The Corporate Insolvency and Governance Act 2020 impact for Landlords

7th July 2020

Introduction

The Corporate Insolvency and Governance Act 2020 (the “Act”) was given royal assent on 25 June 2020 and has introduced a number of measures which will need to be considered by Landlords in situations where tenants are in arrears regarding sums due under a lease.

The relevant provisions of the Act for Landlords are considered below.

New Insolvency Procedure

The Act saw the introduction of a new insolvency procedure which can be instigated by the Directors of a company and takes the form of a free standing moratorium, throughout which the Directors retain control of the company, with the process administered by a licensed insolvency practitioner (the ‘Monitor’).

This new moratorium will last for a period of 20 business days, with the ability for it to be extended by a further 20 business days without the consent of the creditors of the company and then by further periods with the agreement of either its creditors or the Court.

For the duration of the moratorium, creditors will not be entitled to commence or continue court proceedings, or enforce any security against the company in question. As well as this, the company itself will not be able to make payments to creditors for debts pre-dating the moratorium above a statutory maximum, currently set at the greater of £5,000 and 1% of the value of the debts and other liabilities owed by the company to its unsecured creditors when the moratorium began, unless first approved by the Monitor.

Statutory Demands and Winding-up Petitions

Under the Act, a creditor will not be able to present a winding up petition against a debtor company in reliance on a statutory demand that is served between 1 March 2020 and 30 September 2020.

In addition the Act has introduced a “Coronavirus Test” to the above. A creditor will not be able to present a winding up petition under section 124 of the Insolvency Act 1986 against a debtor company until 30 September 2020 on the grounds that it is unable to pay its debts, whether this is by reference to a statutory demand or unsatisfied execution issued on a judgment, unless the creditor has ‘reasonable grounds for believing that (a) coronavirus has not had a financial effect on the company, or (b) the facts by reference to which the relevant ground applies would have arisen even if coronavirus had not had a financial effect on the company’.

Where a creditor is not seeking to rely upon a statutory demand or unsatisfied execution then, again, they must have reasonable grounds for believing that coronavirus has not had a financial effect on the company or that the grounds would apply even if coronavirus had not had a financial effect.

Any winding up petition that is presented in the above period must contain a statement on the part of the creditor that they consider the above conditions to have been met.  The matter will then be listed for a private hearing to consider whether the Coronavirus Test has been satisfied. Only once a creditor can satisfy the Coronavirus Test should the petition should be advertised.

In the event that a creditor presents a petition and the company is deemed unable to pay its debts but it appears to the Court that coronavirus had a financial effect on the company before the presentation, it is only able to make a winding up order if it is satisfied that the grounds would have arisen even if coronavirus had not had a financial effect on the company.

Walker Morris Comment

Obviously each case will turn on its individual facts however in light of the above we would note:

Given that the Act only relates to corporate insolvency, there is, as yet, no change to the rules regarding individual insolvency. As such, where Landlords have tenants that are individuals, the position has not changed.

Where landlords have tenants who have accumulated significant historic arrears, these would appear to fall within the exception to the new rules in that the landlord would state that the relevant grounds for a winding up petition would have been met even if coronavirus had not had a financial effect on the company. Whilst this may be the case, landlords should be aware that a tenant in such a situation may seek to argue that whilst those arrears were not previously affected by coronavirus, this is now the reason they cannot be paid. In such circumstances, it may be necessary to review historic balance sheets of the tenant company to assess the ability to meet the sums due.

In our view, the Act means landlords (and creditors in general) will face a very significant hurdle in persuading a Court that a winding up petition should be presented. The application of the criteria will no doubt be tested through the Courts over the coming weeks and months but it appears that the threshold for debtors to come within the protection of the Act has been set deliberately low.