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UK COVID-19: Landlords take note – this is not a wind up

RE: A COMPANY (INJUNCTION TO RESTRAIN PRESENTATION OF PETITION)

The court considered an application for an injunction in light of the new Corporate Insolvency and Governance Bill 2020 (“CIGB”), which was published on 20 May 2020 and is expected to come into force in late June or early July – click here for more details on the provisions of the CIGB.  Amongst other things, the current draft of the CIGB temporarily prevents creditors presenting winding up proceedings on or after 27 April 2020 on the basis of statutory demands served between 1 March 2020 to 30 June 2020 (or, if later, one month after the CIGB is enacted), unless the creditor can satisfy the court it has reasonable grounds for believing:

(i)  coronavirus has not had a financial effect on the company; or

(ii) the relevant ground (being the company’s inability to pay its debts) would apply even if coronavirus had not had a financial effect on the company.

The case

The tenant, an unnamed high street retailer, failed to pay its rent and service charge pursuant to the lease.  The landlord was, as a result of section 82 of the Coronavirus Act 2020, prevented from exercising a right of forfeiture and instead served a statutory demand on the tenant on the basis that it was unable to pay its debts, as a precursor to presenting a winding-up petition. The landlord was aware that the mere presentation of the petition would be enough to cause problems for the tenant (such that it may force it to pay up).

In the absence of an injunction, the landlord could present the petition at any time after expiry of the statutory demand and as such, the tenant made an urgent application for an injunction.

The tenant initially argued that the petition amounted to an abuse of process: a winding-up order should only be made where that is in the interests of the company’s creditors as a whole and the process should not be used for the sole benefit of a petitioning creditor trying to pressurise the company to pay.

The judge, Mr Justice Morgan, however, invited the tenant to concentrate on the significance of the CIGB and it was primarily on this ground on which the order was made.

The landlord’s position was that in advance of the CIGB being enacted, there was nothing to stop a creditor presenting a winding-up petition.

The court was not convinced and was content it had authority to take into account the likelihood of a change in law that would be relevant to its decision.

The court granted an interim injunction and its reasoning was as follows:

• The policy behind and provisions of the CIGB were obvious and the court was confident that the CIGB would be enacted “more or less” in its current form.

• It was unlikely in any event, that the petition would be heard before the CIGB was brought into force.  As such, the court was able to consider the likelihood of the success of the winding-up petition in light of the CIGB.

• The court was convinced that the petition would be likely to fail (relying a significant amount of financial evidence furnished by the tenant) and that the petition would have a seriously damaging effect on the tenant.

What is the impact?

This case acts as a further deterrent for landlords who are considering the use of statutory demands or winding-up petitions against non-paying tenants in the wake of the pandemic.

The decision is perhaps not too surprising, though, as the courts have previously disapproved of the use of statutory demands as a method of debt recovery.  As landlords will know, the presentation of a petition can put tenants in breach of certain covenants in, for example, loan agreements or other financial arrangements and for that reason they often serve as a useful means of putting pressure on those tenants that can pay.

The CIGB, along with the other measures introduced by the government, leaves landlords with limited options to force the hands of tenants to pay their rent and other sums owing under the lease.  In the absence of statutory demands, winding-up petitions and forfeiture, landlords may have to resort to the more traditional route of commencing debt recovery proceedings at court, seeking an early default judgment against the tenant.

The court in this case also relied on the significant body of financial information furnished by the tenant showing the financial impact of coronavirus on its business.  What we have not seen, is the court considering a situation where the petition is brought against a tenant that is not struggling as a result of coronavirus.  This may be permissible under the CIGB.

What some landlords might find odd is that where a the tenant can prove it is in fact able to pay its debts as they fall due (and is clearly therefore solvent) then they will still be prevented from presenting a winding-up petition under the CIGB, and even before the Bill is enacted the court is likely to grant an injunction against any petition being presented.

 

For material that will help you run your business, as well as details of our business continuity planning, our COVID-19 Topic Centre houses all  of our resources on the topic – from crisis leadership to supply chain.

Key real estate contacts

Daniel Norris, Global Head of Real Estate

Mathew Ditchburn, Head of Real Estate Disputes

Hannah Quarterman, Head of Real Estate Planning