Changes to insolvency legislation further restrict landlords’ enforcement options
The Coronavirus Act 2020 came into force on 20 March 2020 and, under section 82, created a moratorium on commercial landlords forfeiting business leases for non-payment of rent, which remains in place.
On 23 April 2020, the government announced additional temporary restrictions on commercial landlords, referring to:
“High street shops and other companies under strain [being] protected from aggressive rent collection”.
The restrictions are to stop landlords turning to other enforcement measures to put pressure on tenants to pay arrears, including statutory demands followed by winding-up petitions.
The Corporate Insolvency and Governance Act 2020
The Corporate Insolvency and Governance Act 2020 (the “CIGA”) came into force on 26 June 2020.
CIGA provides certain protections for companies. There are no equivalent provisions for sole trader businesses, despite the government’s guidance on the objectives of CIGA suggesting that incorporation should not make any difference. With regards to those objectives, the government said:
“The overarching objective of this Bill is to provide businesses with the flexibility and breathing space they need to continue trading during this difficult time. The measures are designed to help UK companies and other similar entities by easing the burden on businesses and helping them avoid insolvency during this period of economic uncertainty.”
Many of the measures are primarily temporary, set to last until at least 30 September 2020, although they may be extended.
Suspension of statutory demands
A statutory demand is a formal written demand for payment within 21 days of a debt that exceeds, in the case of a company, £750. If the debtor does not pay, or apply to Court, within 21 days for an order restraining the presentation of a winding-up petition, the creditor can petition for a winding-up order, forcing the company into liquidation. While statutory demands are not essential, it has been common practice to use them to establish a debtor’s insolvency.
Statutory demands have been used as a tool by landlords to collect arrears. The government’s view is this is not a legitimate use of the provisions, whose aim is to restrict to dealing with companies that are no longer financially viable.
It was generally expected that the government would provide protections in relation to rent arrear claims. CIGA, however, goes a lot further and covers all debts owned by companies.
No winding-up petition can be presented on or after 27 April 2020 on the grounds that a statutory demand has been served in the period from 1 March to 30 September 2020 and not complied with. This effectively means that statutory demands cannot be served on companies until at least 1 October 2020, further restricting the enforcement options available to landlords of corporate tenants.
Ordinarily creditors can still present a winding-up petition against an insolvent company without the prior service of a statutory demand. Following CIGA, in the period between 1 March and 30 September 2020, a creditor can only do this if they have reasonable grounds to believe that:
- COVID-19 has not had a financial effect on the company; or
- It would have been insolvent even if COVID-19 had not had a financial effect.
The interpretation of “financial effect” is wide and this test is easily met. COVID-19 has a financial effect on a company if its financial position worsens in consequence of, or for reasons relating to, COVID-19. This makes it unlikely that a winding up petition served at the moment will be accepted.
If a petition was presented before CIGA came into force and the petitioner has not satisfied the condition the Court may make an order for the company’s position to be restored to what it would have been if the petition had not been made. The petitioner may be liable for any associated costs.
The retrospective effect of CIGA, therefore, rescinds winding up orders made between 27 April and 26 June 2020 unless the Court would still have made the order if CIGA had been in force when it was granted. However, any actions taken by the official receiver or liquidator in respect of a rescinded order will not make them civilly or criminally liable. Insolvency practitioners who have taken actions, such as selling property, are, therefore, protected.
Courts were already taking CIGA into account when considering petitions before CIGA came into force – allowing injunctions to prevent creditors from presenting winding up petitions.
CIGA also contained other measures that permanently change the United Kingdom’s insolvency regime and will have a potential impact on the landlord and tenant relationship.
A new insolvency procedure has been introduced. This is a free-standing moratorium for 20 days, subject to extension. Companies will be able to seek a moratorium without entering an insolvency procedure. An insolvency practitioner will monitor the moratorium but the company will continue to be managed by its directors.
During the moratorium, the company will be protected from the commencement of most other insolvency proceedings, as well as enforcement action and legal proceedings by creditors such as landlords.
New restructuring plan
A new restructuring process is intended to be available to companies already in or likely to encounter financial difficulties. It therefore applies to both solvent and insolvent companies.
It is similar to a Company Voluntary Arrangement (“CVA”) in that it requires the consent of a certain level of creditors or Court approval. Once agreed, it will, however, bind all creditors, unsecured as well as secured creditors (unlike a CVA). There is greater scope for making the restructuring plan binding on dissenting creditors than would be possible under a scheme of arrangement.
If a tenant takes advantage of either of these new provisions, there will undoubtedly be an effect on their landlord’s rights and remedies.
Landlord and tenant impact
For many landlords experiencing severe financial difficulties, these additional restrictions will come as another major blow. However, with the tenant sector enjoying far more people than their respective landlords, the government has firmly chosen a side with regards to the lessor/lessee relationship and will continue to protect leaseholders at the expense of their landlords.
Increasingly, landlords are turning to their few remaining options for the recovery of arrears, which, depending on the terms of their lease arrangements, may include straight debt claims (albeit that the enforcement options are now more limited if a claim is successful), drawing down on rent deposits and particularly claims against former tenants or guarantors. Directors and other individual lease guarantors are finding themselves in an uncomfortable position, as they have been provided with no additional protection by CIGA.
On the other side, tenants should remember that these restrictions are still mostly described as temporary and were only intended to allow them breathing room, rather than completely releasing their obligations, with their rent and service charge still be paying and accruing interest.
This briefing is for guidance purposes only. RadcliffesLeBrasseur LLP accepts no responsibility or liability whatsoever for any action taken or not taken in relation to this note and recommends that appropriate legal advice be taken having regard to a client's own particular circumstances.