Alison Hardy, Chloe Meredith, Inga West and Samantha Ross take an in-depth look at the provisions of the Corporate Insolvency and Governance Bill – and the likely impact the changes it makes may have on landlords and tenants.
The Corporate Insolvency and Governance Bill (the CIGB) was introduced into parliament on 20 May 2020 and will undergo a fast-track procedure. We expect that it will become law in late June 2020, introducing the biggest changes to the insolvency regime in nearly two decades.
Statutory demands and winding-up petitions
Schedule 10 of the CIGB introduces temporary amendments to the rules relating to statutory demands and winding-up petitions.
Paragraph 1 of Schedule 10 prohibits the presentation of winding-up petitions on or after 27 April 2020 on the basis of statutory demands served during the “relevant period”. The “relevant period” for this purpose is defined as beginning on 1 March 2020 and ending on 30 June 2020 or one month after the coming into force of Schedule 10 of the CIGB (whichever is later). This period can be extended by up to six months by the secretary of state for business, energy and industrial strategy.
The effect of paragraph 1 is to neutralise the effect of any statutory demands served during the relevant period. If landlords want to rely on statutory demands to ground a winding-up petition, they will need to wait until the relevant period has expired and issue a fresh statutory demand then.
In light of this prohibition, we may see more landlords bringing debt claims for arrears, although (subject to any periods of extension) the relevant period is likely to have expired by the time a judgment is received. Landlords who already have debt judgments in their favour may be looking to use them as grounds for presenting a petition to wind up the tenant company; however, such plans may be prevented by paragraph 2 of Schedule 10.
Paragraph 2 operates so that a creditor may not, during a slightly different relevant period (from 27 April 2020 to 30 June 2020 or one month after the coming into force of Schedule 10 of the CIGB (whichever is later), extendable by up to six months by the secretary of state for business, energy and industrial strategy), present a petition for the winding up of a registered company on the basis that it is unable to pay its debts within the meaning of section 123 of the Insolvency Act 1986 (the 1986 Act) unless the creditor has a reasonable ground for believing that:
- coronavirus has not had a financial effect on the company; or
- the facts by reference to which the company is unable to pay its debts would have arisen even if coronavirus had not had a financial effect on the company.
In most scenarios, a landlord would need to show that the judgment debt would not have been paid regardless of coronavirus. We anticipate that many landlords will be unable to satisfy this condition.
Moratorium
Section 1 of the CIGB introduces a new Part A1 into the 1986 Act, which will allow eligible companies to benefit from a moratorium providing various protections from creditors. A company will be eligible for the moratorium unless it falls within the exceptions listed in Schedule ZA1 (which contains a long list of mostly financial services companies).
In order to benefit from a moratorium, the directors of the company must file a statement at court that the company is, or is likely to become, unable to pay its debts and a statement from an insolvency practitioner (the “monitor”) that it is likely that a moratorium would result in the rescue of the company as a going concern.
The moratorium will last for an initial period of 20 business days but may be extended by the directors by a further 20 business days without creditor consent. Extensions of up to a year may be agreed with creditor consent or for a longer period with the consent of the court.
The moratorium provides a payment holiday in relation to pre-moratorium debts that have fallen due before the moratorium or which fall due during the moratorium, except insofar as they consist of amounts payable in respect of:
- the monitor’s remuneration or expenses;
- goods or services supplied during the moratorium;
- rent in respect of a period during the moratorium;
- wages or salary arising under a contract of employment;
- redundancy payments; or
- debts or other liabilities arising under a contract or other instrument involving financial services (as defined in Schedule ZA2).
During the moratorium, a landlord will not be able to exercise a right of forfeiture by peaceable re-entry, enforce security or institute, carry out or continue any legal process (including issuing a winding-up petition), except with the permission of the court. Applications for permission of the court cannot be made in relation to pre-moratorium debts for which the company has a payment holiday during the moratorium. Note that section 82 of the Coronavirus Act 2020 also prevents forfeiture before 30 June 2020 (which may well be extended).
