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Corporate Insolvency and Governance Act

The legislative support introduced last year in the form of the Corporate Insolvency and Governance Act, to help businesses from being forced into insolvency as a result of the Cor...

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Date: 27/09/2021

Authors:

Kirsty smith colour 2019

Kirsty Smith

Associate

The legislative support introduced last year in the form of the Corporate Insolvency and Governance Act, to help businesses from being forced into insolvency as a result of the Coronavirus pandemic, were due to expire on 30 September 2021.

The Government has now announced that new temporary protections will be introduced as the old measures are phased out.

Under the new regulations, there aren’t any restrictions on statutory demands, but there are new conditions imposed on the presentation of a winding up petition including:

  1. The debt is liquidated and has fallen due for payment;
  2. the debt is £10,000 or more (this threshold for issuing a winding up petition has increased from £750); and
  3. creditors are required to seek proposals for repayment from debtors, giving them 21 days to respond with a proposal to the creditors’ satisfaction and informing them that they intend to present a petition, before they can proceed with a winding up petition.

These measures will remain in force until 31 March 2022.

Whilst we don’t yet know how point 2 will work in practice, our initial views are that in order to comply with point 2, a creditor should either:

  • send a letter to a debtor requesting a proposal and allowing 21 days for a response before proceeding to a winding up petition; or
  • to cover all bases, send a letter to a debtor requesting a proposal, accompanied by a statutory demand, and allow 21 days for a response before proceeding to a winding up petition.

This temporary increase in the limit for presentation of a winding up petition aims to strike a balance between the need for creditors to be paid, and the need to protect otherwise viable businesses from insolvency action where the debt is not substantial.

For debts over £10,000, it remains to be seen whether the requirement to seek proposals from a debtor first will offer much protection, given that it appears the decision as to whether a proposal is satisfactory, before a winding up petition is presented, is at the creditors’ discretion. That said, where the creditor does present a petition, it is required to include, amongst other matters, a summary of the reasons why the proposals are not to its satisfaction.

What about commercial rent arrears?

Under the new regulations, restrictions will remain in place for commercial rent, or any other sum or payment a tenant is liable to pay under a business tenancy. Therefore, regardless of whether the debt exceeds £10,000, or whether proposals for payment have been sought, a landlord cannot present a winding up petition for any sum due from a tenant under a commercial tenancy, which is unpaid because of the financial effect of Coronavirus.

This means that a landlord will only be able to present a winding up petition if it can show that the reason for non-payment was not the result of Covid-19. If that test can be met, the conditions set out at points 1-3 above will also then apply before a landlord can present a petition.

This restrictive position in respect of commercial rent arrears supports the moratorium on forfeiture for commercial tenants, and the restrictions on CRAR, which expire on 25 March 2022.

So, what can landlords do?

The Government’s continued intervention to restrict commercial landlords’ remedies, above and beyond all other creditors, means that in the short term, landlords still find themselves with few options and will undoubtedly feel short changed by this latest amendment. What started out as temporary relief measures for commercial tenants will now be in place for two years.

For now, where agreements cannot be reached with tenants, unless a commercial landlord can show that the reason for non-payment was not as a result of Covid, it remains limited to issuing debt proceedings to recover arrears.

Although it has been suggested that Covid related arrears will be ring fenced and a mandatory arbitration process imposed, no legislation has yet been brought forward to give effect to this.

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