It is winding up, but not as we know it.

On 10 September 2021 the Corporate Insolvency and Governance Act 2020 (Coronavirus) (Amendment of Schedule 10) Regulations 2021 was laid before Parliament and comes into force with effect from 29 September 2021.

For most people, that maybe a case of, “So what?”  However, for those who are thinking of enforcing the repayment of debts it will have a logistical impact. 

As many will know, prior to the introduction of the Corporate Insolvency & Governance Act 2020 (“CIGA”) a creditor, owed £750 (or more) could present a winding up petition against a debtor, following either an unsatisfied judgment or the expiration of a statutory demand.  However, provisions within CIGA prohibited the use of statutory demands or winding up petitions, unless it could be proven the petition debt did not arise (or become unpayable) as a direct result of Covid-19.  These interim provisions were due to expire on 30 September 2021, having previously been extended on previous occasions.

We can all speculate on why the CIGA temporary provisions were extended.  However, suffice to say the continuation of Covid-19 and the feared impact of “Letting loose” frustrated debtors to pursue unpaid debt (and its impact on the economy) were clearly on the agenda.

In short, the temporary provisions being introduced:

  1. Increase the debt that must be owed to present a company winding up petition to £10,000.
  1. Creditors must seek proposals from the debtor business for repayment of the debt, giving 21 days to respond before they can proceed with a winding up petition: and
  1. Commercial Landlords must still demonstrate to a court that debts are not Coronavirus related until the end of March 2022.

Many believe the £10,000 limit should remain beyond these temporary measures but that is a discussion for another day.

The more interesting measure is the introduction of the 21-day notice.  At first, those who deal with debt recovery may ask what is the difference between a statutory demand (that provides 21 days to pay or secure the debt in any event).  You may even ask whether a statutory demand still needs to be served after this new 21-day notice has expired.

Thankfully, the amendments to the schedule provide the answers.

Paragraph 4 includes two distinct requirements (in addition to those already prescribed):to the schedule provides the 21-day notice must contain:

(e)          a statement that the creditor is seeking the company’s proposals for the payment of the debt, and

(f)           a statement that if no proposal to the creditor’s satisfaction is made within the period of 21 days beginning with the date on which the notice is delivered, the creditor intends to present a petition to the court for the winding-up of the company.

This is a significant shift from the requirements within a statutory demand as it appears to be steering an unpaid debt scenario down the road of Alternative Dispute Resolution.  This assumption appears to be supported by the fact a statutory demand is not required on the expiry of the 21-day letter.  However, Rule 7.5(1) of the Insolvency (England & Wales) Rules 2016 have been amended to include two statements on the winding up petition, namely:

(1)          that the requirements in paragraph 1 of this Schedule are met, and

(2)          that no proposals for the payment of the debt have been made, or a  summary of the reasons why the             proposals are not to the creditor’s satisfaction (as the case may be).

In theory, this appears like a sound compromise to ensure there is not a flood of winding up petitions from 1 October onwards.  However, the issue regarding whether any proposals are satisfactory, or not, appears subjective.  If a petitioner believes they are not satisfactory, what happens at the first hearing of the petition?  What if the court adopt the view the petitioner was unreasonable in either refusing the proposals or, in the alternative, had not engaged in settlement negotiations?  Worse still, if the petition is dismissed in favour of payment terms, who pays the costs, not to mention consideration of any damage caused by the petition having already been advertised?

At PBC we are taking the view these interim measures were attempting to allow debtors to pursue unpaid debts but in a commercial and understanding manner.  In short, avoiding the potential flood of recovery action that has been the fear behind previous extensions.  It also sends out a warning to those on the receiving end of debt enforcement and that is to act in a timely and appropriate manner when considering the viability of your business.

Should you have an insolvency-related issue then please contact me at PBC Business Recovery & Insolvency on (01604) 212150 (Northampton office) or (01234) 834886 (Bedford office). Alternatively, you may send an email to garypettit@pbcbusinessrecovery.co.uk or access our website at www.pbcbusinessrecovery.co.uk

Should accountants report on clients?

Have any of your clients taken out a Covid-based loan?  If so, then what are your responsibilities as the advising accountant?

At PBC we have noticed a marked increase in businesses looking to close down (by way of strike off or through liquidation) where there is an outstanding bounce back loan (“BBL”) or a CBIL, or in some cases, both.

Due to the uncertainty of what must be done to demonstrate they have exhausted all avenues of recovery (before being able to claim under the Government guarantee) lenders are objecting to strike off.  Lenders are also writing to directors, pressurising them to repay the Covid loans.  There is also a notable heightened attention to companies in liquidation with unpaid Covid loans (for director disqualification and restoration purposes) where Covid loan monies have been used for personal benefit.  As you will be aware, in order to receive a BBL in the first instance, the applicant had to confirm it would not be used for personal purposes but working capital for the business.

So, where does this leave the advising accountant?

While accountants are not required to identify what a BBL was used for, it is likely they will receive this information when preparing their clients’ accounts. If accountants consider their clients may have used BBL funds for personal purposes (e.g. to redeem a personal loan or to purchase a family car etc) they may, depending on the circumstances, have an obligation to submit a Suspicious Activity Report (“SAR”).

ICAEW members (whether in private practice or in business) must adhere to the Code of Ethics which includes the fundamental principle of integrity. Paragraph R111.2 provides an accountant shall not knowingly be associated with reports, returns, communications or other information where they believe that the information:

  • contains a materially false or misleading statement; or
  • contains statements or information provided recklessly; or
  • omits or obscures required information where such omission or obscurity would be misleading.

In addition to the ethical code, accountants must consider their anti-money laundering obligations. In general, accountants are required to submit a SAR to the National Crime Agency, where information comes to them in the course of their business, which leads them to suspect that another person is engaged in money laundering.

As will be the same for insolvency office holders, accountants should question the application of Covid loan monies and consider whether those monies now form an adverse directors’ loan account.  These enquiries may sail close to tipping off under the money laundering regulations so extra caution is advised in such circumstances.  In our opinion, serious consideration of submitting a SAR must be given if the information to secure the BBL or CBIL in the first instance was false or misleading.

As a guide, when looking at circumstances specifically surrounding BBLs we suggest advising accountants consider:

  • Had the company filed dormant accounts for 2019 and/or 2020?
  • Was turnover overstated (in the on-line application) by more than 25%?
  • Was a loan obtained for more than 25% of turnover?
  • Were the directors aware of insolvency at the time of application?
  • Was the application after a petition or winding up resolution?
  • Was the business trading outside of the UK?
  • Had the business ceased trading pre-1 March 2020?

Directors are increasingly seeking to defend insolvency officeholder actions by pointing the accusing finger at their accountant and if that accountant has failed to meet their prescribed duties it could place them in an uncomfortable position. It, therefore, goes without saying you should be satisfied with the level of conduct demonstrated by your client when it comes to BBL or CBIL as, with some 1.5 million loans made, this could become a very hot topic.

Should you have an insolvency-related issue then please contact me at PBC Business Recovery & Insolvency on (01604) 212150 (Northampton office) or (01234) 834886 (Bedford office). Alternatively, you may send an email to garypettit@pbcbusinessrecovery.co.uk or access our website at www.pbcbusinessrecovery.co.uk