COVID-19 UK Real Estate Update: The Corporate Insolvency and Governance Bill – further curbs on landlords pursuing rent arrears

What is happening?

On April 23, 2020, the UK Government announced additional temporary restrictions on commercial landlords pursuing outstanding rent (see our Briefing). It has now published full details.

An initial restriction was imposed by Section 82 of the Coronavirus Act 2020, which came into force on March 20, 2020 (see our Briefing). This created a moratorium on commercial landlords forfeiting a business lease for non-payment of rent. The moratorium lasts until June 30, 2020 and can be extended if necessary.

The Government is concerned that some landlords have turned to other measures, including statutory demands followed by winding-up petitions, to put pressure on their tenants to pay outstanding rent immediately. It therefore announced further curbs on landlords pursuing outstanding rent by employing these tactics.

The additional restrictions are included in the Corporate Insolvency and Governance Bill (the Bill), which was published on May 20, 2020.

Significantly, the restrictions go much further than seemed to be indicated by the original April press release, which referred to: “High street shops and other companies under strain [being] protected from aggressive rent collection”. In fact the restrictions in the Bill apply not just to landlords pursuing rent arrears from their tenants but to all creditors pursuing sums owed by corporate debtors.

Equally significantly, these restrictions have retrospective effect.

The Government intends to ask Parliament to fast-track the Bill. Its  second reading is due in the House of Commons on June 3, 2020.

Background

In the case of a company, a statutory demand is a formal written demand for payment within 21 days of a debt that exceeds £750. If the debtor does not pay or apply to court within 21 days for an order restraining the presentation of a winding-up petition, the creditor can present a petition to the court for a winding-up order to force the company into liquidation. While a creditor has the option of simply presenting a winding-up petition to the court, it is common practice to use the statutory demand route to establish the debtor’s insolvency.

In the Government’s view, insolvency proceedings of this nature are not intended to be used as a tool for debt collection but are to deal with financial failure and tackle companies that are no longer viable. It is therefore legislating to place a temporary limitation on the use of statutory demands and a temporary ban on winding-up petitions where a company cannot pay its bills due to coronavirus.

The detail

More specifically, the Bill provides that:

Statutory demands

A statutory demand served by a creditor between March 1, 2020 and June 30, 2020 (or, if later, one month following the coming into force of the legislation) cannot form the basis of a winding-up petition against a company if it  is presented to the court on or after April 27, 2020.

Winding-up petitions

As a further restriction,  a  creditor who wishes to present a winding-up petition against a company on the grounds that the company is unable to pay its debts can only do so on condition that it has reasonable grounds for believing either:

• that coronavirus has not had a financial effect on the company; or
• that the company would have been unable to pay its debts even if coronavirus had not had a financial effect on it.

Coronavirus has a “financial effect” on a company if the company’s financial position worsens in consequence of, or for reasons relating to, coronavirus. Satisfying this condition may well prove very difficult for many creditors.

This limitation applies to petitions presented between April 27, 2020 and June 30, 2020 (or, if later, one month following the coming into force of the legislation) (the relevant period).

What if a petition is presented before the Bill comes into force and the petitioner hasn’t satisfied the condition? In that situation the court may make an order for the company’s position to be restored to what it would have been if the petition had not been made. This allows the court to undo any negative effects of winding-up petitions that are brought under the pre-existing law. The Bill’s Explanatory Notes state that this “may lead to the petitioner becoming liable for the cost of doing so”.

Winding-up orders

There are also limitations on the court. If a creditor presents a petition during the relevant period for the winding up of a company on the grounds that it is unable to pay its debts, the court can only make a winding-up order if is satisfied that the company would be unable to pay its debts even if coronavirus had not had a financial effect on the company.

What if the winding-up order is made before the Bill is enacted? It will be void if it does not meet this requirement. However any actions taken by the official receiver or liquidator in respect of that order will not make them liable in any civil or criminal proceedings. This is to protect insolvency office-holders who have taken actions that were required during the currency of the order, such as collecting in and selling company property.

Time limits

The Bill is based on the provisions of the Insolvency Act 1986 and several temporary adjustments are also made to time limits in certain sections of that Act. For example where a winding-up petition is  presented during the relevant period and the court has wound up the company on the grounds that it is unable to pay its debts, the winding up is deemed to start on the making of the winding-up order rather than, as is usual, the date of the presentation of the petition.

This means that the petition will not prevent disposals of the company’s property (which are voided from the commencement of the winding up unless the court orders otherwise). As a result, the company will not need to seek permission from the court to engage in its normal trading once a petition has been presented.

Comment

Insofar as landlords are concerned, many of whom will themselves be in a difficult financial position, they may well be dismayed at having their wings clipped yet again and will be concerned about the possible impact on rental payments due on the June quarter day (June 24). As to the options that remain available for the recovery of rent arrears, these may include claims against guarantors or  former tenants or drawing on rent deposits, but much will depend on the lease terms.

Tenants should be mindful of the fact that these restrictions, while allowing them a breathing space, do not let them off the hook altogether – the rent will still be payable and with accrued interest.

More generally, it has come as a surprise to many that these restrictions extend beyond the landlord and tenant context. Conversely it should also be borne in mind that there other measures in the Bill that will have a potential impact on the landlord and tenant relationship. The Bill makes permanent changes to the UK’s insolvency regime, including:

• A new free-standing moratorium. Companies will be able to seek a moratorium without entering an insolvency procedure and with the directors remaining in control.
• A new recovery plan. This would enable companies in financial difficulties to enter into a “restructuring plan” with greater scope for making it binding on dissenting creditors than would be possible under a scheme of arrangement.

Once the Bill is enacted, if a tenant in financial distress takes advantage of any of these new provisions, there would undoubtedly be a knock-on effect on a landlord’s rights and remedies.