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Coronavirus - Forfeiture, petitions and insolvency reforms - UK

  • United Kingdom
  • Banking and finance
  • Coronavirus - Country overview
  • Financial services

06-04-2020

In its response to COVID-19, the UK Government has also been listening to business and seeking to provide further support mechanisms to help those businesses that have been forced to close in the short term. This has included the prohibition on landlord forfeiture; the proposed relaxation of wrongful trading responsibilities for directors; and the proposed standalone moratorium for restructuring.

Prohibition on Forfeiture

The recently published Coronavirus Act 2020 (Act) confirms that landlords are prohibited from taking forfeiture action in order to recover the non-payment of rent for the period from 26 March 2020 to 30 June 2020 (Prohibition Period) and subject to any further extension of the regulations. Section 82 of the Act provides that a right of re-entry or forfeiture under a relevant business tenancy for non-payment of rent may not be enforced by action or otherwise. The provision is limited to forfeiture and does not prevent a landlord taking action to recover the rent liability by other methods such as pursuing a winding up petition against the tenant (see below). The embargo is limited to the Prohibition Period but may be extended by the Government depending on progress with COVID 19 or possibly the introduction of other insolvency reforms such as the standalone moratorium.

It should be noted that the prohibition does not amount to a waiver or deferral of the rent provisions and therefore rent will continue to accrue during the Prohibition Period leaving any tenants that do not pay with a much larger and present liability at the end of the Prohibition Period.

Winding Up Petition

Whilst landlords are prevented from taking any forfeiture action, the Government made it clear that rent was still owed by tenants.  Landlords can therefore present a winding up petition for the non-payment of rent (as can any other creditor owed more than £750) without the risk of falling foul of the Act prohibiting forfeiture action. All that is required is for the landlord (or creditor) to send a letter of demand (explaining that if payment of the debt is not made it will treat the non-payment as inability to pay) or to serve a statutory demand giving a period of 21 days in which to pay (and where failure to pay will be deemed to be inability to pay). 

Taking steps to wind up a company can have a significant and detrimental impact if early payment cannot be made. Whilst it is not unusual for a company receiving a winding up petition to be lulled into a false sense of security that it will have until the date of the petition hearing to make settlement, issues will occur far earlier on the basis that the creditor is entitled to advertise the petition in the London Gazette upon the expiry of 7 business days from the date of service of the petition. Following advertisement of the petition, the company’s bankers will freeze its bank accounts with immediate effect. As a consequence a company will struggle to continue to function without seeking a validation order with the court for the purpose of making payments out of its bank account.

The position is exacerbated by the impact of COVID 19 on the Court Service which has been seeking to adjourn the hearing of winding up petitions given its inability to facilitate formal hearings.  Hearings are now progressing remotely, by phone or skype, but there will be delays in seeking a validation order quickly for a period.

Standalone Moratorium

Following the recent Government announcement it is now expected that there will be a revision to Insolvency legislation in order to allow companies to seek a standalone moratorium in order to protect a business from creditor action and to seek to put in place a rescue or restructuring plan to support the continued trading of the company. Whilst the Government has not provided any detail at this stage in relation to the proposed legislation it is likely to mirror proposals that were consulted upon in 2018 for a standalone moratorium. The key provisions are expected to include:

  1. the ability for a company to file for moratorium protection through electronic filing with the court;
  2. the creation of a moratorium for a period of time to give breathing space for the business to order its affairs and prepare a rescue or restructuring plan;
  3. protection for the continuation of supplies to the company during the moratorium period (it is unclear whether this will extend to essential supplies, or all supplies to the company); and
  4. that any approved restructuring plan will be binding on the creditors (which may include a cross class cram down of creditor rights).

At the present time there is no draft legislation available and it may take time for the legislation to be approved as a result of the current parliamentary recess.

It is clear that numerous companies (including tenants) will look to rely upon the new moratorium (provided they fit the eligibility criteria) particularly when the Prohibition Period expires and there is greater visibility on the medium term effects of COVID 19.

Relaxation of Wrongful Trading rules

Finally, in response to a request from directors for further protection the Government has announced its intention to suspend the operation of the wrongful trading provisions under Section 214 and 246ZB of the Insolvency Act 1986 with retrospective effect to 1 March 2020. It is expected that this will be incorporated into the legislation dealing with the standalone moratorium (although the timing on the introduction of the legislation is not clear).

This relaxation is helpful to directors seeking to navigate the current crisis and to deliver their business intact for the benefit of all stakeholders once the emergency conditions imposed as a result of COVID 19 are at an end, as it removes the need to act precipitously just to protect the directors from personal liability. However the Government has also made it clear that all other duties and protections relating to directors will remain in force. 

Directors must still act in the best interests of creditors where insolvency is a real risk.  The suspension of the wrongful trading provisions may not make much practical difference, other than to encourage directors to take the time to consider all options for the business in the context of the Government’s assistance schemes. Ultimately, if a business is not viable even after the COVID19 restrictions are lifted, the directors should still be considering formal insolvency if that is in the best interests of creditors.