What a wind-up: when can COVID-19 be raised as a ground to dismiss a winding up petition?

Although the contentious background to the applications to restrain the presentation of two winding up petitions heard together in (but only listed singularly as) the case of Shorts Gardens LLB v London Borough of Camden Council [2020] EWHC 1001 (Ch) is somewhat unusual, these cases nonetheless raise some interesting points of principle which may be used by the courts in determining whether it is appropriate to restrain or dismiss a winding up petition due to COVID-19.

The applicants in Shorts Gardens were actually both Shorts Gardens LLP and Saint Benedict's Land Trust Limited (SBLT), with the respondents respectively being the councils of Camden Borough and Preston City. The debts underlying the petitions related to unpaid national non-domestic rates (i.e. business rates) and costs from previous litigation. The Shorts Gardens’ petition had not been presented at the time of the hearing.

The facts and litigation history of the SBLT petition and its connection to the Shorts Gardens petition is convoluted and certainly makes for interesting reading. In particular, Snowden J had already imposed a general civil restraint order against SBLT in relation to an “extraordinary series of meritless and abusive applications in its attempts to avoid the payment” of the rates in question.

However, of more importance to our readers are the take-away points on when COVID-19 might be a legitimate ground to dismiss a winding up petition. Among various other things, both applicants argued that it was inappropriate to proceed with a winding up petition "until 14 days after COVID-19 has been controlled through vaccination and/or the Government make an announcement that it is safe for the United Kingdom to come out of the lockdown".

The applicants relied on reports and ministerial statements that the Government was considering temporary changes to the insolvency regime. Judgment was reserved by Snowden J in the Shorts Gardens case on 7 April 2020 and handed down on 27 April 2020. On 23 April 2020, the Government announced that it intended to accelerate emergency legislation regarding statutory demands between 1 March and 30 June 2020 and winding up petitions between 27 April 2020 and 30 June 2020. The press release stated, in the notes section (which focused on the position of retailers and companies in the hospitality sectors):

"Under these measures, any winding-up petition that claims that the company is unable to pay its debts must first be reviewed by the court to determine why. The law will not permit petitions to be presented, or winding-up orders made, where the company's inability to pay is the result of COVID-19."

Having previously asserted that liquidity was not an issue, both the SBLT and Shorts Gardens now contended that they would suffer cash flow restrictions due to the coronavirus.

In the absence of legislation, Snowden J helpfully considered the intention behind the Government’s proposals to restrict the use of statutory demands/making of winding up orders as a result of COVID-19.

He considered that it seemed "overwhelmingly likely that the proposed legislation will be limited to companies in certain identified sectors of economic activity, and to relate to statutory demands and petitions based upon claims by landlords for arrears of rent"  and that the measures would not be intended to extend to the present case (in which the arrears related to historic business rates liabilities and outstanding court orders). He further noted that the SBLT petition, which had been presented at the time of the hearing, had as a matter of fact actually been presented in March 2020, prior to the dates stated in the Government announcement.

The applications were also criticised for failing to identify, or support with evidence, precisely how either applicant would be unable to pay its petition debts as a result of the coronavirus. Their arguments that the strain under which the court system is placed during the coronavirus crisis would slow the progress of their challenges to the rates liabilities were also rejected.

The claims were deemed to be without merit and dismissed as an abuse of process.

This is another instance of a judge having to give directions or make decisions based on Government statements rather than existing legislation (see our previous article on the Debenhams and Carluccio’s administrations here). We look forward to seeing the coronavirus legislation (presumably under its draft name or something similar) soon, and we hope that it will iron out some of the present uncertainties. The devil, as they say, will be in the detail.

Tim Carter, Partner and Co-head of Restructuring & Insolvency at Stevens & Bolton, comments:

“This case provides helpful insight as to the approach the courts may take regarding the scope of some of the Government’s proposed insolvency-related measures to mitigate the effects the COVID-19. We await the legislation to see whether any threshold applies, or for example whether the measures will be general or limited to specific sectors or industries. Those seeking to present a statutory demand or a winding up petition should, of course, consider the practicalities of doing so in the current climate, especially before we have sight of the much-awaited legislation.”