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Laws for winding up orders need more clarity

Debt threshold increase for winding up petitions

Entrepreneurial small business owners should be overjoyed with Government plans to increase the debt threshold for winding-up petitions to £10,000.

The move is in harmony with new protections and laws designed to support businesses. Temporary measures introduced last year under CIGA 2020 will be replaced from 1 October to 31 March 2022.

Subsequently, more debtor-friendly legislation will come into effect in England, Scotland, and Wales for 6 months via a Statutory Instrument. Similar measures will roll out in Northern Ireland simultaneously.

Under the new legislation, you may obtain a winding-up order against an insolvent company that owes £10,000 or more. BUT only if you have:

  1. Sought proposals for payment
  2. Allowed 21 days for a response

Officials from the Department for Business, Energy and Industrial Strategy claim the measures will “…help smaller companies get back on their feet to give them more time to trade their way back to financial health…”

Nevertheless, the legislation makes life harder for vulnerable company directors / owners struggling to collect overdue invoices and debts. In this regard, the Government’s proposal is disappointing.

Vague directives on winding-up orders

The Government need to be clearer about the 21-day period before the commencement of winding-up proceedings. For example, what happens if a:

  • Creditor’s proposal is wholly unacceptable?
  • Debtor rejects a perfectly reasonable proposal?

Furthermore, the safeguards to protect companies against devious debtors are lacking. For example, a director who obtains £19,000 worth of goods on credit from 1 company can avoid paying for at least 6 months, simply by:

  • Acknowledging £9,999 of the debt
  • Disputing the remainder (£9,001)

Even if the debt’s paid, the director had the goods interest-free for 6 months without ever having to worry about:

  • Paying for them
  • The creditor winding up their company 

From what’s been revealed so far, the Government’s proposals seem debtor-friendly, and ill-thought-out. Moreover, they appear to support insolvent ‘zombie’ companies, many of which would’ve collapsed without the protection these new measures provide.

Any serious plan to boost the economy must include provisions to reduce the number of zombies in our midst. Sadly, the Government’s strategy appears to facilitate rather than annihilate zombies, which can only lead to problems in the future.

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