Short Read:
Despite the law not yet being in force, the High Court has this week granted an unnamed high street retailer an injunction preventing one of its landlord creditors from presenting a winding-up petition against it on the expectation that the restrictions in the Bill will shortly be enacted.
The approach taken by the Court in this case reflects the approach it has taken in several other recent unreported cases, in which the Court has been willing to prevent the presentation of a winding up petition against a debtor company on the basis of what had been said in ministerial statements about proposed restrictions, including before the draft Bill was even published.
Landlords may be tempted to use the threat of a winding up petition (which in and of itself can be extremely damaging to the reputation and operation of a tenant company) to pressurise tenants into paying their debts, despite the impending restrictions. The approach of the High Court in the last few weeks has demonstrated that it is not willing to allow creditors to use the insolvency process in this way and is prepared to protect the identity of tenant companies in order to achieve this.
Tenants should not consider this to give them carte blanche to ignore their obligations. It isn’t a get out of jail free card.
Longer Read:
The Corporate Insolvency and Governance Bill 2020 has yet to receive Royal Assent. As matters stand today, it has yet to be debated in the House of Lords, having passed through the House of Commons this week. The Bill, which if passed in its current form will enact short-term restrictions preventing the presentation of debt-based winding-up petitions, is expected to come into force by the end of June, although will have some retrospective effect
The Proposed Restrictions
Once it receives Royal Assent the Bill will prevent:
- a creditor from presenting a winding up petition on or after 27 April 2020 that relies upon a statutory demand served between 1 March 2020 and one month after the Bill comes into force;
- a creditor from presenting a winding up petition between 27 April 2020 and one month after the Bill comes into force, unless the creditor can prove to the court that it has reasonable grounds for believing that:
- coronavirus has not had a financial effect on the company; or
- that the company would have become unable to pay its debts even if coronavirus had not had a financial effect on the company;
- the court from ordering the winding-up of a company, unless it is satisfied that the ground(s) the creditor relies upon would have applied even if coronavirus had not had a financial effect on the company.
These provisions will be regarded as having come into force on 27 April 2020.
The restrictions will also affect any debt-based winding up orders that have been made since 27 April 2020, in that:
- the winding-up order will automatically be deemed void if the court would not have made the winding-up order because it would not have been satisfied that the relevant ground(s) relied upon by the creditor would have applied even if coronavirus had not had a financial effect on the company; and
- The court may give directions for the purpose of restoring the company to the position it was in immediately before the petition was presented.
The Court’s Approach
The background
In an urgent application made by an unnamed high street retail company this week, the tenant company sought to restrain one of its landlords from presenting a winding up petition against it on the basis of unpaid rent and service charge.
On 15 April, the landlord served a statutory demand on the company and subsequently filed a winding-up petition, but had not presented it before the tenant company made its application. The landlord’s petition relied upon the ground specified in section 122(1)(f) of the Insolvency Act 1986, namely that the tenant company was unable to pay its debts.
The tenant company’s application for an injunction specified various grounds on which it relied (none of which disputed their liability for the debt) including that a winding-up order would harm the interests of its creditors generally and confer no benefit on the landlord, but the High Court “invited” the tenant company to concentrate on the significance of the restrictions which would come into place if and when the Bill in its current draft form receives Royal Assent.
The Court’s approach now
In the circumstances the Court considered that it was entitled to take into account the likely forthcoming change in the law and the relevance that would have on its decision at the hearing of the petition.
The Judge concluded, given ministerial statements demonstrating the government’s commitment to enact the legislation imminently, that he had a “high degree of confidence” that the provisions relating to winding up petitions in the Bill would be enacted in more or less their current form.
Accordingly, he granted the tenant company the injunction on the basis that:
- once the petition was presented, it was unlikely to be heard by the court before the Bill was passed and as such, at the hearing of the petition, the Court would have to consider whether coronavirus had had any financial effect on the tenant company and could only wind the company up if satisfied that the facts on which the petition was based would have arisen even if the coronavirus had not financially affected the tenant company;
- on the basis of the evidence provided by the tenant company demonstrating the impact of the coronavirus on its finances, the Court concluded there was a strong case (at its lowest) that the coronavirus had had a financial effect on the company and the facts on which the petition was based would not have arisen if coronavirus had not had such an effect, such that the petition would likely fail and
- even though the Court would likely be prevented from winding-up the tenant company at the subsequent hearing because of the restrictions in the Bill, the mere existence of a presented petition would likely cause serious damage to the tenant company.
Comment
Retrospective
Landlords (and all other creditors) should take note of the fact that although the restrictions only apply for a limited period, the Bill has retrospective effect and includes an express provision to allow for any of the relevant periods to be extended by up to six months.
Broad interpretation
Furthermore, the reference to “coronavirus” having a financial effect on the company, as opposed to the lockdown specifically, is very wide and could encompass circumstances where a company was not prevented from trading through the lockdown period but has been otherwise affected by the effects of coronavirus such as a fall in consumer confidence or supply or staffing issues.
Onus on creditor
In practice, the restrictions will likely prevent any debt-based winding up petitions from being presented in the near future unless the underlying debt arose long before the pandemic. Even then the onus will be on the creditor to show coronavirus has had no financial effect on the company or the facts giving rise to the petition would have arisen in any event, which is likely to be very difficult to prove; simply showing that the debt arose pre-pandemic is unlikely, in most cases, to be enough.
What can a landlord do?
Landlords, who are also currently prevented from forfeiting leases by virtue of section 82 of the Coronavirus Act 2020, are now left with little option but to try and reach an agreement with their tenants in relation to unpaid rent and service charge.
A free for all?
However, tenants need to be careful. Nothing in the legislation to date stops the rent, service charge and other sums due under a lease from continuing to accrue and as restrictions are eased, the Courts are not likely to have much sympathy for tenants who have not made provisions for paying these debts (especially those who have accessed emergency funding through the Coronavirus Business Interruption Loan or similar schemes) and/or those who have a history of poor payment and seek to use the impact of the coronavirus as an excuse.
A level playing field
The Courts will have regard to both landlords’ and tenants’ compliance (or otherwise) with the Government’s forthcoming code of practice currently in development by a working group including leading business and trade associations, the purpose of which is to encourage all parties to work together to protect viable businesses affected by coronavirus.
In announcing the forthcoming code the accompanying Government statement specifically stated that the measures to be introduced by the Corporate Insolvency and Governance Bill do not amount to a rental holiday but are designed to “allow breathing space for tenants facing significantly reduced income due to the closure measures and current economic circumstances…rent is still owed, and those tenants who are able to pay some or all of their rent are expected to do so”.
The code will encourage fair and transparent discussions between landlords and tenants over rental payments during the coronavirus pandemic and guidance on rent arrear payments and, if parties fail to comply, may be mandatory.
This update is for general purpose and guidance only and does not constitute legal advice. Specific legal advice should be taken before acting on any of the topics covered. No part of this update may be used, reproduced, stored or transmitted in any form, or by any means without the prior permission of Brecher LLP.
