The long awaited Corporate Insolvency and Governance Bill (the “Bill”) has been laid before Parliament. It sets out significant changes to UK insolvency law, designed to protect business and promote recovery in the short term. In particular, the Bill proposes dramatic changes in relation to the use of statutory demands and winding up petitions.
What do I need to know?
The Bill contains provisions which will restrict the ability of a creditor to issue a winding up petition against a debtor company to court, on or after 27 April 2020, and/or limit the ability to present a winding petition relying on an unsatisfied statutory demand which was served between 1 March and 30 June 2020 ('the relevant period').
Due to the previous announcements made by the Business Secretary Alok Sharma it was thought that the prohibition would be restricted to unpaid rent, a view taken by Mr Justice Snowdon in the case of Shorts Gardens LLB v London Borough of Camden Council. The Bill goes further and applies to any unpaid debt owed in any sector.
When can a petition be presented?
A winding up petition can only be presented during the relevant period where the creditor has reasonable grounds for believing that:
- coronavirus has not had a financial effect on the company; or
- the facts that gave rise to the grounds of the winding-up petition would have arisen even if the coronavirus had not had a financial effect on the company.
Coronavirus is said to have had a 'financial effect' on a debtor if the debtor’s financial position worsens in consequence of, or for reasons relating to, coronavirus.
If a petition is presented without a creditor having reasonable grounds for a belief in either of the above factors, the court has the power to restore the position as if the petition had never been presented. If a winding up Order has been made or will be made between 27 April and the date that the Bill comes into force, the winding up order will be deemed void. In such circumstances liability will not however attach to the official receiver, liquidator or any provisional liquidator for any action taken pursuant to the winding up order.
What does all of this mean?
Greater detail is eagerly awaited. Specifically, there is no guidance as to what the "reasonable grounds" may be, for believing that the Coronavirus has not had a financial impact on the company. How would a creditor go about proving these? Who determines whether the debt issues would have arisen anyway? It may be that the company would be required to provide proof of solvency prior to the lockdown, or demonstrate a loss in revenue since the lockdown. However, even these figures may not produce a completely accurate picture. A landlord may be unable to rent its properties, and this may coincide with the pandemic, but may not necessarily be caused by it. How does either party, creditor or debtor, prove that the financial difficulty is or is not due to the Coronavirus?
The answer to these questions may well be found in accompanying rules and or practice direction issued by the Court once the Bill is passed. If not, these questions will cause uncertainty and may well end up being determined by a string of unwelcome 'the unpaid debt has nothing to do with Covid' court cases.
While the provisions provide welcome relief to debtor companies, non-payment of debt is of course at the expense of creditors, who may be having cash flow issues of their own. The hope is however that these measures will give a breathing space to encourage parties to reach fair agreements in respect of outstanding debts. Unfortunately the lack of detail opens up the door to abuse by creditors and debtors alike and whether they will, as Mr Sharma puts it, enable businesses to "emerge intact the other side of the COVID-19 pandemic", remains to be seen.
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