Effective ban on winding up petitions by creditors during the Coronavirus pandemic
Following the Government’s announcement on 23 April that it was planning to introduce measures to restrict the use of statutory demands and winding-up petitions during the Covid-19 pandemic, it was widely trailed by the Government that such measures would target aggressive action by commercial landlords, most likely in specific sectors such as retail. Many in the profession were therefore surprised to find that (amongst a number of other detailed and significant changes to insolvency legislation, for example the introduction of a preliminary moratorium), the Corporate Insolvency and Governance Bill (“the Bill”) proposes restrictions on statutory demands and winding-up petitions which it is intended will bind all creditors, not just landlords.
Schedule 10 of the Bill, Part 1, provides that a creditor will be prohibited from applying for the winding up of a debtor company between 27 April 2020 and 30 June 2020 (or one month after this provision comes into force, whichever is later) if the creditor is relying on failure to pay a statutory demand that was served between 1 March 2020 and 30 June 2020 (or one month after this provision comes into force, whichever is later) (“the Relevant Period”). Significantly, the proposed restriction relates to all statutory demands served within the Relevant Period, not just those relating to rent arrears.
There is a similar restriction against winding up on the basis of other insolvency grounds, e.g. by relying on the debtor company being unable to pay its debts. Part 2 of Schedule 10 provides that a creditor may not apply for the winding up of a debtor company on or after 27 April 2020, for example by reference to cash flow or balance sheet insolvency, unsatisfied execution of a judgment or a statutory demand served outside the Relevant Period. This is unless the creditor has reasonable grounds to believe either that (i) Coronavirus has not had a financial effect on the company or (ii) the facts by reference to which the relevant insolvency ground applies would have arisen in any event. There is a presumption that Coronavirus will have had a financial effect on the company if the company’s financial position worsens as a result of, or for reasons relating to, Coronavirus. This is likely to be a preliminary issue in circumstances where a winding-up petition is issued.
When the Bill comes into force, the provisions will have a retrospective effect from 27 April 2020 which in some cases will result in winding up orders already made being voided and the companies in question being restored to their pre-petition state. Consideration will have to be given as to how this will be achieved and the implications on any action taken by the Official Receiver since the Order was made.
It is important to note that the provisions in the Bill relate solely to debtor companies. There is no similar protection proposed for individual tenants against statutory demands and subsequent bankruptcy petitions although the Courts are determining separately whether and if so how such demands and petitions should proceed.
The Bill has not yet been passed into law and it remains to be seen whether it will progress without amendment. The Bill is scheduled to have its second reading in the House of Commons today (3 June 2020) and the indications are that all remaining of stages of the Bill will proceed on an urgent basis and consequently therefore without full and considered parliamentary scrutiny which would ordinarily be afforded to detailed legislation.
John Bradshaw is a partner and specialist in Insolvency & Business Recovery at Barker Gotelee Solicitors.