Finally, after what has seemed like an interminable wait, businesses are now able to consider the promised legislation protecting commercial tenants from insolvency proceedings (the Coronavirus Act loophole) – Courts will no doubt also be grateful for this having been required so far to make judgements on the basis of law that would likely be.
No Insolvency due to Coronavirus
The Government announcement on these measures was relatively clear:
- Statutory Demands and Winding Up petitions to be temporarily voided; and
- Protect the High Street from aggressive debt recovery.
Quite a simple headline – no winding up commercial tenants for rent arrears. However, what are some of the key features proposed:
When does it apply
The ‘Relevant Period’ (always important to know when it applies):
Begins – 1 March 2020
Ends – 30 June 2020 (at the moment)
What does it not apply to
No Winding Up Petitions – unless:
…the creditor has reasonable grounds for believing that –
- coronavirus has not had a financial effect on the company; or
- the facts by reference to which the relevant ground apples would have arisen even if coronavirus had not had a financial effect on the company.
Petitions presented before 1 March 2020
The court may wind up a company if it is satisfied that the ground (reason for winding up) would have arisen even if coronavirus had not had a financial effect on the company.
Winding Up Orders – are they now void
For winding up orders made on or after 27 April 2020, there is a retrospective approach as to whether the court would have made the Winding Up Order if this legislation had been in force. If in doubt, the office holder (liquidator / interim liquidator) can apply to the court for Directions.
Other amendments to the Insolvency Act 1986
Perhaps not of immediate interest, but should be of note, the legislation amends some of the provisions of the Insolvency Act 1986 in relation to misconduct and fraud, and also amends the period for identifying what is known as the ‘Relevant Time’ (s. 240 IA 1986).
The Bill also includes, amongst other things:
- the proposed suspension of Wrongful Trading provisions (section 10);
- makes provision for the termination of contracts with a company entering insolvency procedures (sections 11 – 12);
- provides extensions to certain companies for the periods of filing their accounts (sections 36 – 37);
- Flexibilities in relation to General Meetings (section 35); and
- Adds to Part 26 of the Companies Act 2006 in relation to Arrangements and Reconstructions (Schedule 9).
What is next?
This Bill is still a long way from receiving Royal Assent, so it may be that following further consideration and review elements of this will be amended.
It leaves a lot to be fought over in court when it comes to determining the reason a company has found themselves in financial difficulties, but the Government did need to include some safeguard to avoid the pandemic being used as an excuse for insolvency which would otherwise have arisen in any event.
The Bill seems to take a pragmatic approach toward the unfortunate reality that although Directors are receiving protections, and companies granted flexibility for compliance, these measures will sadly never be enough to ensure the survival of all businesses out there.
Given this underlying pragmatism, the Government likely anticipates that parties will want to avoid inundating courts with arguments over what actually led to the insolvency, and instead look one step forward to see whether the business remains viable moving forward.
The above is accurate as at 21 May 2020, however until the Corporate Insolvency and Governance Bill receives Royal Assent, the information above may be subject to change.
The content of this note should not be considered legal advice and each matter should be considered on a case by case basis.
Charles is a solicitor in our Dispute Resolution Team, working across disciplines with our Company Commercial, Employment and Commercial Property Teams to provide advice to companies considering the suitability of re-structuring.