Moratorium on winding up petitions under the Corporate Insolvency and Governance Bill 2020
On 20 May, the Secretary of State for Business, Energy and Industrial Strategy (BEIS) introduced the Corporate Insolvency and Governance Bill to Parliament.
The text of the Bill was made available on the same day. The Bill covers, principally, the introduction of a new restructuring moratorium, to allow company directors a breathing space in which to restructure its affairs with a view to rescuing the company as a going concern (and the concomitant restructuring plan provisions).
Of more immediate concern to debtors and creditors of trading companies, however, are the provisions in sections 8-9 and Schedule 10 of the Bill, which effect a temporary moratorium on presentation of winding up petitions between 27 April 2020 and 30 June. This temporary measure affects most non-financial services focused trading companies (significantly retailers and wholesalers of consumer goods). However, it comes as some surprise that the provisions have not been confined to a specific sect of circumstances (e.g. leases of commercial property) or to a specific sector (e.g. retailers). Instead, potentially any company benefits from the provisions, unless it falls within a narrow list of exceptions (mostly related to financial services, capital markets, derivatives and commodities).
For companies in scope, the moratorium can be summarised as follows:
- The Bill isn’t yet in force, all stages are scheduled to go through on 3 June, so that it will come into effect on that day (or shortly thereafter). It affects only winding up petitions issued on or after 27 April 2020 until 30 June, so will have retrospective effect.
- Schedule 10 of the Bill contains the provisions on statutory demands and winding up petitions.
(a) On or after 27 April, under paragraph 1 of Schedule 10, there is a blanket prohibition on presentation of winding up petitions based on statutory demands served between 1 March and 30 June. Although there appear to be no exceptions to this, the provisions appear to conflict with the next provision (paragraphs 2 and 3 of Schedule 10).
(b) Under paragraphs 2 and 3 or Schedule 10, no winding up petitions at all may be presented on or after 27 April on the grounds set out in S.123(1) (a) to (e) and (2) of IA 1986 (i.e. the majority of the grounds for winding up) UNLESS the creditor has reasonable grounds to believe that:
- Coronavirus has had no financial effect on the company (i.e. its financial troubles had arisen independently of Coronavirus); OR
- The inability to pay debts would have arisen even if Coronavirus has not had a financial effect on the company (i.e. were inevitable).
In this scenario, the burden of proof is on the petitioning creditor, and it may prove to be a hard burden to discharge, as the petitioning creditor is effectively being asked to prove a negative.
- As mentioned, the provisions above are deemed to have effect from 27 April 2020, so will have retrospective effect. This puts courts in a dilemma now, before the Bill obtains the force of law, but given its retrospective effect, as to whether to restrain winding up petitions. The courts are bound to have regard to the Bill when making that decision. So far, there have been two cases of which we are aware which have considered the prospective legislation with regard to enforcement for (respectively) (i) unpaid business rates and (ii) unpaid rent, with differing outcomes:
(a) Shorts Gardens LLP V London Borough of Camden [2020] EWHC 1001 (Ch), decided 27 April 2020. This case decided that Covid-19 was not the reason the companies involved were facing financial difficulties. Although the learned judge expressed his understanding was that the bill would only apply to landlord & tenant situations, in specific sectors and linked to Covid-19, the fact that the petitions were presented well before 27 April and were based on long-standing arrears and costs orders, mean that the Bill would not have been engaged, despite the widening of its scope.
(b) Travelodge Hotels Limited (THL) v Prime 2020, an as yet unreported decision made on 6 May 2020, in which the judge restrained the issue of a petition for unpaid rent, having regard to the upcoming Bill and its retrospective effect (and the fact that he Bill was virtually certain to be passed). The restraint granted was temporary however, and the case will be coming back to court.
Both cases amply demonstrate the balancing act the courts will have to undertake during the period to 30 June, and in particular the assessment as to whether a company’s financial difficulties are almost exclusively due to the impact of Coronavirus on its business.
In summary, winding up petitions against most trading companies are now prohibited from 27 April, save where the creditor can satisfy the court that (i) Coronavirus did not cause the debtor’s financial difficulties or (ii) the debtor’s financial difficulties would have occurred independently of Coronavirus. No doubt a substantial body of case law will arise as a result of the legislation.
If you would like to discuss any questions or concerns you may have about the new legislation, please contact us.
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at May 2020. Specific advice should be sought for specific cases.
