At the start of the coronavirus pandemic, temporary provisions were put in place under the Corporate Insolvency and Governance Act 2020 ("CIGA") to allow businesses impacted by the COVID-19 pandemic breathing space from the threat of winding up action. Those restrictions will expire on 30 September 2021. However the restrictions will not fall away entirely with new temporary provisions being introduced by the UK government by way of the Corporate Insolvency and Governance Act 2020 (Coronavirus) (Amendment of Schedule 10) Regulations 2021 (the "CIGA Schedule 10 Regulations") which will be effective between 1 October 2021 and 31 March 2022.
The CIGA Schedule 10 Regulations are designed to provide continued support to viable businesses whilst allowing a return to the normal order of things as regards the winding up process (temporarily with carveouts). They state that statutory demands will return, however their return will be tapered to give all relevant businesses a fighting chance at prospering in the future. The new temporary restrictions will still, however, prevent commercial landlords presenting winding up petitions in relation to 'commercial rent arrears built up during the pandemic' unless it can be shown that the reason for non-payment is unrelated to the pandemic. This phasing out of the restrictions on winding up petitions has been drafted in this way to ensure that it will work alongside (and, crucially, not undermine) the proposed legislation in relation to the recently announced rent arbitration scheme.
What are the rules?
In order to issue a winding up petition against a creditor, the following four conditions must be met:
A. The debt owed is for a liquidated amount, has fallen due for payment and is not an 'excluded debt' (effectively rent or any other payments (e.g. service charges) that are due under a relevant business tenancy)
B. The creditor has delivered written notice to the debtor company containing a statement that the creditor is seeking the company’s proposal for the payment of the debt and that if no acceptable proposal is made within 21 days of the date of delivery of the notice then the creditor intends to petition for the company’s winding-up (this is called a Condition B notice)
C. 21 days have passed since the Condition B Notice was delivered and the company has not made an acceptable proposal for the payment of the debt
D. The debt owed to the creditor (or a group of creditors provided they have all met Conditions A to C) is at least £10,000.
The term "excluded debt" captures rent, or any sum or payment that a tenant is liable to pay, under a relevant business tenancy (for England and Wales) or under a lease as defined by the Law Reform Act 1985 (for Scotland) which is unpaid by reason of a financial effect of the coronavirus.
The use of the term 'financial effect' with respect to the definition of 'excluded debt' will perhaps be unwelcome to commercial landlords who will have been looking for a clearer distinction as to what is and what is not an "excluded debt", particularly as regards rent arrears of those tenant companies who have not been forced to close premises during the pandemic. The broad definition is, presumably, in recognition of the fact that even if premises have remained open that does not necessarily mean that the pandemic has not had a financial impact on the business e.g. on cash flows.
The practical effect of the new provisions will be that as long as a tenant is able to establish that non-payment of rent is due to the financial effect of the pandemic on its business it will be able to resist the presentation of a winding up petition on the basis of such non-payment irrespective of whether its premises have remained open.
Jonathan Dunkley, Restructuring and Insolvency Partner (London) commented:
"It will be interesting to see how the courts apply the 'financial effect' test in the context of the new provisions. Taking a steer from the recent case law on this in the context of winding up petitions presented post CIGA the threshold for a debtor establishing a financial effect is likely to be relatively low meaning a significant number of tenant companies may well be able to resist winding up petitions. This is perhaps not a surprising outcome as these newly announced provisions will still allow winding up petitions to resume without undermining the proposed rent arbitration scheme which is intended to facilitate negotiations between landlords and tenants so that they share the pain in relation to rent arrears."
We await further detail on the rent arbitration scheme with interest. The latest position on that is contained in the update from Womble Bond Dickinson's Mark Barley, Real Estate Litigation (Partner) which can be found here.
Mark Barley commented:
"The government have been clear that they envisage genuine disputes regarding commercial rent arrears arising during and as a result of the pandemic to be resolved through the anticipated arbitration scheme, rather than through normal debt recovery procedures.
"The new restrictions on winding up petitions in respect of rent arrears will not necessarily, however, prevent some landlords from trying to use insolvency procedures after 30 September 2021, though we can probably anticipate the courts being slow to allow landlords to force payment of rent arears by means of such procedures in circumstances where the arbitration scheme could be expected to be the more appropriate forum for resolving rent arrears disputes."
Should you be interested in how the recent legislative changes will impact your business, please get in touch with any one of the contacts listed.
Attributed to Omar Sammakia, Solicitor.