Statutory demand / winding up petition ban
As has been widely reported, the government has announced a temporary ban (until 30 June 2020) on the use of statutory demands or winding up petitions to chase outstanding debts where the inability to pay is caused by COVID-19.
Headlines around the measure emphasise how it is largely aimed at commercial landlord and tenant relationships and is to help retailers and other high street tenants struggling to cope with the effects of COVID-19. To that effect, it is linked with other measures already introduced such as the moratorium on evictions of commercial tenants for at least three months, and the various reliefs that are available to businesses more generally. In addition, the government announced that it will amend the rules on Commercial Rent Arrears Recovery (CRAR), which effectively involves bailiffs being appointed to seize tenants’ goods, without the need for court proceedings. The changes to CRAR will require there to be 90 days’ unpaid rent before this remedy can be used, rather than the seven days of arrears that applied prior to the current crisis. (In practice, the amendments to CRAR may be of limited application, given that it is only effective if premises are open and accessible, and during the tenant’s normal trading hours; with many commercial tenants closed at present – particularly those in retail – this may therefore be difficult to enforce in current circumstances).
However, with regards to the ban on statutory demands and winding up petitions, the actual wording used in the announcement is in fact very broad, referring to ‘bills’ and ‘debts’ rather than just rents. We are already seeing and advising on how this will have far wider application and impact. Not only does it affect landlord / tenant relationships in other sectors off the high street – eg hotels, clubs, hospitality, business parks – but all debtor / creditor contacts through supply chains and the whole economy.
There are some key aspects of the measure that could invite fierce arguments over its applicability. Is the debtor unable to pay its outstanding bills due to COVID-19? Does that apply to all or just some of its debts? Does COVID-19 have to be the sole cause or merely a partial one? The government is urging companies to pay rents (and presumably other debts) where they can afford to. It is very unclear what that is supposed to mean or how the sentiment may be enforced in practice. In the context of statutory demands and winding up petitions, we would expect the courts to reject those based on debts where there is any reasonable argument that COVID-19 has affected the debtor’s ability to pay. By contrast, we would also expect them to reject any specious ‘virus’ defences where the debtor demonstrably was not able to pay the relevant debts before late February 2020. There will be a lot of ground between those scenarios.
What does seem clear from the wording of the announcement is that the government is looking to encourage (or coerce?) landlords, tenants and all parties to ‘work collaboratively’ and to keep to a spirit of ‘fair commercial practice’. They are expecting parties to take a reasonable, commercial approach to resolve disputes, even if just for the meantime. While naturally not welcomed by landlords or other creditors, it has already over the weekend helped unblock a crucial issue (and currently often the last remaining one) in otherwise successful restructuring plans for distressed businesses. To that end, it must be to the overall benefit of creditors and other stakeholders in struggling businesses.
The measure does not solve debt problems longer-term. There will of course be plenty of further financial and operational pinch-points and wrinkles to work through and work out later this year and beyond as deferred debts continue to accrue while businesses take time to rebound, if they can at all. For the meantime though, it does relieve some tensions and allows time for businesses to keep focused on plans for survival.
It should be noted that the push to be reasonable is in line with a joint statement to banks, other lenders and investors by the Financial Conduct Authority, the Financial Reporting Council and the Prudential Regulatory Authority that they should take into account how their debtors may have been impacted directly by COVID-19 before they take action for any covenant breaches or other events of default. The crucial difference is that there is no current ban on such actions, potentially including placing the debtor into administration. The government has proposed bringing in a general moratorium on creditor action but as things stand nothing has been implemented and it remains to be seen how that moratorium would be applied. Companies with financial issues pre-dating COVID-19 continue to be placed into administration, and that should be allowed to continue.
This remains a critical issue not just for the companies themselves but also for their landlords and other creditors; putting a debtor under such financial pressure that it defaults to its lender who then takes enforcement action could result in greater losses in the long run for the landlord / other creditor, who will then become an unsecured creditor in an administration for the balance of their debt / future losses. This may result in them ultimately suffering a greater loss than had they agreed a commercial compromise that allows the debtor breathing space. Specifically for landlords, there would then be the added issue over how rents accruing during the course of an administration may be treated and paid (or not) by the administrators, and any tenant liability for disrepair, dilapidations and any other covenant breaches will also be affected.
Overall, and particularly while these temporary measures are in place, the starting point for all stakeholders in a distressed scenario must be to open a reasonable, open dialogue. Then assess your potential options and likely outcomes under professional advice before instituting any plan of action.