Restrictions partially lifted on the use of winding up petitions - but not for commercial landlords

Regulations have been published which, from 1 October 2021, will change the current restrictions on the use of winding up petitions (the regulations). A link to the regulations can be found here.

In summary, the regulations partially lift the temporary restriction on the use of winding up petitions imposed by the Corporate Insolvency and Governance Act 2020 and provide that:

1. Creditors (other than those holding “excluded debts”) will have the ability to once again issue winding up petitions against companies in respect of unpaid debts.
2. There will be a threshold imposed during the “relevant period” (up until 31 March 2022) so that a creditor cannot seek to issue a winding up petition against a debtor unless the outstanding debt is at least £10,000. Creditors holding debts of less than this amount will continue to be unable to issue a winding up petition during the relevant period.
3. Creditors with debts of at least £10,000 will first be required to seek proposals from the debtor company for repayment prior to issuing a winding up petition, providing the debtor with 21 days in which to respond.
4. The partial lifting of the restrictions will not apply to commercial rent arrears which are categorised as “excluded debts” under the regulations – and therefore commercial landlords will continue to be prevented from issuing winding up petitions against tenants for unpaid rent or any other payments due from a tenant under a lease.

The continuing (albeit more limited) protection afforded by the regulations will be welcomed by many businesses – particularly those operating in the retail and hospitality sectors still struggling to return to pre-pandemic profitability. This is on the basis that the regulations will prevent creditors from relying upon relatively small debts to form the basis of winding up petitions. 

Where creditors are able to meet the requirements under the regulations and issue winding up petitions, the obligation to seek repayment proposals from the debtor should (theoretically, at least) help foster a more collaborative approach between the parties - although any proposals put forward by the debtor must be to the “creditor’s satisfaction” and notably there is no express requirement to negotiate.

The exclusion of rent arrears in respect of commercial tenancies will come as a blow to landlords, although perhaps not unexpected. This is in light of the government’s earlier decision to extend the restrictions on forfeiture of commercial leases for unpaid rent and the use of the commercial rent arrears recovery process until 25 March 2022, alongside the widely-anticipated rent arbitration legislation to address COVID-related rent arrears. 

Details of the rent arbitration scheme are still awaited, but it is likely to include at least:

1. Ring-fencing of so-called "COVID arrears" by reference to the periods of time when businesses were forced to close by government regulations.

This means that businesses which chose not to re-open for commercial reasons may not be able to benefit from the scheme. The definition of "COVID arrears" will also likely differ for different sectors to reflect the fact that, for example, nightclubs were closed for longer periods than non-essential retail.

Some businesses of course were only open for relatively short periods between lockdowns, and might argue that they were not able to trade freely due to continuing restrictions.

2. Reductions in the rent payable during the lockdown periods to reflect (at least to some extent) the drop in turnover for the tenant business.

This is intended to take into account the fact that some businesses could not trade at all during lockdown while others were able to continue to trade on an alternative basis (e.g. restaurants offering takeaway service).

Landlords can still issue money claims through the courts to recover arrears of rent (or other sums due from tenants) and many have successfully obtained summary judgments for the full amounts due. Given the uncertainties of the rent arbitration scheme, and the ongoing restrictions on winding up petitions for rent arrears, landlords would be wise to consider whether they should issue a money claim in the short-term, rather than risk losing out under the arbitration scheme in the long-term.

The continuing restrictions on creditor action will be particularly frustrating for landlords, given that other creditors will be able to make use of winding up petitions once again (subject to meeting the relevant requirements), enabling such creditors to pursue debtors for unpaid debts in priority to landlords’ own claims against those debtors (as tenants) for outstanding rent arrears.

Of course, this feature also presents a real challenge to directors of debtors, given that they are no longer afforded the "air cover" of the suspension of the wrongful trading provisions of the Insolvency Act 1986 (this temporary relief was removed with effect on 1 July 2021). In deciding whether to pay a non-landlord creditor who is threatening the debtor with winding-up proceedings, those directors will also need to consider whether they will eventually be able to reach a satisfactory accommodation with their landlord creditors, once the arbitration process has run its course. Faced with this mandatory "time subordination" of their rent arrears claims, commercial landlords may be well advised to write stiff letters to their defaulting tenants, warning them of the perils of "wrongful trading" if they start cutting cheques to creditors on a "first come first served" basis.