Update on changes to Covid-19 temporary insolvency law measures

The temporary insolvency restrictions protections introduced in 2020 after the start of the Covid-19 pandemic are being significantly eased and replaced by new targeted measures to support, in particular, small businesses and commercial tenants.

The UK Government have introduced changes to the regime for winding-up petitions. These changes will be in effect from 1 October 2021, withdrawing in part some protection for businesses. These changes will be in place until 31 March 2022. The new measures are contained in The Corporate Insolvency and Governance Act 2020 (Coronavirus) (Amendment of Schedule 10) Regulations 2021.

Winding-up petitions

Until 1 October 2021, a winding-up petition could not be presented:

• on the basis of a statutory demand; or
• on the basis of other evidence of a company’s inability to pay its debts unless the petitioning creditor has reasonable grounds to believe:
  • that Covid-19 did not have a financial effect on the company; or
  • that the company would have been unable to pay its debts even if Covid-19 had had a financial effect on the company.

From 1 October 2021 until 31 March 2022, it will be possible again to present a winding-up petition against a company on the basis of failure to satisfy a statutory demand.  The creditor will also not have to consider the financial effects of Covid-19 on the debtor.

Commercial tenancies

However, not all restrictions are being removed.  So a creditor will only be able to present a petition to wind up a company if the following conditions are met:

• the debt does not relate to unpaid rent or other sums due under a business lease;
• the debt to which a petition relates is £10,000 or more (although this restriction only applies to petitions based on statutory demands and not to petitions based on an unsatisfied judgment debt, or to petitions where the creditor proves that the debtor is cashflow or balance sheet insolvent); and
• the creditor must have given notice to the debtor which includes a statement that if no proposal for the payment of debt to the creditor’s satisfaction is made within 21 days, the creditor will present a winding up petition.

The new measures will apply to businesses of any size.

Rent Arbitration Scheme

Commercial landlords will continue to be prevented from forfeiting business leases under section 82 Coronavirus Act until 25 March 2022 or until new legislation is introduced to replace it.

The Government is proposing that the current moratorium will be replaced by a Rent Arbitration Scheme designed to ‘ringfence’ arrears relating to periods of enforced closure from March 2020 until restrictions for the commercial rent sector are fully lifted.  The proposal is for the ringfenced debt to be dealt with by means of binding arbitration.  In addition, before the new legislation takes effect, a Code of Practice will be published setting out ways in which rent arrears may be mitigated through negotiation.