Corporate Insolvency and Governance Bill: restrictions on statutory demands and winding up petitions

Temporary provisions restricting action to wind up companies and reverse some winding up orders already made are a step closer following presentation of the Corporate Insolvency and Governance Bill (“Bill”) to the House of Commons on 20 May. The Bill will now work its way through both Houses before imminently becoming law. The Bill includes a number of substantial corporate insolvency changes, but also temporary provisions restricting action to wind up companies in light of Covid-19, on which we focus here.

In short, from a real estate perspective, no winding up petition based on a statutory demand served on a corporate occupier between 1 March and 30 June 2020 (or 1 month after the Bill becomes law if later) will be permitted. Therefore, presentation of any petition would have to be brought on one of the other grounds contained in the existing insolvency legislation, for example on the basis of the company’s inability to pay its debts or to satisfy a judgment, or evidence that its assets are less than its liabilities, which may not be an option.

If there are valid grounds to present a petition, the creditor must get over an additional hurdle in showing it has reasonable grounds to believe that coronavirus has not had a financial effect on the company, or the facts on which the grounds for the petition is based would still have arisen. In many cases, this may be difficult to do where the debtor holds the evidence. This seems at odds with Government commentary encouraging corporate tenants to pay what they can afford.

Property owners will need to carefully assess the reasons given for any non-payment and invite those occupiers who say they cannot pay to provide suitable supporting information in order to consider its options. Inevitably every business will have been impacted in some way by Covid-19 and as such there is a risk, on the current wording, that asking that question will automatically make it impossible to take any further steps.

That said, the provisions will clearly help companies suffering the financial impact of coronavirus to avoid insolvency while trying to keep the future business viable and should encourage struggling corporate occupiers to be open and transparent about their financial position. The reality is that these sums are still due, the restrictions are temporary and so it should be in the interest of creditor and debtor to work together to achieve a commercially viable outcome.

Summary of provisions

The Bill, as currently drafted, contains the following provisions, which will take effect from 27 April 2020 when made law:

• No winding up petition (“petition”) can be presented after 27 April 2020 based on a statutory demand served during the period 1 March 2020 to 30 June 2020 or, if later, 1 month after these provisions become law (“relevant period”). The Bill does contain provisions allowing for extensions to time periods given
• No petition can be presented after 27 April 2020 based on the company’s inability to pay its debts or other relevant grounds unless the creditor satisfies the condition that it has reasonable grounds for believing that coronavirus has not had a financial effect on the company, or the relevant grounds for presenting the petition would have arisen even if coronavirus had not had a financial effect on the company (“Condition”)
• The Court can restore the company to its position prior to presentation of the petition in respect of any petition presented after 27 April 2020 but before the Bill becomes law if the Court is satisfied the creditor presented the petition without meeting the Condition
• If it appears to the Official Receiver (following an order for winding up) that the creditor who presented the petition did so without the Condition being met it must refer the matter back to Court
• If a petition is presented in the relevant period where it appears coronavirus had a financial effect on the company, the Court can only make a winding up order if satisfied the relevant grounds would have arisen even if that was not the case
• If a winding up order was made after 27 April 2020, but before these provisions come into force, the order will be void if the Court would not have made the order had the provisions been in force

Other Government measures affecting landlords and tenants

The proposed restriction on landlords’ ability to rely on a statutory demand and the threat of winding-up as a means of putting pressure on a tenant to pay its rent adds to a host of measures taken by the Government to help struggling tenants affected by Covid-19, which include the restriction on forfeiture of commercial leases for non-payment of rent (or other sums) until 30 June 2020 and the requirement for 90 days’ rent to be in arrears before CRAR can be exercised (expiring on 30 June 2020).

As things stand, these measures have effect only in the short term, and it remains to be seen whether the government will seek to extend these, or introduce further interim measures to ease tenants back into the status quo before the advent of Covid-19.

The Government will be keen to push the Bill through quickly and an update will follow.