As has been anticipated for several weeks, the Government has now presented the Corporate Insolvency and Governance Bill to Parliament. The Bill, aimed at further protecting struggling businesses in the time of COVID-19, will lead to a number of important considerations for creditors if and when it is passed as law.
The detail of the measures may of course be amended or updated as the Bill passes through Parliament, but there are two areas that will be of particular interest to landlords.
Provided it does not already have a winding-up petition presented against it, under the Bill a struggling business may apply to a court for a moratorium preventing legal action being taken against it. This measure is intended to give companies breathing space from creditors whilst they restructure their business. The moratorium would run for an initial period of 20 business days, but can be extended by an additional 20 business days by a further application to court, or with the consent of creditors.
All creditors must be notified of the moratorium coming into force, or if it is extended or terminated.
During such time, landlords cannot forfeit leases where rent has fallen due, nor can creditors issue or progress legal proceedings against the company. This type of measure has been under discussion for a number of years but its timing has been brought forward.
Prohibitions and restrictions on statutory demands and winding-up petitions
Under the proposals, the draft legislation effectively nullifies the use of statutory demands during the period of 1 March 2020 to 30 June 2020.
The draft legislation also restricts the presentation of winding-up petitions from 27 April 2020 to 30 June 2020 where COVID-19 has contributed to the company’s financial difficulties. A petition cannot be presented unless the creditor has reasonable grounds for believing that coronavirus has not had a financial effect on the company or the company’s debts and inability to pay would have arisen even if coronavirus had not had a financial effect on the company.
Where a winding-up petition has been presented or a winding-up order made after 27 April 2020 (and prior to the passing of the Bill), the court will apply the same considerations of the effect of COVID-19 and make such order as it sees is appropriate. For example, if the court determines that coronavirus did have a financial effect on the company, it must preserve the position prior to the presentation of the petition, and the company will not be wound-up. It would appear that any company, even if continuing to trade successfully throughout the pandemic, will be able to say that COVID-19 has had an adverse financial effect on it. Therefore, as currently proposed, it seems that almost any company (other than one which was already on the road to insolvency before COVID-19) will be able to prevent a winding-up by a creditor.
Only winding-up orders made by a court prior to 27 April 2020, irrespective of the impact of COVID-19 on the company, will survive under the draft legislation.
This adds an additional burden for landlords, and further limits the action they can take against tenants who have fallen into arrears. As the Bill has to pass through Parliament, there is a small window of opportunity for landlords to make representations regarding the adverse consequences on them, but it remains to be seen whether the Government will take them on board.
Naturally, these measures will give many struggling companies some comfort, in addition to those protections introduced by the Coronavirus Act 2020, that more limits will be imposed on the steps open to creditors.