Temporary suspension of statutory demand provisions - what does it mean for businesses and creditors?

The new UK Corporate Insolvency and Governance Bill introduces a variety of measures which amend existing insolvency law to help businesses survive the coronavirus pandemic.

One such temporary measure prevents any statutory demands made against companies in the period between 1 March and 30 June 2020 from being used as the basis of a winding-up petition. This provision will apply retrospectively from 27 April 2020.

What is a statutory demand?

A statutory demand is the first step of the insolvency process where there is an undisputed debt due.

In terms of section 123(1)(a) of the Insolvency Act 1986 (the “Act”), a creditor can present a company with a formal written demand (the statutory demand) requiring payment of the unpaid debt. If the outstanding debt is not resolved within three weeks, this can be used by the creditor to demonstrate to a court that the company is unable to pay its debts. A statutory demand followed by non-payment will normally constitute grounds to present a winding-up petition to force the company into liquidation through the courts.

What is the effect of the Bill?

This Bill will temporarily stop creditors using statutory demands as the basis to seek to wind up a debtor company.

Once passed, Schedule 10 Part 1 of the Bill will prevent any statutory demands made against companies in the period between 1 March 2020 and 30 June 2020 (or one month from when the Bill comes into force, whichever is the later) from being used as the basis of a winding-up petition at any point on or after 27 April 2020.

This restriction addresses the use of aggressive debt recovery tactics reportedly being used by, for instance, some commercial landlords to put pressure on tenants to pay their rent, despite the protection for non-payment of rent that is in place in Scotland and England and Wales.

The measure is designed to give businesses who are suffering financially as a result of the pandemic the opportunity to reach realistic and fair agreements with all creditors.

When will the Bill become law?

The Corporate Insolvency and Governance Bill has already been through its initial stages in the House of Commons. The second reading debate of the Bill in the House of Lords took place on 9 June, with the committee stage on 16 June followed by the report and third reading on 23 June. Thereafter the amended version will be reviewed by the House of Commons before being passed and becoming law at the end of June, or early in July.

Alternatives under the Act

In Scotland, it is common for creditors to issue a “short form” demand (by way of a letter to the debtor) with reference to section 123(1)(e) of the Act. This can be used by a creditor in a winding up petition, in the event that the undisputed debt is not paid by a debtor within a period of time (usually much shorter than the three week period in a statutory demand), as proof that the debtor is unable to pay its debts as they fall due.

These types of demands have not been outlawed by the Corporate Insolvency and Governance Bill, and therefore may be able to be used by creditors during the time in which statutory demands are restricted by the Bill.

We’re here to help

Please contact our specialist dispute resolution and insolvency teams for advice on debt recovery, insolvency proceedings or on the impact of these changes for your business.