Following a government announcement on 16 June, the Corporate Insolvency and Governance Act 2020 (Coronavirus) (Extension of the Relevant Period) (No. 2) Regulations 2021 (the Regulations) have been laid before Parliament, coming into force on 22 June.
The Regulations further extend the restrictions on statutory demands and winding up petitions which were introduced last year to give businesses a "breathing space" during the pandemic. These measures had been due to expire at the end of June – leading to fears of a wave of insolvencies when they were lifted. Any potential wave has now been postponed at least to the autumn – with the relevant period now expiring (absent further extension) on 30 September 2021.
The Regulations do not extend the temporary suspension of directors’ liability for wrongful trading, and this was not referred to in the government’s announcement on 16 June - although it may be that such an extension will follow, as it has on previous occasions.
It was also announced on 16 June that – following the UK government’s call for evidence published in April this year, seeking stakeholders’ views on what should replace the restrictions on forfeiture of commercial tenancies for non-payment of rent – those restrictions will be extended by a further nine months, to 25 March 2022. The same is true for commercial rent arrears recovery action (CRAR), albeit it remains the case that CRAR can be exercised as long as 554 days’ rent is outstanding. In extending these restrictions again, the government will be expecting tenants to pay where they can, but where not, it will introduce legislation to ring fence rent arrears built up during the periods of closure due to the pandemic. Landlords will then most likely be forced to share the financial impact with tenants, with a binding arbitration process to take place where agreement cannot be reached.
What this means will depend on the drafting, but if the proposed legislation does what the government aims to achieve, it is to be hoped it will strike the right balance between protecting landlords and supporting businesses in most need. However, whether the property industry agrees is another matter. Landlords are already expressing dismay at another nine months of restriction (with a potential legal challenge now being considered by the British Property Federation) whilst tenants are generally heaving a sigh of relief. This puts the additional insolvency restrictions, which we consider more closely in this article, into much sharper focus.
Recap: what are the restrictions on winding up and statutory demands?
Introduced in the Corporate Insolvency and Governance Act 2020 (CIGA), the temporary restrictions on winding up originally applied to petitions presented from 27 April 2020 to 30 September 2020, and have already been extended several times beyond the initial period. This latest extension is a reminder that, even with the easing of lockdown, many businesses will be prevented from making a full recovery until social distancing and other Covid-related measures are completely lifted.
The restrictions on winding up are set out in Schedule 10 of CIGA, and provide that:
- No winding up petition may be presented based upon a statutory demand served on or after 1 March 2020 – whether or not the financial difficulties of the debtor company are related to coronavirus.
In pre-covid times, a statutory demand left unsatisfied for three weeks would deem a company unable to pay its debts for the purposes of s.123(1) of the Insolvency Act 1986 (IA 1986). The Schedule 10 restriction means that creditors currently have little to gain from service of a statutory demand.
- A creditor may not petition for the winding up of a company on any grounds unless the “coronavirus test” is satisfied. The coronavirus test requires a creditor to have reasonable grounds for believing that:
- Coronavirus has not had a financial effect on the company, or
- The company would have been unable to pay its debts even if coronavirus had not had a financial effect on the company.
Coronavirus is held to have had a financial effect on a company if (and only if) the company’s financial position has worsened in consequence of, or for reasons relating to, coronavirus.
Practical considerations
While the coronavirus test undoubtedly presents a very significant hurdle to any creditor seeking to wind up a recalcitrant debtor, it is not a total bar. The latest statistics published by the Insolvency Service bear this out. From 1 January to 31 May this year in England and Wales, 175 companies have entered into compulsory liquidation (31 during the month of May). Although this represents a mere 13% of the figure for the equivalent period in 2019, it nevertheless indicates that even this deep into the pandemic, cases are still arising where the courts are satisfied on the coronavirus test.
To present a petition, however, a creditor will need to have good reason to believe that the coronavirus test will be satisfied – a summary of which must be set out in the petition itself. Any petitioner will also have to contend with a protracted timescale and additional risk as to costs. A winding up petition will initially be listed for a non-attendance pre-trial review (PTR), for the first available date after 28 days from the date of its presentation. At the PTR, the court may dismiss the petition, if it considers that the coronavirus test will not be satisfied, or give directions either for the hearing of the petition in the winding up list (if unopposed) or for a preliminary hearing to hear oral submissions from the parties on the coronavirus test.
