Corporate Insolvency and Governance Bill—temporary changes to winding-up petitions

Corporate Insolvency and Governance Bill—temporary changes to winding-up petitions

This News Analysis looks at the proposed temporary changes to winding-up petitions introduced by the Corporate Insolvency and Governance Bill.

What is the background to the changes?

The coronavirus (COVID-19) pandemic and the resulting lockdown and social distancing measures introduced by the UK government continue to have a profound effect on businesses and the economy. On 20 March 2020, the government announced that businesses including restaurants, pubs and leisure centres must close, and on 23 March 2020 a full lockdown was introduced, sending huge parts of the private sector into hibernation. The forced closure of businesses has threatened the financial health of many previously successful companies, while for those already struggling it has proved to be the tipping point.

In order to mitigate the economic consequences of coronavirus and keep the economy on life support, the government has introduced a range of measures, from financial support initiatives to legislative reform.

The Coronavirus Act 2020 (CA 2020) took effect from 26 March 2020, and contains a provision (CA 2020, s 82) prohibiting landlords taking steps during the ‘relevant period’ to forfeit a ‘relevant business tenancy’ on the grounds of non-payment of rent and other sums falling due under the lease. In response to this prohibition, it was found that landlords were instead looking to invoke the winding-up regime and on 23 April 2020 the Business Secretary announced further measures to protect commercial tenants from these ‘aggressive’ rent collection strategies and to ‘safeguard the UK high street’ by temporarily voiding statutory demands and winding-up petitions issued against commercial tenants.

The Business Secretary’s announcement was however met with confusion, as the ‘notes to editors’ supporting the press announcement suggested that this temporary voiding might apply to all winding-up petitions, and not just those issued against commercial tenants. This point was raised in Re Saint Benedict’s Land Trust Ltd; Re Shorts Gardens LLP [2020] EWHC 1001 (Ch), [2020] All ER (D) 159 (Apr) which concerned an application to restrain the presentation of a winding-up petition.

The Corporate Insolvency and Governance Bill

On 20 May 2020, the much-anticipated Corporate Insolvency and Governance Bill was introduced. The Bill seeks to make a number of far-reaching changes to UK insolvency law, some permanent and some temporary (see News Analysis: Corporate Insolvency and Governance Bill). Unlike the temporary changes to winding-up petitions, many of the changes are based on the 2016 Insolvency and Corporate Governance consultation, which the government responded to in August 2018.

What are the proposed changes to winding-up petitions, and what do they mean in practice?

The changes can be found in section 8 and Schedule 10 of the Bill. They affect all winding-up petitions, not just those presented against commercial tenants.

Statutory demands

No statutory demand served between 1 March 2020 and 30 June 2020 (or one month after the Bill is enacted, whichever is later) can provide the basis of a winding-up petition presented against either a registered or unregistered company on or after 27 April 2020.

There may be instances where a statutory demand needs to be served to try and evidence insolvency, for example to trigger termination provisions in a contract. There is nothing in the Bill to prevent a statutory demand being served, only that it cannot be used to found a winding-up petition as set out above.

Winding-up petitions

An unsatisfied statutory demand does not provide the only gateway to the presentation of a winding-up petition—a creditor can petition to wind up a company if the creditor can prove that the debtor company is insolvent on either a cash-flow or balance sheet basis.

The Bill does not prevent a creditor presenting a winding-up petition on either of these bases. The Bill does, however, create a new, additional condition: the creditor must additionally be able to demonstrate that it has reasonable grounds for believing that:

  • coronavirus has not had a financial effect on the debtor company, or
  • the debtor company would have been insolvent even if coronavirus had not had a financial effect on the debtor company

The Bill does not define ‘financial effect’ meaning that in the absence of further legislation or guidance we will need to wait for case law to be developed on this point.

This new condition applies to winding-up petitions presented between 27 April 2020 and 30 June 2020 (or one month after the Bill is enacted, whichever is later), including those which are based on an unsatisfied statutory demand served on the debtor company prior to 1 March 2020.

The Bill does not state when the additional condition needs to be proven; ie whether at the time the petition is presented, or at some later time, though it does provide that the petition may not be advertised until such time as the court has made a determination of whether it is likely that a winding-up order will be made. The petition must contain a statement that the petitioner considers that the additional condition is met.

Practically speaking, the ability of most creditors to satisfy the additional condition would appear to be limited. Unless the creditor is privy to the debtor company’s financial records and position, it is difficult to see how they could provide satisfactory evidence to demonstrate their ‘reasonable belief’.

Winding-up petitions presented, and winding-up orders made, before the commencement of Schedule 10

Schedule 10 provides that the provisions are to be regarded as having come into force on 27 April 2020, ie on the second working day after the Business Secretary had made his announcement.

So what does that mean for winding-up petitions presented, and winding-up orders made, after 27 April 2020 and before the commencement of Schedule 10?

For petitions that fall into this category, unless the creditor can satisfy the additional condition, the court may make such order as it thinks appropriate to restore the position to what it would have been if the petition had not been presented.

For orders that fall into this category, they are regarded as void (the court having had no power to make the order) unless the order would have been made in any event had the provisions been in force at the time, ie that coronavirus has not had a financial effect on the debtor company, or the debtor company would have been insolvent even if coronavirus had not had a financial effect on the debtor company. Neither the official receiver nor the liquidator(s) or provisional liquidator(s) are liable for anything done following the winding-up order, and the court may give such directions as it sees fit to restore the debtor company’s position to what it was immediately before the winding-up petition was presented.

The Bill contains a power to extend by up to six months the end date of this temporary impact on statutory demands and winding-up petitions, currently 30 June 2020 (or one month after the Bill is enacted, whichever is later).

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About the author:

Stephen qualified as a solicitor in 2005 and joined the Restructuring and Insolvency team at Lexis®PSL in September 2014 from Shoosmiths LLP, where he was a senior associate in the restructuring and insolvency team.

Primarily focused on contentious and advisory corporate and personal insolvency work, Stephen’s experience includes acting for office-holders on a wide range of issues, including appointments, investigations and the recovery and realisation of assets (including antecedent transaction claims), and for creditors in respect of the impact on them of the insolvency of debtors and counterparties.