Our Insolvency Solicitors Advise that the Temporary Suspension of Winding Up Petitions and Statutory Demands is NOT a Universal Charter for Refusing to Pay Debts
In this article, our Insolvency Solicitors explain why the Government’s proposed emergency insolvency legislation, as a result of COVID-19, to ensure the survival of some companies is not a universal charter for refusing to pay debts. This was emphasised in the judgement of the High Court in April 2020, in the case of Shorts Gardens LLB v London Borough of Camden Council, when it ruled that the Winding Up Petition in that case could go ahead, despite their ‘temporary banning’ by the Government.
The message we want Directors to take from this article is that if you are facing cash-flow issues from COVID-19, or you are a troubled limited company, then you must be very careful how you explain your position to your creditors when seeking to buy time to make payment. You should be able to explain clearly how COVID-19 has impacted your business, if that is the case.
There is a route through debt hurdles in these difficult COVID-19 times, though it is not guaranteed, and specialist insolvency advice from our experienced Solicitors is valuable and effective.
Context – Emergency Insolvency Legislation
In a Press Release on 23rd April 2020, under the heading “New Measures to Protect the UK High Street from Aggressive Rent Collection Closure”, the Ministry of Housing, Communities & Local Government plus the Department for Business, Energy & Industrial Strategy announced that the Government was bringing forward emergency insolvency legislation.That relates to the use of Statutory Demands and/or the presentation of Winding-Up Petitions as debt recovery tools.
The Press Release said:
“High street shops and other companies under strain will be protected from aggressive rent collection and asked to pay what they can during the coronavirus pandemic, the Business Secretary has set out today (23 April 2020).
The majority of landlords and tenants are working well together to reach agreements on debt obligations, but some landlords have been putting tenants under undue pressure by using aggressive debt recovery tactics.
To stop these unfair practices, the Government will temporarily ban the use of Statutory Demands (made between 1 March 2020 and 30 June 2020) and Winding-Up Petitions presented from Monday 27 April, through to 30 June, where a company cannot pay its bills due to Coronavirus. This will help ensure these companies do not fall into deeper financial strain.”
The Government indicated that it is going to produce a Corporate Insolvency and Governance Bill. The exact details are still awaited, but the Business Secretary Alok Sharma indicated he would publish draft legislation shortly.
Practical Impact – A Recent High Court Judgement Decided Winding Up Petition Can Go Ahead
The issues from the Press Release were considered by the High Court judgement in Shorts Gardens LLB v London Borough of Camden Council. In Shorts, the Court was asked to restrain two Winding-Up Petitions because of the prospective insolvency legislation and the comments in the Press Release.
The Court decided that the Petitions could go ahead. This was because there was no compelling evidence that the companies facing the winding up petitions faced liquidity or operational challenges from circumstances related to COVID-19. The debtor companies were ordered to pay costs.
Helpful Lessons – Take Early Advice from Insolvency Solicitors
Shorts is one of the first cases to consider COVID-19 issues against a background of hostile debt recovery action. Plainly, the debtor firms in Shorts did not have the evidence to persuade the Court that COVID-19 was the main cause of the delays in paying the relevant creditors.
Anyone facing such challenges should provide specific evidence about:
- The company being unable to pay debts which are the subject of any Statutory Demand/Winding-Up Petition as a direct result of the effects of the Coronavirus (e.g. on staff or logistics);
- Giving credible details to support any such conclusions;
- With a focus upon debts, which were incurred after the impact of the Coronavirus – in say February and March 2020 – onwards.
- Also a focus upon the type of liabilities which the proposed legislation intends to protect e.g. retail and other businesses facing recovery action from landlords.
In Shorts, the Court felt that any further arguments about Covid-19, could be decided upon written evidence after the Winding-Up Petitions were served, advertised and then heard. That, however, ignores the impact of a firm’s bankers learning that petition has been presented.
Accordingly, early expert advice from our Insolvency Solicitors is critical.
This is because the Court expressly said in Shorts that allowing a petition to be presented, would protect the position of creditors. The issue of a petition triggers provisions, which allow later challenges to antecedent transactions – for example transactions at an undervalue or preferences, if a winding-up order is made.
COVID-19 has presented quite several legal challenges in the insolvency arena. Here at NDP, we are very proud that during early April 2020, we used the company Winding-up regime to maximum advantage for our company client (a key logistics supplier in the chain fighting COVID-19 and itself on the wrong end of a Winding-up petition) by using the current, flexible approach of the Courts to avoid a Winding-up order being made.
That action preserved employees’ jobs and enabled the company to get back up on its trading feet, delivering vital product in the fight against COVID-19.
Free Initial Advice from our Insolvency Solicitors
If you are a Director reading this and are concerned about your business or any future liability, as a result of COVID-19 or otherwise, then please do not hesitate to call us on 0121 200 7040 or contact a member of the Team. The initial discussion is FREE.
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