Law in the time of COVID-19: making a successful winding up petition

Article by Naomh Gibson

On 23 April 2020, the Government announced emergency measures to protect commercial tenants, to include a moratorium on evictions and a temporary ban on the the use of statutory demands (made between 1 March 2020 and 30 June 2020) and winding up petitions presented from Monday 27 April, through to 30 June, in circumstances where a company cannot pay its bills due to COVID-19.

At current time, the scope of the intended restriction and precisely how it will be implemented is unclear. This has understandably left some wondering in which circumstances a winding up petition might be permitted to proceed.

The High Court has now provided such guidance, in Shorts Gardens LLB v London Borough of Camden Council [2020] EWHC 1001 (Ch). This case concerned two applications to restrain presentation of two separate winding-up petitions against different companies by Camden and Preston councils. The petitions relate to unpaid liability orders from national non-domestic rates and certain unpaid costs orders arising out of earlier litigation.

The joint applicant (Saint Benedict’s Land Trust (“SBLT”) and Shorts Gardens) denied liability for the rates and sought injunctive relief on the basis that the debts in question were genuinely disputed on substantial grounds or were subject to cross-claims. The applicant also argued that it would be inappropriate for a winding up petition to be proceeded with, ‘until 14 days after COVID-19 has been controlled through vaccination and/or the Government make an announcement that it is safe for the United Kingdom to come out of the lockdown’.

The press announcement from Ministry of Housing, Communities and Local Government and the Department for Business, Energy & Industrial Strategy in respect of the emergency measures contained a “Notes to Editors”, which provides as follows (emphasis added):

“Under these measures, any winding-up petition that claims that the 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….”

However, upon his analysis, Mr Justice Snowden noted that he did not consider either applicant company to be in financial difficulty from the information provided. In fact, the reverse appeared to be true, as both companies were each disputing the underlying liability orders, and SBLT was asserting a cross-claim. In an earlier hearing, the applicant companies put forward in their written submissions that they were not facing liquidity or operational challenges.

Overall, there was a total lack of financial information to support a finding that the companies were unable to pay their debts due to COVID-19, beyond witness statements from the director/trustee of SBLT and her legal representative. The veracity of these statements no doubt had to be carefully weighed, in light of the fact that a general civil restraint order was made against SBLT at an earlier date as a result of their history of ‘meritless and abusive applications’ in an attempt to avoid payment.

The learned Judge also noted the proposed measures were ‘overwhelmingly likely’ to be limited to companies in certain identified sectors of economic activity, and to relate to statutory demands and petitions based upon claims by landlords for arrears of rent. It was held that these extraordinary measures evidently intend to give relief to those facing genuine hardship, such as tenants in the retail or hospitality industry, and could not be taken advantage of by repeat-offenders like the applicant companies who were the subject of ‘outstanding court orders and longstanding arrears… owing under liability orders to local authorities’.

This decision demonstrates that the Government’s emergency measures are not carte blanche for companies to refuse paying their debts. Any Directors or limited companies facing cash-flow issues from COVID-19 must be very careful in communicating their position to creditors when seeking to buy time to make payment.

If you require any advice on your options during this unprecedented crisis, Halcyon Chambers has a dedicated Commercial and Chancery team and is still taking instructions, including for remote hearings. Please contact our clerks for further information.

Law in the time of COVID-19: Changes to wrongful trading laws

Article by Naomh Gibson

Wrongful trading is a statutory offence under Section 214 and Section 246ZB of the Insolvency Act 1986. Once Company Directors conclude – or should have concluded – that there is no reasonable prospect of the Company avoiding an insolvent liquidation or, in relation to business conducted on or after 1 October 2015, insolvent administration, they have a duty to take every step which a reasonably diligent person would take to minimise potential loss to the Company’s creditors.

If a Director fails to comply with this duty, the Court can order the Director to make such contribution to the Company’s assets as it thinks proper. However, on 28 March 2020 the Government announced it would introduce new insolvency measures to prevent businesses unable to meet debts due to the impact of COVID-19 from being forced to file for bankruptcy.

The move will allow Directors to pay staff and suppliers, even if there are fears the Company could become insolvent. This is a very real concern for Directors and a suspension of this potential liability will take some of the risk away when deciding whether to continue trading through this period.

The temporary suspension takes force retrospectively from 1 March 2020 for a period of 3 months. All other checks and balances to ensure directors continue to fulfil their legal duties and obligations will remain in place, including those relating to fraud, misfeasance, and the threat of Director disqualification. As such, Directors should continue to seek advice on how to record their decision making throughout this period.

In addition to the temporary suspension of wrongful trading provisions, the new measures also include:

  • Permitting Companies who are required by law to hold AGMs to hold them remotely, or where this is not possible, postpone them without sanction, or hold them in-person. Any in-person AGMs will still have to comply with social distancing protocols but will not be considered ‘gatherings’ so as to fall foul of new restrictions;
  • A moratorium for businesses undergoing a restructuring process, during which time they cannot be put into administration by creditors and will continue to be able to access all raw materials;
  • New restructuring plans to bind and safeguard creditors and supplies, to ensure that they are being paid while a solution is sought.  

The new Restructuring Moratorium may be an essential tool for some of these businesses who need extra time to work out a temporary solution to their cash flow issues. Previous consultations have suggested that the Restructuring Moratorium will be modelled on the existing Administration Moratorium and triggered by an out-of-court filing.

The Government states that it intends to introduce the legislation at the earliest opportunity and may extend any of the above measures as necessary, depending on the development of the pandemic. The overriding objective will be to help companies to keep trading.

Other changes to ease the burden of regulation on Companies during this challenging time have already been introduced. On 25 March 2020, Companies House announced that Companies affected by COVID-19 can apply for a 3-month extension for filing their annual accounts. Applications for the extension can be made through a fast-tracked online system (here) and will be treated with latitude where issues around COVID-19 are cited in support. An application for the extension must be made before the company’s filing deadline.

Tom Wheeler successfully defeats a Bankruptcy Petition against the odds!

Tom’s client was faced with liability orders for unpaid council tax across a large portfolio of tenanted properties. Having failed to participate in the proceedings which brought about the liability orders, and having later ignored statutory demands served off the back of them, Tom was faced with opposing a petition for his client’s bankruptcy.

Tom had previously advised that a prompt application to set aside the liability orders was essential, but this had not been achieved by the date of the hearing. Against all odds, Tom was able to achieve dismissal of the petition. Arguing reliance on s.271 Insolvency Act 1986, Tom successfully persuaded the Court that a bankruptcy order was inappropriate in circumstances where the client was prepared to sell a property and give security for the debts owed.

Despite not having made such an offer before, the Court was satisfied that the Petitioning Creditor’s position was protected, and the petition was dismissed.

Tom is an expert in all areas of insolvency and can advise on all steps in the process of both company insolvency and personal bankruptcy – his profile can be found here.