued, has your debtor said anything about struggling in the current climate – whether this be financially or practically as a business? If they have, it is probably not sensible to issue a petition as you run the risk of being liable for your debtor’s costs if the Court finds that your debtor has been negatively impacted by the current climate.

  1. Check whether the debt was outstanding before the Covid-19 crisis

If the debt was outstanding pre-Covid-19, there is a higher chance of proving that the debtor’s ability to pay was not purely affected by the pandemic and that they were reluctant or unable to pay before the financial/commercial impact of Coronavirus.

Always seek to obtain evidence from your debtor to support their position as anyone can say Covid-19 has impacted them in some way.

  1. Prepare for the long haul

Prior to Covid-19, it would not be impossible to get through the process from issuing the demand to being granted the winding up order within two months.

However, now that it may be necessary to file additional documents or a witness statement affirming why you believe you fall into one of the exemptions above, along with delays in many courts, it could easily take twice as long to obtain a result if the debtor does not pay following the presentation of the petition.

  1. Engage in communication after the petition is presented

If the debtor only makes contact at this point, you should still endeavour to reach a resolution. If you agree a repayment plan, consider the deadlines for advertising a petition (seven working days prior to the hearing) when deciding on the payment terms as you may need to withdraw the petition or adjourn it based on what you agree.

It is important to note that it is not impossible to pursue insolvency proceedings despite the CIGA restrictions or Covid-19 generally. However, it is advisable to err on the side of caution and fully evaluate the current climate and your debtor’s position before commencing insolvency proceedings.

A ‘Do’s and Don’ts’ guide on how to maximise your chances of recovering money owed to you:

  • Have all your documents ready and organised. You are going to need to be able to refer to relevant documents throughout the insolvency proceedings process. Therefore, any contracts, purchase orders, invoices, proofs of delivery, email correspondence and so forth must be easily available.
  • Conduct sufficient due diligence on your debtor. What industry are they in? Are they a key industry affected by Covid-19? Have they filed their latest accounts?
  • Ensure any disputes are resolved before attempting to deal with your matter via the insolvency proceedings route. To put it simply, if there is a ‘genuine’ dispute, whether you were aware of this or not, you will be unable to pursue the debt via insolvency proceedings and there is a real risk of you being liable for your debtor’s costs if they apply to set aside a petition.
  • Obtain legal advice early on. The sooner you act, the greater your prospects of recovering the debt. Chances are you are not the only one pursuing your debtor.
  • Leave it until to the eleventh hour to try and recover your debts. If the debt is undisputed and the debtor is a company, a winding up petition (if available) is an extremely powerful and effective tool. Once they are in breach of the payment terms, seek advice and do not delay.
  • Pursue a petition because you do not agree with the debtor’s dispute or believe it is not ‘valid’. Ensure you have sought appropriate advice to determine your prospects of success otherwise, there is a risk that the debtor could apply to set aside a statutory demand or for injunctive relief to prevent you from advertising the petition and this can have significant cost consequences for you.

Finally, it is worth pointing out that the temporary restrictions imposed by CIGA do not apply to insolvency proceedings against individuals.  Therefore, if you are owed money by an individual or sole trader, it is still possible to serve a statutory demand and follow this with a bankruptcy petition in the same way as prior to the pandemic.

However, just because you can does not mean you should. It is quite possible that an individual debtor will have been affected by Covid-19, perhaps due to furlough, redundancies, reduction in orders/business, difficulties caused by home schooling children or mental health issues – all of which can severely impact the prospects of successfully petitioning for bankruptcy.

This information is correct as of 17 February 2021 and does not constitute legal advice on a specific issue. If you are looking to issue a petition or statutory demand or simply want to review your options for recovering aged debt, please do not hesitate to contact [email protected] for further assistance.