Creditor or Company Debtor: Property Rental Issues?
If, as a business, you owe or are owed money for rent then you should understand the effect of emergency Government measures on Statutory Demands and Winding Up Petitions.
The Government’s Insolvency Service issued a press release recently explaining the position of a debtor facing a winding up petition. In essence the rules now allow a Defence that depends on proving the Covid-19 lockdown to be the cause of the default. Such arguments must now be considered by a Court, which may then block or dismiss the proceedings.
The Press Release caused some concern amongst the legal fraternity and a useful clarification was recently issued by the Insolvency Service Policy Group. I quote from an email issued by an Assistant Director of the Group [slightly amended in form only]:
As the press release indicates, the (Government’s) measures are intended to bring some relief to companies struggling during the Covid-19 pandemic, particularly those commercial tenants whose landlords have been taking aggressive debt recovery action. A clarification has subsequently been issued which includes more of the detail of the temporary changes:
• Statutory demands made between 1 March 2020 and 30 June 2020 will be voided.
• Winding-up petitions that are presented between [27 April 2020] and 30 June alleging that a company is unable to pay its debts must first be reviewed by the court to determine why. The law will not permit petitions to be presented, or winding-up orders made, where the company’s inability to pay is the result of Covid-19.
The usual path for a creditor who is owed money and wishes to engage the insolvency process is to present a statutory demand and then in due course follow that with a winding-up petition. The demand will put the recipient on notice as to the consequences that may follow, and so is a serious matter; but within the winding-up process it serves to demonstrate to the court that the company is unable to pay its debts, while the presentation of a winding-up petition can of course have a far more direct effect on the company itself (e.g. by bringing into play the protection against disposal of the company’s assets).
The measures will firstly have the effect of removing statutory demands as a tool for creditors. This cannot entirely insulate companies from the many forms debt collection might take, or from the pursuit of winding-up proceedings on the grounds that they are unable to pay their debts: there are other ways than statutory demands to prove that to the court. It will however resolve the recent use of statutory demands in particular. The second effect will be to prevent certain windings-up from going forward unless the creditor first satisfies the court that the inability to pay is not Covid-19 related. While some creditors may feel that they have the necessary evidence to demonstrate that, in the meantime the law will protect the company from the adverse effects that the winding-up petition might otherwise have. I should say that as this is intended to protect companies that are otherwise viable, if the creditor can in fact demonstrate that the company’s inability to pay is not the result of the pandemic then it would not be appropriate to prevent a winding-up order from being made.
The intention and impact is clear. If a company is in arrears solely due to causes directly attributable to the pandemic, the creditor will not be able to issue a Statutory Demand, or proceed with Winding Up. Other methods of Debt recovery remain unaffected, although many Creditors will find it hard in the present climate to pursue these through the Courts.
It is important, however, to recognise that these “protective” measures are time limited, and currently, will end on 30 June 2020, unless the Government extends this period.