Commercial tenants and their creditors: Clarification for all; comfort for some

On 23 April 2020, in its daily press conference, the government announced that it would introduce emergency measures to protect commercial tenants from winding-up proceedings and other enforcement action by a landlord, if the commercial tenant cannot pay its debts because of Covid-19. Two days later, the government provided further clarity as to the scope of its proposals. Specifically:

1. Statutory demands served between 1 March 2020 and 30 June 2020 will not necessarily legally support a subsequent winding-up petition;
2. Winding-up petitions presented at court between 27 April 2020 and 30 June 2020 based on a company’s inability to pay its debts will be reviewed before being issued, thereby adding another layer of scrutiny to the winding-up process; and
3. The pending legislation would be called the Corporate Insolvency and Governance Bill 2020.

For debtors, the news would have come as a comfort; for creditors, a concern.

As has become a feature of the government’s proposals to avert economic collapse, the announcement lacked clarity as to the mechanics of the restrictions. There followed industry speculation that the measures would potentially cover petitions issued by non-landlord creditors; and industry fear that some debtors would seek to use the measures as another shield against insolvency. The necessary legislation is still to be created, yet debtors are already seeking to rely on the government proposals for protection. Indeed, the proposals have already been before the judiciary. The consequence: amid much speculation, we have now gleaned some guidance as to what approach the court will take to such debtor applications.

In Saint Benedict’s Land Trust Ltd, Re [2020] EWHC 1001 (Ch), the applicants, Saint Benedict’s Land Trust Ltd and Shorts Gardens LLP, sought to prevent the presentation of winding-up petitions by local authorities over unpaid national non-domestic rates, which were owed long before the outbreak of the pandemic.

In reaching its decision to dismiss the applications, the court looked to the wording of the government’s announcement in concluding that: “…it seems overwhelmingly likely that the proposed legislation will 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.” Mr Justice Snowden conceded that the government’s announcement, if taken out of context, does suggest a wider restriction. He determined, however, that the government’s clear focus was in fact the retail and hospitality industry, and petitions based on arrears of rent. Accordingly, in this instance, he saw “no reason to exercise any discretion in favour of the applicants based upon the prospect that legislative measures are to be introduced to assist more deserving companies experiencing genuine financial hardship caused by the effects of the COVID-19 pandemic”.

He went on to emphasise the threshold test envisaged in the government’s measures, under which the restrictions on use of statutory demands and presentation of petitions will only apply where the reason that the company is unable to pay its debts is due to Covid-19. Put simply, if a company’s debts were accruing before the pandemic or its financial demise was in any case inevitable, it cannot look to the court to save it on the basis of the pending law.

Snowden J. did remark, possibly with a hint of scepticism, as to the practicality and implementation of such a threshold test: “the mechanism for the application of that test is entirely unclear”. And, no doubt, there will be some head-scratching from the legislature as to how it can translate the government’s announcement into a functioning reality.

Unsurprisingly, the applications in Saint Benedict’s Land Trust Ltd were not just dismissed, but were deemed an abuse of process and having been made totally without merit. A stark warning to similarly minded debtor companies.

Separately, and in an important development, an injunction was obtained in the High Court last week against the landlord of a significant consumer/retail facing business in the leisure sector, in response to the threat of the presentation of a winding-up petition. The Judge was seemingly very sympathetic to the plight of the business in this case in the light of all the evidence before the court. Whilst the details of the case are subject to a privacy order, and so limited, the decision would appear to be in line with Snowden J. who made clear that the retail and leisure industries were indeed the intended beneficiaries of the government’s proposals. More significantly, however, was the court’s willingness in this case to grant an injunction on the basis of proposals that are yet to be enshrined in to law. A stark warning to similarly placed creditor companies.

Only time will tell what the government’s proposed legislation will look like and when it will come into force. But, for now, based on the court’s pronouncement in Saint Benedict’s, non-landlord creditors of commercial tenants should take a degree of comfort that any statutory demand they serve or winding-up petitions they issue will not be automatically invalidated by the government’s proposed measures.

If you have any queries about this topic, please contact Sophia Bompas or any member of the Business Protection Team.

 

If you aren’t receiving our legal updates directly to your mailbox, please sign up now