Insolvency proceedings and the Coronavirus

If a statutory demand served by a creditor seeking payment of a debt is not satisfied or set aside by the debtor company, it establishes insolvency for the purposes of the Insolvency Act 1986 and allows a creditor to present a winding up petition against the debtor.

One of the temporary measures to be introduced into law by the new Corporate Governance and Insolvency Bill 2019 -2021 (the Bill) to assist UK businesses facing extreme, but temporary, difficulties caused by the coronavirus epidemic is a provision preventing creditors from presenting a winding up petition against a debtor company on or after 27 April 2020 based on a statutory demand which has been served in the period between 1 March 2020 and 30 June 2020[1]. The Bill also provides for restrictions on the presentation of winding up petitions in the period between 27 April 2020 and 30 June 2020 unless the creditor has reasonable grounds for believing that: (a) coronavirus has not had a financial effect on the company, or (b) the facts by reference to which the relevant ground for petitioning applies would have arisen even if coronavirus had not had a financial effect on the company.

Notwithstanding that the Bill has not yet become law, any uncertainty as to how an application to restrain a creditor from presenting a winding up petition would be dealt with by the Court in the current circumstances has been largely dispelled following a recent decision of the High Court handed down on 2 June 2020[2]. In this case, injunctive relief was granted preventing the creditor issuing a winding up petition on the basis of these prospective changes to the law.

Background to the case

The debtor company was an unnamed high street retailer. It traded from a retail unit belonging to the landlord creditor until it was required to close on the instructions of the UK Government due to the coronavirus crisis.

The retailer subsequently failed to pay rent and service charge which had fallen due to the landlord under the terms of its lease.  The landlord, unable to seek forfeiture of the lease on the grounds of non-payment as section 82 of the Coronavirus Act 2020 prevented it from doing so, served a statutory demand on the retailer on 15 April 2020.

Aware that a winding up petition could be presented at any time, the retailer applied to the Court on an urgent basis for an injunction to restrain the landlord from presenting the petition.

In granting the injunction the Judge focussed primarily on the significance of the prospective changes to the law to be made by the Bill. The Judge was satisfied, based on ministerial statements, as to the Government’s commitment to enact the Bill and that it would be enacted in ‘more or less’ its current form. The Judge also noted that it was unlikely that the petition would be heard before the Bill was enacted and, once enacted, the relevant provisions are to have retrospective effect (they are to be regarded as having come into force on 27 April 2020).  The Court was therefore able to consider the likelihood of success the petition would have in light of the Bill.

The Judge was presented with a substantial body of evidence to show the financial effects of coronavirus on the retailer, leading the Court to conclude that there was ‘a strong case (at the lowest)’ that coronavirus had a financial effect before presentation of the petition and the facts upon which the petition would be based would not have arisen had it not been for coronavirus.

Commentary

The restrictions on creditors’ rights to enforce payment of debts brought about by the Bill are wide reaching, albeit temporary, and are likely to prevent the presentation of many winding up petitions during the period in which the restrictions apply unless it can be shown by a creditor that the debt relied upon existed before the outbreak of coronavirus and that a debtor would have been unable to pay even if coronavirus had not had a financial effect.

Even in circumstances where a creditor believes it may have an arguable case that coronavirus did not have a financial effect, it remains to be seen how a Court will determine this given that it may not be immediately obvious how a debtor’s finances and ability to meet its debts have been impacted by the coronavirus outbreak. For example, a debtor may have been financially impacted by supply chain issues caused by restrictions imposed by other countries or a fall in consumer confidence.

If you are a debtor faced with the prospect of a winding up petition it will be important for you to present as much supporting evidence as possible to demonstrate the impact of coronavirus on the financial position of the company.

[1]The end of the ‘relevant period’ for this temporary measure may be extended depending on when the relevant provisions of the Bill come into force.

[2]Re: A Company (Injunction to restrain presentation of petition) [2020] EWHC 1406 (Ch)

Originally published at Kermanco.com prior to the firm’s combination with Armstrong Teasdale in early 2021.