COVID-19: Severe restrictions placed on corporate insolvency
The Corporate Insolvency and Governance Bill has now been published and, if enacted in its present form, it is clear that the proposed restrictions will be wide reaching and will have a great impact on many creditors and debtors. Although it was expected that the legislation would be aimed at commercial landlords the proposals are not sector specific and are not limited to rent liability. The amendments relate to any company that can be the subject of a winding up petition.
What protections can corporate debtors expect?
The Bill proposes that:
- Statutory demands served between 1 March 2020 and 30 June 2020 (or, if later, 1 month after the law comes into force) will become ineffective as a ground of a winding up petition – They cannot be relied upon – even for petitions filed after 30 June 2020. There is no need to show COVID-19 financial difficulties for the restriction to apply. While statutory demands can still be served they will be of limited benefit because they will be void and cannot be relied upon in respect of a petition.
- Unless new coronavirus specific exceptions are met a winding up petition cannot be presented on the ground that a company is unable to pay its debts (whether by reference to a statutory demand (served prior to 1 March 20020), or unsatisfied execution of a judgment, or by proof of the company’s cash flow or balance sheet insolvency or otherwise) in the period between 27 April 2020 and 30 June 2020 (or, if later, 1 month after the law comes into force).
- Where a winding up order has already been obtained on or after 27 April 2020 but prior the law coming into effect the order will be deemed void and the court may restore the company to the position it was in prior to the petition being presented. It remains to be seen how this will operate where key assets have already been sold or a business irreversibly shut down.
Importantly, the proposed legislation will have retrospective effect – Even creditors who have already taken steps towards serving a statutory demand or presenting a petition during the specified period will find that their options are immediately limited.
What are the circumstances under which a creditor can present a winding up petition?
It is important to realise that there is no blanket ban on petitions. A winding up petition can still be presented on the ground a company is unable to pay its debts if the creditor has reasonable grounds for believing that:
- coronavirus has not had a financial effect on the company; or
- the company would have been unable to pay its debts even if coronavirus had not had a financial effect on the company.
Coronavirus will be considered to have a “financial effect” on a company if (and only if) the company’s financial position worsens in consequence of, or for reasons relating to, coronavirus.
Creditors will need to be satisfied that one of the exceptions applies prior to petitioning a debtor – where they proceed and are unsuccessful they may find they are liable for the debtor’s legal costs and in some cases, damages.
What will happen if a petition has already been presented but at the time of the new law no winding up order has been made?
Where a winding up petition has been presented on or after 27 April 2020, but before the new law comes into force, the court will apply the above exceptions. Where the new test is not satisfied the court will have power to make “such order as it thinks appropriate to restore the position to what it would have been if the petition had not been presented”. This can include the creditor paying the debtors legal costs.
How difficult will it be for a creditor to rely on one of the exceptions?
As cases proceed through the courts we will obtain judicial guidance on how the exceptions will be interpreted. It does seem at this stage that it may be difficult for a creditor to argue, especially in certain industries (for instance, leisure, retail, and restaurant), that a business has not been financially impacted by coronavirus. The wording of the Bill does not seem to account for a situation where, in order to survive the coronavirus period, a company has improved short term finances – for instance by sacrificing some projects. Where there are older undisputed debts creditors may find it easier to fall within an exception. Every case will be assessed on its merits and will depend on the facts – we expect to see the courts taking a broad approach.
Will the procedure change?
Yes – Given these new restrictions there are a number of new protective measures which have been put in place. A winding up petition presented while these new temporary restrictions are in force must contain a statement in relation to the exception relied upon (as set out above).
Practically, factual issues will now be raised so no doubt procedures will take longer due to extended evidence and/or submissions. This is at a time when the court is already working within difficult operating conditions.
Further, a petition is not be to advertised “until such time as the court has made a determination in relation to the question of whether it is likely that the court will be able to make an order” winding it up.
Where a creditor is successful in obtaining a winding up order under the new temporary rules there are a number of other consequential amendments. This importantly includes the date of commencement of the winding up. This will not be the date of the petition but the date the winding up order was made. This is important in relation to the disposition of assets by the company – Transactions entered into after the presentation of a petition prior to the making of a winding up order will not be void.
Despite these protections the presentation of a petition alone may still have a great impact on a company as it may result in termination rights arising in loan agreements or supply contracts.
When can we expect this law to come into force?
The Bill will be expedited through parliament but it seems that it is likely that it will not take effect as law until mid to late June. This will affect the overall length of the temporary measures. The period of time it will cover will potentially be wide reaching – Insolvency procedures of this nature could be restricted from the start of March (in respect of statutory demands) until mid to late July. There is also the power for the time frame to be extended.
If you are a creditor wishing to take steps to enforce a debt or a debtor concerned about insolvency procedures during the coronavirus pandemic our specialist and experienced teams can assist.