Tenants will be obliged to pay rent during the moratorium and, if they fail to do so, the monitor can terminate the moratorium. Whether “rent” means basic rent or extends to other sums which are defined in the lease as rent is unclear. However, service charge due during the moratorium is likely to remain payable as the tenant remains obliged to pay for all services supplied during the moratorium.
If the moratorium is successful, the payment holiday will come to an end and the company will be obliged to pay its debts. If the company enters into another insolvency process, for example administration, the pre-moratorium debts will be dealt with as part of that process.
Restructuring plan
Complementing the moratorium, Schedule 9 of the CIGB introduces a new Part 26A to the Companies Act 2006 in relation to the new restructuring plan which will provide a company encountering financial difficulties with the ability to propose a compromise or arrangement with its creditors and/or shareholders to restructure its affairs.
The framework of the restructuring plan shares some of the features of the UK’s existing scheme of arrangement procedure. Additionally, the new restructuring plan allows courts to sanction a plan that binds dissenting classes of creditors and members, provided:
- they are no worse off than in the alternative scenario (ie the winding-up of the company);
- the requisite voting threshold is reached; and
- the plan is fair and equitable and in the interests of creditors. The process of binding dissenting classes in this way is called “cross-class cram-down”.
Schemes of arrangement are not usually used to restructure landlords’ rents as landlords form a class of creditors and each class has to approve the scheme. In theory, the new restructuring plan could be used to restructure landlords’ rents as landlords could be “crammed down” as a class, meaning that the plan could be passed even though landlords voted against it. However, we anticipate that company voluntary arrangements (CVAs) will continue to be the process of choice in this regard.
Ipso facto
Section 12 of the CIGB introduces a new section 233B into the 1986 Act, which will restrict the operation of termination clauses in contracts for the supply of goods or services where such clauses are triggered by a company going into one of a range of insolvency procedures, including administration and liquidation.
Section 233B(5) provides some limited safeguards for suppliers. The section allows for supply contracts to be terminated with the agreement of the insolvency practitioner in an administration or liquidation, the company itself if it is subject to a moratorium, CVA, or restructuring plan, or with the permission of the court, where the continuation of the contract would result in hardship.
The CIGB does not include a definition of a “contract for the supply of goods or services” and the meaning is potentially broad. The authors do not consider that a lease would amount to a contract for the supply of goods or services, as a lease primarily creates a proprietary interest and any obligation to provide services is typically ancillary to the supply of land.
The position is less clear in relation to serviced office agreements, which the authors consider are likely to amount to contracts for the supply of services. As a result, we are likely to see serviced office providers unable to terminate their contracts in the event of occupier insolvency.
However, it is common for serviced office agreements to purport to be licences when, in reality, the occupier has exclusive possession of the premises. Where this is the case, it may be possible for serviced office providers to argue that their agreements with insolvent occupiers are, in fact, leases rather than licences in order to circumvent these provisions.
Even if such an argument were successful, providers would still be subject to the usual insolvency restrictions on forfeiture, and this argument may be unattractive to serviced office providers unless their own leases have wide alienation rights.
Landlords, pay attention
If enacted into law, the CIGB will introduce some big changes for the insolvency regime. The full impact of those changes on landlords will only become clear once companies and insolvency practitioners start to put the provisions into practice.
Setting aside the temporary amendments to the rules on statutory demands, in the authors’ view, the biggest change for landlords is the complete prohibition on forfeiture in relation to pre-moratorium debts during the course of a moratorium, and with this in mind, landlords would be well advised to closely monitor their tenant arrears position.
Alison Hardy is a partner and Chloe Meredith an associate in the real estate dispute resolution team, and Inga West is counsel and Samantha Ross a solicitor in the restructuring and special situations team at Ashurst
Click here to listen to the EG podcast on the Corporate Insolvency and Governance Bill.
