Covid Law in Action

What the Corporate Insolvency and Governance Bill 2020 means for insolvency law and insight to the extent to which government intervention to protect businesses from the economic impact of the pandemic will go.

Covid law moves quickly and Mr Justice Morgan’s 2 June 2020 decision in Re: a Company (Injunction to Restrain Presentation of Petition) [2020] EWHC 1406 (Ch) in which he stopped a landlord creditor presenting a winding up petition against an unnamed high street retailer that owes rent and service charges shows just how much the landscape has changed in the last few months.

The Corporate Insolvency and Governance Bill 2020

The decision may well alarm some as it’s based on the provisions of the Corporate Insolvency and Governance Bill 2020 which is not yet law. When passed, the bill will enact the changes to insolvency law the Government announced at the end of March, including the relaxation of the rules around wrongful trading. It will not, however, relax any of a director’s duties under the Companies Act 2006 or any other of the matters they must consider under the Insolvency Act 1986 to prevent potential personal liability in the event of an insolvency.

The judgment follows fast on the heels of Mr Justice Birss’ ruling in Travelodge Ltd v Prime Aesthetics Ltd [2020] EWHC 1217 (Ch) which also considered the bill and prevented another petition. It acknowledges that Travelodge was handed down before the bill was published and was based on what had then only been said in ministerial statements.

Morgan J took the view that the position is clearer now that the bill has been published and “is being actively and speedily considered by Parliament” so he could “form a confident assessment as to when it will receive Royal Assent”. Like Birss J, he also accepted submissions that the court can take the possibility of a change in the law into account in reaching a decision. It will be interesting to see both how far authorities on this are pushed and the extent to which government intervention to protect businesses from the economic impact of the pandemic will go.

That protection is eminently sensible and in a great many cases likely essential at a macroeconomic level. It also chimes with the Government’s views on responsible contractual behaviour during the pandemic that I wrote about previosuly. Many in the landlord/creditor lobby will no doubt beg to differ as they are arguably entitled to given their dependence on receipts.

Is the CIG Bill a blanket ban on winding up petitions?

Not in the right case. Its proposed provisions in relation to petitions and statutory demands will be temporary, but they need to be considered carefully to establish whether there may be a way around their terms on the specific facts.

Paragraph 1 of schedule 10 of the bill prevents both registered and unregistered companies from being wound up where they have failed to comply with a statutory demand served between 1 March 2020 and the later of 30 June 2020, or one month after schedule 10 comes into force. As it also provides that it shall be taken as having come into force on 27 April 2020, 30 June may well be the cut-off date unless pressure is brought to bear to extend the protection beyond then (and the bill includes powers for this).

Schedule 10 continues to prohibit the presentation of winding up petitions against registered and unregistered companies based on various grounds, including the usual non-compliance with a statutory demand and either cash flow or balance sheet insolvency unless the petitioning creditor can satisfy the court that it has reasonable grounds for believing that:

  • (a) coronavirus has not had a financial effect on the company; or
  • (b) the debtor company would have been unable to pay its debts or be insolvent even if coronavirus had not had a financial effect on the company.

These qualifications introduce a new requirement for evidence to clear the hurdles they put in place. In short, a would-be petitioner will have to satisfy the court that the debtor’s inability to pay was not caused by the pandemic. Given the severe global economic shock the virus has delivered, that may be hard to evidence in many cases.

Courts have long frowned on creditors using insolvency proceedings as a debt recovery tool. Additional care will be needed now because, not least because petitions presented between 27 April 2020 and the date on which the bill comes into force that do not meet its no financial effect conditions will be void, and the petitioning creditor can be made liable for the costs of undoing any negative impact the petition may have had on the debtor.

CONTACT SIMON

If you would like more information or advice relating to this article or a Commercial Litigation & Dispute Resolution law matter, please do not hesitate to contact Simon Walsh on 01727 798085.

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