The Corporate Insolvency And Governance Bill - Not Exactly What It Said On The Tin

On 23 April 2020, the government announced that it would be introducing legislation aimed at “encouraging landlords and tenants to work together and making clear that those businesses who are able to meet their liabilities should do so.”

It was further clarified that this would, “temporarily ban the use of statutory demands and winding up orders where a company cannot pay their bills due to coronavirus.”

Landlords, therefore, perhaps assumed two things:

1. The restriction on enforcement against corporate tenants would be limited to liabilities accruing during the lockdown, or at least relatively recently; and
2. The government would provide a suitable mechanism to allow enforcement when the tenant was financially in a position to pay its liabilities or at least part of them.

Unfortunately, the Corporate Insolvency and Governance Bill provides for neither.

Timing

Under the Bill, if enacted without amendment, landlords cannot rely on a statutory demand served after 1 March 2020. They are invalid and this will continue until 30 June this year (with the possibility of further extension).

Further, landlords will not be able to present a winding petition between 27 April and 30 June 2020.

Statutory demands and winding up petitions which might normally have been utilised during such a time frame would in many instances inevitably include liabilities going back many months, and often more than one quarter, i.e. well before lockdown.

Regrettably for landlords, the Bill neuters the landlord’s ability to enforce on such debts for the present time, however historical in nature, and irrespective of how much forbearance the landlord may have provided.

Carve out

Whilst the government in their 23 April 2020 announcement stressed a balance in ensuring “businesses who are able to meet their liabilities should do so”, the Bill requires landlords to prove a negative in practice.

This requires the landlord to show that the tenant has not been financially affected by the current coronavirus crisis, or to show that the tenant is in the same financial position it would have been, irrespective of the crisis.

How does the landlord show either, without access to the tenant’s own internal management accounts or inviting the Court to make assumptions as to the nature of the tenant’s business being ‘COVID-proof’?

Further, how financially affected does the tenant have to be to enjoy this shielding – will a 0.1% drop in monthly turnover suffice? Without full clarification in the legislation, the Courts will have to guess at what the government intended.

Chaos in July?

Both the restriction on statutory demands and winding up petitions is due to end on 30 June 2020.

This presents a cliff edge for tenants and an obvious strategy for landlords. Why not wait until 30 June when it appears creditors are going to have an unimpeded path to pursuing insolvency enforcement remedies?

Will this create chaos, or is the government optimistic that tenants will be able to fund both the next quarter and the previous quarter from post-lockdown income?

The forgotten tenants/debtors

Individual tenants of commercial properties are not given any protection by the Bill at the moment, meaning the personal equivalent of winding up proceedings – bankruptcy proceedings – will remain unrestricted and available to the respective landlords.

This group of tenants can and is being pursued more aggressively by landlords.

Landlords of corporate tenants will be dusting off their leases to check whether any guarantor to the lease signed in their personal capacity, enabling the landlord to commence bankruptcy proceedings against the guarantor – whether because they believe the guarantor’s personal asset profile will lead to a partial repayment of the liabilities within the bankruptcy or because it will prompt the tenant to make a satisfactory payment, in a time when often the creditor who shouts loudest is paid first.

A sting in the tale for tenants

Whilst many tenants will see the Bill as a necessary lifeline to preserve their business pending revenue picking back up, landlords may be concerned that a minority of corporate tenants will deploy funds that otherwise could or should have been used to pay or partially discharge rent liabilities, to other less deserving creditors of the tenant.

Notwithstanding the government’s temporary softening of wrongful trading provisions (another development set out in the same Bill), various other rights of action against directors breaching their duties to the company (which includes that of preferring certain creditors to put them in a better position in the event of the company entering a formal insolvency procedure) will be open to liquidators.

As such, directors of corporate tenants will still need to be very careful if the tenant’s failure to pay rent to their landlord is made as a conscious choice rather than an economic necessity.

This article first appeared on CoStar