Until the court has concluded that the coronavirus test is likely to be satisfied (either at the PTR or a preliminary hearing), the petition remains private and will not be available for inspection, or discoverable on the court file in response to any search – a fact which could lead to several winding up petitions being presented in relation to the same company.
Requirements to publish or advertise the petition do not apply until the court has made a determination as to whether it is likely to be able to make a winding up order. It will not be therefore be necessary for a company served with a winding up petition to apply for an injunction restraining advertisement of the petition - as would be usual where the petition debt was in dispute.
Only when the court has been satisfied on the coronavirus test, will the winding up petition finally be listed for a hearing in the winding up list. Undoubtedly the extra procedure and delay may discourage creditors from presenting a petition, even where they feel they have a strong case.
The approach of the courts
The decision of Mr Justice Barber in In Re A Company [2020] EWHC 1551 (Ch) makes clear the challenge facing petitioners. While the judge held that the evidential burden of showing that coronavirus had had a financial effect on the debtor company fell upon the company, not the petitioner, it was only necessary for the company to establish a prima facie case. Coronavirus need merely to be shown to have had some financial effect – not that it be the cause of, or even a contributor to, the company’s insolvency. In this case, the debt in question pre-dated the pandemic, but the (limited) evidence provided by the company, regarding difficulty in obtaining financing due to the pandemic, enabled it to meet the low threshold.
Where it appears to the court that coronavirus has had a financial effect on the debtor, the Judge Barber held that burden of satisfying the court that the company would have been unable to pay its debts even if coronavirus had not had an effect on it, then falls on the petitioner.
More recent cases, however, demonstrate that debtor companies should not become complacent with regards to showing the financial effect of coronavirus on their business, when defending a winding up petition. In Newman v Templar Corp Ltd [2020] EWHC 3740 (Ch), the judge held that the debtor company had failed to adduce any evidence to indicate that the reason for failure to pay its debts (in this case unpaid wages) was due to coronavirus. The low threshold test of showing that coronavirus had had a financial effect on the company was not satisfied.
Similarly, in Re PGH Investments Ltd v Sean Ewing [2021] EWHC 533 (Ch), the judge stated that although it was sufficient for a company to show that it had suffered only indirect financial effect as a result of coronavirus, it nevertheless had to adduce some documentary evidence of this – it was not sufficient merely to refer to the prevailing investment climate. In this case, had the judge not already decided that the company was not liable to pay the debt in question, he stated that he did not consider coronavirus to have had a financial effect on the company, and therefore the restriction on making a winding up order in relation to the company did not apply.
Looking ahead
Notwithstanding the above cases, there are certain industries – notably those with substantial outstanding rent such as retail and hospitality – where it is likely to be impossible to satisfy the coronavirus test. This therefore raises the question of whether the current extension merely pushes the insolvency cliff-edge back for a few months. Whether the government proposals regarding coronavirus rent arrears help to alleviate this remains to be seen – while rent arrears may well be the most substantial debt on many companies’ balance sheets, they are unlikely to be the only one.
However, many landlords are themselves facing financial uncertainty, especially when faced with pressure from lenders whose patience may not extend to a full two years since the eviction ban began. Unless the CIGA restrictions are extended beyond 30 September 2021, some landlords may have little option but to take matters into their own hands and pursue petitions, if they are likely to result in payment, notwithstanding the government proposals.
We await with interest the government’s proposed new legislation which will codify how the ring-fenced pandemic-related rental arrears will be finally determined and the envisaged timetable for that determination (particularly taking into account that the moratorium on winding-up petitions will expire on 30 September this year, by which date it is highly unlikely that any arbitration process will have run its course). It will also be interesting to see what – if anything – that legislation provides with respect to the payment of future rent which falls due after lockdown is lifted on 19 July. It is noteworthy that, in their responses to the government’s call for evidence published in April, both the British Retail Consortium and the British Property Federation opined that tenants should be required to pay rental liabilities arising post lifting of lockdown as they fall due, without any further moratorium protection either from winding-up petitions or from forfeiture.
If you have any questions about the matters discussed, please contact a member of our restructuring and insolvency or real estate disputes teams.
David Steinberg
Helen Martin
Markus Klempa