Click or tap here for our initial blog on this topic, dated 24th April 2020.

The announcement was ambiguous and left a lot of room for interpretation by lawyers and courts alike – clarification has now been provided in the form of the Corporate Insolvency and Governance bill which was published on 20 May 2020 - for a general overview of the bill please click or tap here for our related blog post.

Government announcement - 23 April 2020

When the UK Government announcement was made on 23 April 2020 the general understanding of the new measures were that it was likely to apply only to commercial landlord creditors in a landlord and tenant context. This was further speculated on in the recent case of Shorts Gardens LLP v London Borough of Camden Council ([2020] EWHC 1001 (Ch) in which Mr Justice Snowden held that whilst the new legislation had not yet been enacted, it seemed clear that it was likely to be limited to certain sectors of the economy (i.e. the retail and hospitality industry) and to statutory demands and petitions issued by landlord creditors for rent arrears, stating:

“…it seems overwhelmingly likely that the proposed legislation will be limited to companies in certain identified sectors of economic activity, and to relate to statutory demands and petitions based upon claims by landlords for arrears of rent. Although the press statement does contain phrases that might, if taken out of context, suggest a wider prohibition, when those phrases are read in the broader context of the announcement as a whole, I anticipate that the prohibitions are not intended to extend to entities such as SBLT and Shorts Gardens, neither of which is a tenant in the retail or hospitality industry, or to petitions which are not based upon arrears of rent…”

The High Court also anticipated that the restrictions would solely apply where the inability to pay was due to coronavirus suggesting that until the Government provided further guidance and / or implemented the new measures that the Court would not apply the guidance to wider commercial debts outside the scope of claims made by landlord creditors against high street tenants for rent arrears.

However, it is now clear (although the bill is in its first reading and is therefore subject to change) that the bill goes much further than this and seeks to bind all creditors not just landlords. If the bill remains unchanged the new measures will have retrospective effect and are likely to cause several winding up orders made since 27 April 2020 to become void, this could cause many companies whom are in liquidation to be restored to the position prior to the issue of the petition where the measures would have prevented its grant by the court.

The key points of the legislation in this regard are as follows:

• The measures will apply to all creditors

• The measures will be in force on a temporary basis and will affect:

1. statutory demands served in the period between 1 March 2020 and 30 June 2020 (or if later 1 month after the legislation is enacted) (‘the Statutory Period’); and;

2. petitions presented between 27 April 2020 and 30 June 2020 (or as above) (‘the Petition Period’)

• The measures will apply even where the court has already made a winding up order on a petition presented after 27 April 2020

• They apply only in the context of corporate insolvency

• A creditor cannot seek to rely on statutory demand served in the Statutory Period when presenting a winding up petition against a debtor company, such a statutory demand cannot be relied on even after the expiration of this period

• A creditor cannot present a petition against a debtor in the Petition Period on an existing statutory demand (served prior to the Statutory Period) unless the creditor has reasonable grounds to believe:

1. Coronavirus has not had a “financial effect” on the company; or

2. The debtor would have been unable to pay its debts even if coronavirus has no financial effect on them

• Where the creditor is not relying on a statutory demand i.e. on evidence of cash-flow or balance sheet insolvency then they cannot present a petition against a debtor unless they have reasonable grounds to believe:

1. Coronavirus has not had a “financial effect” on the company; or

2. The relevant ground would apply even if coronavirus had not had a financial effect on the company

• “Financial effect” will occur where the company’s financial positions worsens in consequence of, or for reasons relating to coronavirus

• If a creditor presents a winding up petition after the Petition Period it must contain a statement that the creditor considers that coronavirus has not had a financial affect and the debtor would have been unable to pay its debts in any event / the relevant ground would have applied in any event and must not be advertised until the court has made a determination in relation to whether it is likely that the court will be able to make a winding up order

• Where a creditor presented a petition within the Petition Period the court will have power to make such order as it thinks appropriate to restore the position to pre-petition if the creditors has not evidenced the reasonable grounds as above

• Where a creditor does have reasonable grounds to believe as above and presents a petition within the Petition Period and the company is deemed unable to pay its debt but it appears that coronavirus had a “financial effect” on the company the court can only make a winding up order if they are satisfied that the facts by reference to the ground would have occurred in any event

• Winding up orders made within the Petition Period which would not have been had the legislation been in effect at the time will be deemed void and the court can give directions to restore the company

• Where a creditor presents a winding up petition in the Petition Period and the court makes a winding up order in accordance with the new measures several further amendments will be made in terms of the impact of the order including the dates for review in respect of transactional avoidance mechanisms

It will be interesting to see how the court interprets and applies the wide stretching legislation, particularly given there is limited guidance on the meaning of “financial effect” of the coronavirus which as it stands appears to hold a fairly low threshold. We will keep you updated as the courts apply the legislation in the interim and any significant changes as the bill goes through parliament.

Further reading

Corporate Insolvency and Governance Bill 2020 given royal assent

Need advice? Get in touch today

If you would like further information or require advice in relation to the contents of this blog, please contact either of the following members of our specialist team:

• Steve Dillon (Head of Insolvency) on 01482 590232 / 07967 513408 or email Steve by clicking here.
• Farhana Choudhury (Trainee Solicitor) 01482 590125 or email Farhana by clicking here.