UK: Covid-19 Real Estate Update: Restrictions On Use Of Statutory Demands And Winding Up Petitions

In our update on 24 April  we outlined the Government's proposed measures to temporarily restrict the use of statutory demands and winding up petitions during the worst of the COVID-19 pandemic.  The details have finally been set out in Schedule 10 of the long awaited and wide ranging Corporate Insolvency and Governance Bill. 

The Bill is still not law, but it is expected to be passed within the next fortnight.  This is what we know from the drafting as regards the foreshadowed restrictions on statutory demands and winding up petitions:

Have statutory demands and winding up petitions been banned?

Not entirely, but the moratorium is broader than had been expected.  It was suggested in the Government's announcement on 23 April that the measures might only apply to landlords seeking to wind up tenants, or possibly even just retailers.  However, the new restrictions apply to all creditors.

The draft legislation makes reference to the "relevant period" which in all cases means the period between 27 April 2020 and 30 June 2020 (or the date one month after the new legislation comes into effect). It should also be noted that the 30 June cliff edge is capable of variation by the Secretary of State.

• A creditor cannot present a winding up petition that is based on a statutory demand served on or after 1 March or during the relevant period.
• A creditor cannot present a winding up petition within the relevant period based on an earlier statutory demand or other usual grounds for proving that a company cannot pay its debts unless the creditor has reasonable grounds to believe that:
  • (a) Covid-19 has not had a financial effect on the company, or
  • (b) the facts giving rise to the right to present a petition would have arisen even if COVID-19 had not had a financial effect on the company.

The impact of the restrictions means that there is a blanket moratorium on winding up petitions save in the (presumably limited circumstances) where there are clear reasons to show that the company's insolvency is not related to Covid-19. There is plenty of scope for dispute on whether or not the debtor has been financially affected by Covid-19 and such a dispute could in itself lead to a complicated hearing with potentially expert and witness evidence being adduced. The listing of such a hearing may well take us beyond the relevant period.

Interestingly, and somewhat surprisingly, the proposed moratorium only relates to companies and not individuals. We expect that extending the restrictions to include individuals is something that will be debated by Parliament in the coming days.

What about petitions that have already been issued?

Where any petition has been started after 27 April 2020 but before this schedule comes into force, the court has the discretion to, in effect, dismiss the petition (with costs) unless it considers the exceptions mentioned above would apply.

What other restrictions have been put in place?

The new legislation introduces what is, effectively, a double lock by making it clear that the court cannot make a winding up order on any petition issued during the relevant period unless it is satisfied that the grounds on which the petition is based would have arisen if Covid-19 had not had a financial impact on the company.

Further, and in some ways most radically, if, after 27 April 2020, but before these new rules come into force, a court has made a winding up order, and that order would not have been made if these new rules had been in force, that winding up order may be void and the court may make such orders as it sees fit including ordering the Official Receiver to restore the company to the position it was in immediately before the petition was presented.

Where a creditor presents a petition in the relevant period and, in the limited circumstances available to it, the court does make a winding up order then the commencement of the winding up will be from the date of the winding up order, rather than from the date of presentation of the petition. This means that a debtor company will not need to apply for a validation order pursuant to s127 of the Insolvency Act 1986 in relation to any dispositions of its property.

What is going to be the impact of this legislation?

The changes are very significant and given it's possible that the relevant period may extend beyond 30 June 2020 we do not yet know how long they may be in force .

However long they last, for now, it is going to be very hard for a creditor to be able to push a petition through the courts as we consider that the burden will be on the creditor to show why it has reason to believe that the company has not been financially affected by Covid-19.

Without access to detailed financial information, which a company will be under no compulsion to give, it is going to be very hard for the creditor to meet the burden of proof.

It's also fair to say that the courts will likely take these new rules as an implicit direction that they are to be very cautious about ordering a winding up for so long as the temporary legislation applies.