Insolvency Update: How COVID-19 Continues to ‘Wind-up’ Creditors

Temporary stay on possession proceedings and enforcement

Initially, the onset of COVID-19 led to many changes to legislation, including but not limited to the introduction of the Coronavirus Act 2020 and an amendment to the Civil Procedure Rules 1998 (CPR) being introduced by the Government. Amongst several new short-term measures included a temporary stay of possession proceedings being introduced under  Practice Direction 51Z. This directed that all proceedings for possession brought under CPR Part 55 and all proceedings issued seeking to enforce an order for possession by a warrant or writ of possession were to be stayed for a period of 90 days from the date this Direction comes into force. 

At present, this Practice Direction will cease to have effect on 30 October 2020 (but this could be subject to change).

In addition to the above, social distancing makes it harder than ever for High Court Enforcement agents and County Court bailiffs to execute warrants and writs of control. Most attendances at debtor’s properties will involve an agent having to gain entry to a property and as people are being told to stay home and not enter other people’s properties, from a practical perspective, this poses a challenge. However, many enforcement agents are still able to send letters and notices of enforcement and contact debtors via telephone to make payment arrangements.

What have the changes meant?

These significant and unprecedented changes have led to a lot of creditors being unable to enforce their legal rights, but has also afforded many vulnerable debtors much needed protection and breathing space, in an economic landscape that none of us could ever have imagined. The position seems to be rapidly changing every day and legal practitioners must keep well-informed of these developments.

So, what’s the latest?

Since the above changes came into force, many creditors were trying to find a way of still being able to pursue debtors (mostly landlords that were owed monies by tenants). This led to an increase in statutory demands, bankruptcy petitions and winding up petitions being issued by creditors trying to get paid. This has placed immense pressure on many High Street businesses who understandably are unable to trade, but still have ongoing liabilities that continue to mount up whilst the world remains ‘on hold’ due to lockdown, and in turn, mounting pressure on landlords that own business premises.

As from 23 April 2020, the Government announced that additional temporary measures shall be put in place, which shall 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 2020, where a company is unable to pay debts due to COVID-19. The new measures shall be included in the Corporate Insolvency and Governance Bill.

Whilst this Bill has been said to come into effect from 27 April 2020, no legislation has been formally published as at the date of this article and further, how such legislation shall be applied is to be determined.

How is this looking in practice?

Despite the above measures being proposed, there are still many petitions and statutory demands that were issued prior to the new proposed changes, which shall need to be dealt with either by way of a hearing, or adjournment. The courts are, at present, continuing to hear these matters in a bulk list by way of video conference and some of the hearings are being adjourned, if required.

In order to decide whether a petition is allowed to proceed, where a winding up petition relies on the fact that the company is unable to pay its debts as they fall due, it is being proposed that the courts shall be required to review the content of the petition first, in order to determine why. If the company is unable to pay as a direct result of COVID-19, the petition will not be permitted to proceed by the court.

Once a winding up petition is issued, it is important to bear in mind that any creditor deciding to present a winding up petition should be very careful about payments they accept from a debtor, without a validation order being in place to authorise such payments. Failure to have such an order in place will make such payments vulnerable to being clawed back by an insolvency practitioner under Section 127 of the Insolvency Act 1986.

A recent example

Evidence of the proposed test where the courts are required to consider whether the company is required to pay its debts and whether such failure is linked to COVID-19 being discussed in practice can be seen in the recent case of Shorts Gardens LLB v London Borough of Camden Council [2020] EWHC 1001 (Ch) (27 April 2020). In this case, there were 2 winding up petitions issued and the Respondents in those cases had issued applications to restrain the presentation of winding up petitions.

Amongst other arguments being raised about a dispute in relation to the petitions was an argument brought by the Respondents that the petitions should be restrained due to COVID-19. However Mr Justice Snowden dismissed this argument because firstly, he had to deal with the petitions based on the current law as it stands (bearing in mind that the proposals suggested to be included in the Corporate Insolvency and Governance Bill are not yet formally in force), and secondly, he was not convinced on the current evidence before him that the reasons the debtors had not satisfied the petitions was not due to them being unable to pay, but instead due to a dispute. As the applications were dismissed, the petitions shall proceed, unless or until this recent decision is appealed. 

This case sends out a very clear message to both creditors and debtors faced with an insolvency situation that the courts will not allow debtors to use COVID-19 as an easy way out, without having good reasons and supporting evidence. It therefore remains to be seen how the courts shall deal with winding up petitions in the immediate future and we shall be watching the developments closely over the next few weeks.

How can Ellis Jones help you?

If you are a creditor wishing to explore your options or a debtor being faced with an aggressive creditor and require insolvency advice, we would be happy to discuss your case and see if we are able to assist. Should you wish to discuss this further, please do not hesitate to contact our specialist Insolvency Team on 01202 525333.